Business Law - III B.Com (MKU)

1. Business Laws
Mrs. R. Senthil Lakshmi
Assistant Professor
S.B.K.College
Aruppukottai
Unit – 3
AGENCY (Sec 182 to 238)
Agent: (Sec 182)
“Agent is a person employed to do any act for another or to represent another in dealing with
third parties”.
Principal:
“The person for whom an act is done or who is so represented” is called the principal.
Note: 1. The main function of an agent is to create contractual relationship between his principal
and third parties.
2. Agent is a “link” between principal and third party.
Agency:
The relationship between the principal and his agent is known as “agency”.
Rules of agency: There are two rules -
1. Whatever a man can do personally, he can do it through another (agent). Exemption –
marriage, work involved personal skill, artist, work related to public office like Magistrate, teacher.
2. He, who does an act through another does it by himself, (ie) the acts of agent are
(considered as) acts of the principal.
Essentials of agency:
The following are essentials of contract of agency
a. Agency depends upon agreement (not on contract) between principal and his agent. {It is
because any person (minor, unsound mind person etc) can become agent}.
b. The acts of agent will bind the principal.
c. There is no need of consideration for creating agency.
d. The principal and the third parties must be competent to contract.
Who can employ agent?
Any competent major can employ agent. As such, a lunatic, minor, drunkard, etc cannot
employ agent.
Who can act as agent?
As the agent does not make contract for himself and he acts on behalf of his principal,
agent need not have contractual capacity. So, any incompetent person like a minor, lunatic, drunkard
etc can act as agent.
Creation of agency
Contract of agency is created in the following ways:
1. Agency by express agreement

2. 2. Agency by implied agreement
3. Agency by ratification
4. Agency by operation of law
1. Express agreement:
Agency created by words spoken or written is called express agency. Here, the scope of agents’
power and authority is clearly written or uttered. So, the agent should act within this scope to bind the
principal for his acts. Eg: written agency – power of attorney.
2. Implied agreement:
Implied agency arises from the conduct, situation or relationship of parties.
It is inferred from the circumstances of the case, things happened during the ordinary
course of dealing etc.
Eg: a. ‘A’ and ‘P’ are brothers. ‘A’ lives in ‘Delhi’ and ‘P’ lives in ‘Patna’. ‘A’ leases the lands of
‘P’ with his consent. ‘A’ collects the rent and remits it to ‘P’. Here ‘A’ is the agent of ‘P’ even through
there is no agreement.
b. ‘A’ tells ‘T’ within the hearing of ‘P’, “I am agent of P”. ‘P’ does not object to this statement.
Later ‘T’ supplies goods to ‘A’ on credit. Here ‘P’ is liable to pay for the goods.
c. ‘A’ was ‘P’s agent. His service was terminated by ‘P’. No notice of termination was given by ‘P’.
Later on , ‘A’ purchased some goods (in the name of P) on credit from ‘T’. Here, P was liable to pay the
price to ‘T’.
Implied agency arises in the following ways:
A. Agency by estoppels:
Agency by estoppels arises- when a person by his conduct / or ( by words spoken / written) makes
another to belive that a third party is his agent, then the is estopped from denying the relationship
subsequently.
Eg: ‘P’ makes ‘B’ to believe that ‘A’ is his agent. Then ‘P’ is bound by any agreement between ‘B’
and ‘A’.
B. Agency by holding out:
It is a branch of agency by estoppels. It arises where there is a prior positive affirmative act on the
part of principal. Eg: ‘P’ allows his servant (A) to buy goods for him on credit from ‘T’ and pays for
them. On a day he pays cash to his servant to buy goods from ‘T’. But the servant buys the goods on
credit and misappropriates the cash. Held that ‘T’ can recover the price from ‘P’.
C. Agency by necessity:
At time for emergency a person may act as an agent to another without the consent of the latter, it
is known as agency by necessity.
Eg: i. A horse was sent by train. At the destination there is no body to receive it. So, the railway
company fed the horse. Held the railway company recovered the expenses from the owner of the horse
(Great Northen rail vs Swaffield)

3. ii. ‘P’ consigned a quantity of butter through a railway company. Due to strike, there was delay in
transit. So, the railway co. sold the butter. Held the sale was valid. (Sim vs Midland Rail co)
[Husband and Wife: A husband is bound to maintain his wife. So, a wife can pledge has husband’s
credit to buy all necessaries of her life. Let us discuss-
i).Where husband and wife live together: Wife can pledge her husband’s credit for necessaries
provided her husband does not maintain her. But the wife can’t pledge under the following
circumstances:
a) The husband makes adequate provision for maintenance.
b) He instructs the traders not to supply goods on credit to her.
c) The wife is forbidden from pledging his credit and
d) The goods purchased are not necessary goods.
ii).Where husband and wife live apart: Wife who is deserted by her husband and lives apart, can
pledges the husband’s credit for her necessaries provided her husband does not make any provision for
her maintenance. (The husband can’t forbid her right by inshucting trader not to give credit to her).
But, the wife can’t enjoys this right if-
a) She lives apart of her own will
b) her husband makes adequate provisions for her maintenance]
3. Agency by “Ratification”:
Sometimes a person (agent) can act on behalf of another person (principal) without his
consent/knowledge. If the other person (principal) accepts the act, then contract of agency arises by
ratification. Simply, agency arising after the event 9act)is known as agency by ratification. It is also
called as Ex Post facto agency.
Eg: i). “A” insures “P”s goods without his consent. Later on “P” ratifies “A”s act of insuring
goods. Held, the contract of insurance is valid (as if it is taken with the consent of “P”). Williams vs
North china Insurance co.
ii). ‘A’, without authority, lends ‘P’s money to ‘T’ subsequently, P accepts interest from T.
Contract of loan lending is valid.
iii). ‘A’ buys some goods for ‘P’ at higher price. ‘P’ objects the purchase but sells some of goods to
‘T’. Held: the purchase is valid because ‘P’ ratifies it by his act of selling (Cornwal vs Wilson).
4.Agency by operation of law:
Sometimes agency may arise by operation of law.
Eg: i). During formation, promoters are agents of company.
ii). Partner is agent of partnership.
Its all agency implied by operation of law.
Essentials of a valid ratification:
Ratification is the approval of a past unauthorized act. It is a kind of affirmation of an
unauthorised act.
Ratification makes the unauthorized act as valid.
Requisites/ Essentials of valid ratification:
1. Agent must act on behalf of principal:

4. To be valid, the act must be done for the principal, it should not be done on account of agent.
Eg: Keighley Vs Durand: The agent was authorised to buy wheat at a specified price. But, he
purchased wheat at higher price and for his own name. The principal accepted the purchase. Held, the
ratification was not valid. The agent could not recover the price from ‘P’.
2. Principal must exist at the time of contract:
To be valid, the principal must exist at the time of performance of the act.
Eg: A company cannot ratify any act done for it before its incorporation.
Kelner Vs Baxter: The promoters of a company entered into a contract before its incorporation.
Held: The company could not ratify the contract.
3. Principal must have contractual capacity:
The principal must have contractual capacity both at the time of contract and at the time of
ratification.
Eg: An act done on behalf of minor cannot be ratified by him after attaining majority.
4. Principal must have full knowledge/facts of the act:
To be valid ratification is made after knowing full facts of the act.
Eg: ‘P’ authorizes ‘A’ to buy goods at a fixed price. ‘A’ purchases goods at higher price. Even
then ‘P’ accepts the purchase. Later it is known that the goods (purchased) are belonging to ‘A’ himself.
Ratification is invalid (because ‘A’ conceals the material fact).
5. Ratification within reasonable time:
To be valid ratification must be made within a reasonable time. Otherwise it is invalid.
6. The whole transaction must be ratified:
To be valid ratification must be made for whole transaction. If it is partially accepted/ rejected,
ratification is not valid.
7. Ratification is for lawful act:
To be valid, ratification is made only for lawful acts. If the act is not lawful (void, illegal) then
ratification is not valid.
8. Ratification must be communicated:
To be valid, ratification must be properly communicated to the concerned to the concerned person
(T).
9. Power of principal to ratify:
To be valid, the ratification is made on those acts which the principal can do. (The principal can’t
ratify an act which he is incapable of doing). Eg: A company can’t ratify the acts of directors (which are
ultraires the company’s power).
10. Ratification and third party:
Ratification, to be valid, should not cause any loss to third part.
Limitation to doctrine of ratification:
Ratification is not valid under the following circumstances:
A). When the act is not done on behalf of principal up to 10

5. Classification of agent:
Agent
On the basis of authority On the basis of nature of work
Special General Universal Commercial Banker Non-
Agent Agent Agent Agent coml. Agent
Factor Auctioneer Broker commission agent Del-credere agent
1. On the basis of authority:
On the basis of authority, agent may be classified as Special agent, General agent, Universal agent.
i). Special agent:
An agent who is appointed to do a particular act for his principal, is known as special agent. He
has limited authority. (ie) He is authorized to do the particular act and none else. His authority comes to
an end when he does the act. Eg: a). An agent appointed to sell a house. b). An agent employed to bid at
an auction.
ii). General agent:
An agent who has authority to do all acts relating to a particular trade/ business, is known as
general agent.
Eg: Manager of a business house. He has all authority to carry on the business successfully. But,
the principal can limit his authority.
iii). Universal agent:
An agent who has unlimited authority is known as universal agent. He can bind his principal by
his act if- a). the act is a legal one b). the act is agreeable to the law of land.
2. On the basis of nature of work:
On the basis of nature of work done by the agent, agent can be classified into-
i). Commercial (or) Mercantile agent ii). Banker iii). Non- Commercial (or) Non-Mercantile agent.
Let us discuss.
i). Commercial (or) Mercantile agent:
An agent who has authority- a). to sell goods b). to consign goods for sale c). to buy goods
and d). to raise money against the security of goods. Mer. agent can be further classified into-
I.Factor:
A factor is a mercantile agent who-

6. a). has possession of goods for sale. b). has authority to do anything for the successful conduct of
business c). can sell goods in his own name d). can sell goods on credit e). can receive the price of goods
and give a valid receipt for it f). has general line on goods for his claims on agency.
Eg: ‘F’ delivered his car to ‘A’ for sale @ £575. But ‘A’ sold the car to ‘K’ @ £340. K bought the
car in good faith. Later on ‘F’ sued K’ to recover his car. Held: the sale was valid and ‘F’ could not
recover his car from ‘K’-Fokes Vs King.
II. Auctioneer:
Auctioneer is a mercantile agent who-
a). has possession of goods for auction sale b). has authority to receive commission for his act c).
can receive the price of the goods and give a valid receipt d). can sue the buyer for the price in his own
name e). has particular line on goods for his commission.
III. Broker:
Broker is a mercantile agent who buys or sells goods on behalf of another. His main
function is to bring contractual relationship between buyer and seller. He is entitled to commission
called brokerage.
He has no possession of goods. He cannot sell goods in his own name and sue for price. He
cannot exercise line on goods.
IV. Commission agent:
An agent who buys or sells goods for others remuneration is called commission agent. His
remuneration is known as commission.
V. Del- credere agent:
An agent who guarantees the recovery dues from debtors for an extra commission is known
as del-credere agent. He acts in dual capacity. (ie) an agent and guarantor.
When the debtors fails to pay, the agent has to bear the bad debts.
ii). Banker:
Banker is agent to his customer when the buys/ sells securities, collects cheque, bills etc for
his customers.
iii). Non- Mercantile agents:
Those persons who represent their principal in various (transactions other than buying &
selling of goods) transactions related to rendering services, are called non- mercantile agents.
Eg: Attorney, solicitors, insurance agent, clearing and forwarding agent etc.
Relations of principal and agent:
Relation between principal and agent can be studied under-
i). Rights and duties of agent towards principal
ii). Rights and duties of agent principal against agent.
Let us discuss:
Duties of agent:
1. Act as per direction and within his authority:
Agent must act as per the instructions of his principal. He also acts within the scope of his
authority. Otherwise he is liable to his principal.

7. Eg: i). An agent, instructed to insure goods failed to insure the goods. Held: Agent is liable to
compensate the loss of principal [P. Jankidas Vs Mohanlal]
ii). An agent sells goods of his principal on credit which is against the customs of their business.
Later on the buyer becomes insolvent. Held: The agent is liable to compensate the loss.
2. Act with reasonable care, skill and diligence:
Agent must do the business (of agency) with reasonable care, skill and diligency. If the principal
suffers any loss due to negligence, want of skill of agent, then the agent has to compensate the loss.
Eg: i). ;A; sells goods of ‘P’ on credit to ‘T’ without verifying solvency of ‘T’. Later on, ‘T’
becomes insolvent. ‘A’ has to compensate the loss.
ii). ‘A’ (insurance agent) was instructed to insure the ship of ‘P’. A omitted to see whether usual
clauses are inserted in the policy. Later on the ship sunk. Nothing was recovered from the insurance
company. ‘A’ was liable to make goods the loss.
3. Render proper accounts:
Agent must maintain proper accounts and render them to the principal on demand.
4. Communicate with principal in case of difficulty:
At the time of difficulty/ emergency, agent must make all efforts to communicate with the
principal and get his instructions.
5. Not to deal on his own account:
In agency business, agent does not deal on his own account without the consent of the principal. if
he does so, the principal can repudiate (cancel) the contract.
Eg: ‘P’ directs ‘A’ to sell his estate. A buys the estate for himself in the Name of ‘T’. Later on ‘P’
knowing the fact can cancel the contract.
6. Remit sum received for principal:
Agent must remit all money received for his principal, to the principal. He may deduct all his dues
from the sum.
7. Protect the interest of principal in case of his death or insolvency:
When the principal dies/ becomes insolvent/ unsound mind the agent must take utonose care to
protect the interest of his ex- principal.
8. Not to make secret profit from agency: (An agent position is fiduciary in nature)
Agent cannot make secret profit without the knowledge of his principal. he is entitled to his
remuneration/ commission for his service. If the agent makes secret profit, the principal can get back
that profit, he can refuse to pay commission; he can repudiate the contract and he can dismiss the agent
without notice.
Eg: An agent sold his own goods to the principal without disclosing the fact. Held: The agent must
return any profit out of the sale to his principal. Kimber Vs Barber.
9. Not to disclose confidential matters:
Agent should not disclose confidential information of agency to others.
10. Not to set up adverse title:

8. Agent should not set up an adverse title against his principal on the goods received from him.
11. Not to delegate his authority:
The agent should not delegate his authority to others. There are certain exceptions to it. Eg: Sub-
agent.
Rights of agent:
The rights of an agent are as follows:
1. Right to receive remuneration:
Agent has right to receive agreed or reasonable remuneration on completion of the act of agency.
But he cannot get his remuneration upon his misconduct.
Eg: i) ‘A’ was appointed to get orders for advertisements in a newspaper. It was agreed to pay
commission to him on the publication of the advt. A secured (got) orders for advt but the advt was not
published due to termination of agency.
Held: A was entitled to commission. Sellers Vs London country newspapers.
ii). ‘A’ was employed to collect Rs 100000 from ‘T’. Due to ‘A’s misconduct, the amount was not
collected. Held: ‘A’ could not get remuneration but compensate the loss to the principal.
2. Right of retainer:
The agent can retain any amount due to him by way of commission, advance or expenses from the
money collected for the principal.
3. Right of particular line:
The agent has right to retain goods , papers (documents), other property of the principal till his
claims (dues) for commission, expenses arew received from the principal.
4. Right of indemnification:
The agent is entitled to be indemnified for all lawful acts done by him for his principal. (But he
can’t get any compensation for his unlawful acts which are evensupported by the principal.
Eg: i). ‘A’ was instructed to contracted with ‘T’ deliver certain goods to him. Later ‘P’ did not
deliver goods to ‘T’. So, ‘T’ filed a suit against ‘A’ and got compensation from ‘A’. Held: ‘A’ could
recover the compensation from ‘P’.
ii).’P’ employs ‘A’ to beat ‘T’. He also agrees to indemnify ‘A’ for any loss (due tp the act). ‘A’
beats ‘T’. So ‘A’ has to pay damages (compensation) to ‘T’. Held: ‘P’ is not liable to indemnify ‘A’.
5. Right of compensation:
The agent has right to get compensation for any loss sustained by him due to the negligence or
misconduct of the principal.
Eg: ‘P’ employs ‘A’ as a brick layer (mason) for constructing a house and puts up scaffolding by
himself. ‘A’ falls and gets injured. ‘A’ can get compensation from ‘P’.
6. Right to stoppage in transit:
Agent has right to stoppage in transit in the following cases-
i). When he incurs personal liability on the purchase of goods for principal.( he purchases goods in
his own name and the principal becomes insolvent).

9. ii). When he incurs personal liability towards the principal for the price of goods sold. (Delcredere
agent can stop goods in transit when the buyer becomes insolvent).
Duties and rights of principal:
Duties of principal: (Right of right)
The following are the duties of principal-
1. Duty to indemnity agent for lawful acts:
The principal has to indemnify the agent for all lawful acts done by him towards agency. (But he
does (need) not indemnify for unlawful acts of agent).
2. Duty to indemnify the agent for acts done in good faith:
The principal has to indemnify the agent for his acts done in good faith. (ie) Sometimes principal
may not have good title to goods. Without knowing it, the agent in good faith may sell the goods to third
parties. Defective title may third parties cause loss (if any). The principal has to indemnify the agent in
such cases.
3. Duty to compensate the agent for his negligence/ misconduct:
The principal has to compensate his agent for any loss sustained by him due to his negligence/
misconduct.
4. Duty pay remuneration:
The principal has to pay agreed or reasonable remuneration/ commission to his agent for his
services.
5. Duty to reimburse expenses incurred towards agency:
The principal has to reimburse any expenses incurred (by the agent) towards agency.
Rights of principal:
The following are the rights of principal-
1. Right to indemnify:
Sometimes the agent does not follow the instructions of the principal and causes loss to the
principal. in such case, the principal can recover the loss from the agent.
2. Right to recover damages:
Sometimes the agent may cause loss to the principal by not following customs of trade. In such
case, the principal can recover damages from the agent.
3. Right to get compensation:
Sometimes the principal may sustain loss due to negligence/ misconduct of agent. In such case, he
can recover the loss from the agent.
4. Right to recover secret profits:
Whenever the agent makes secret profits (without the knowledge of the principal) out of agency,
the principal has right to recover such secret profits from the agent.
5. Right to resist claim for remuneration:

10. Whenever the agent makes secret profits, the principal can refuse to pay remuneration
(commission) to the agent for his services.
6. Right to resist claim for indemnify:
Sometimes the agent incurs personal loss in the course of agency business. in such case, it is the
duty of the principal to compensate such loss. But, the loss is due to agent’s negligence, the principal can
resist the claim for loss.
7. Right to verify accounts of agency:
The principal has right to get the books and accounts of agency and verify them.
Termination of agency:
Meaning:
When the relationship between agent and principal comes to an end, it is known as
termination of agency.
Modes of termination of agency:
Contract of agency is terminated by- (I). Act of parties (II). Operation of law
(I). By act of parties:
i). By agreement:
contract of agency can be terminated by mutual agreement between agent and principal (at any
time and at any stage).
ii). Revocation by principal:
The principal may revoke the authority of the agent at any time. But the revocation must be made
before the agent exercises his authority. Otherwise, he is liable to breach of contract. In case of
continuous agency, it can be terminated by giving notice of termination to the agent and terminate.
iii). Revocation by agent:
The agent can also the agency by giving notice of termination to the principal.
In case of continuous agency, (agency for a specific period) if agency is terminated
abruptly without sufficient cause, the agent has to compensate the principal (or the principal has to
compensate the agent).
Delegation of authority:
Introduction:
The general rule is that an agent cannot delegate his authority to another. Without principal’s
consent (ie) “Delegates non potest delegare” is the maximum. Because, in a contract of agency, the
principal relies upon agent’s skill, competence and integrity.
Exceptions: Under the following cases, an agent can delegate his authority to another (sub-agent).
i) Where the trade custom permits delegation. Eg: A banker who is authorized to let out a
house and collect rent, may entrust the work to an estate agent.
ii) Where the nature of work requires delegation. Eg: A banker who is instructed to pay a
certain amount to a person at a particular place, may do it through another banker (who has its branch
at that place)
iii) Where the principal permits such delegation.
iv) Where unforeseen emergencies arise requiring delegation.

11. v) Where the act of agent does not requires skill or confidence.
Sub- agent and substituted agent:
Sub agent:
A person who is employed and controlled by the original agent is called sub- agent.
Sub- agent has no relationship with the principal. he is responsible to the original agent.
Eg: A banker who is authorized.
Substituted agent (or) Co- agent:
A person who is nominated by the agent ( with the consent of principal) to acvt for the
principal, is called substituted agent or co- agent.
A co- agent is also an agent of the principal. he has contractual relationship with the
principal. he is responsible to the principal. Eg: ;P; appoints ‘A’ to recover his dues from ‘T’.
‘A’ instructs A1 (a solicitor) to take legal action against ‘T’ to recover the dues. Here A1 is co-
agent and works for ‘P’
Sub- agent Vs substituted agent:
Sub- agent Substituted agent/ Co- agent
He is appointed by original agent. He is nominated by the agent but appointed
by the principal.
He is the agent of original agent. He is the agent of the principal.
His acts binds the original agent. His acts binds the principal.
There is no relation between him and the
Principal.
There is a relationship between him
& the principal.
The principal cannot sue subagent. The principal can sue the Co- agent.
He is controlled by the original agent. He is controlled by the principal.
II). Termination (of agency) by Operation of law:
By operation of law, agency may be terminated in the following ways (or) modes.
1. Performance of the contract:
An agency comes to an end when its object is fulfilled.
2. Expiry of period:
When an agency is created for a specific period, then the agency comes to an end at the expiry
of the specific period. (eventhrough the object is not fulfilled)
3. Death, insanity and insolvency of agent or principal:
When the agent or the principal dies, becomes insane or insolvent the agency comes to an end.
4. Destruction of subject matter:
When the subject matter of agency is destroyed, then the agency comes to an end.
5. Alien enemy:
When the agent or the principal becomes an alien enemy, then the agency comes to an end.
6. Dissolution of firm (or) company:
When the firm/ company (which is either agent or principal) is dissolved, then the agency
comes to an end.
7. Termination of sub- agents authority:

12. When the agent’s authority is terminated, it will automatically terminate the authority of sub-
agent.
When termination takes effect:
As to agent, when the agent has the knowledge of termination of his authority.
As to third party, when they know about the termination.
Irrevocable agency:
When an agency cannot be terminated, it is called irrevocable agency.
Following are irrevocable agencies-
a). Agency coupled with interest:
When an agency is created to protect the interest of the agent, such agency is called agency
coupled with interest. Eg: ‘P’ owes some amount to ‘A’. He employs ‘A’ as his agent to sell his
land and allows him to recover his dues from the sale proceeds. The agency can’t be terminated.
b). When agent has incurred personal liability:
When the agent incurs a personal liability towards/ for the agency, then the agency
becomes irrevocable.
c). When agent exercises authority partially:
When an agent party exercises his authority, then the principal cannot revoke the agency.