UNIT 3: Contract of agency

Question Bank Answer

1. Define Contract of Agency.

Ans: Contract of Agency is a two-party relationship in which one person acts as
representative to the other in business dealing in order to create contractual relations
between that other and third person.

An agency may be created to perform any act which the creator of agency himself could
lawfully do.

2. Explain the Essentials of Contract of Agency.

Ans: These are the essentials of Contract of Agency which are given below:

● Agreement: There shall be an agreement between the principal and agent.

● Consideration: The contract shall be with or without consideration.

● Intention to act: There shall be an intention of the agent to act on behalf of the principal.
When the agent enters into a contract for himself, then the principal will not be liable.

● Creation of agency: The Contract of Agency could be created in any of the subsequent
ways;

● Express agency: The agency or agency agreement could also be created by words of
mouth or by an agreement in writing.

● Implied agency: An implied agency or agency agreement arises from conduct, situation
or relationship of parties.

3. Explain the agency Created by Agreement.

Ans: : 1. Agency Created by Agreement
Most agencies are created by contract. But agencies can also be created without contract, by
agreement. Therefore, three contract principles are especially important: the first is the
requirement for consideration, the second for a writing, and the third concerns contractual
capacity.

Consideration
Agencies created by consent—agreement—are not necessarily contractual. It is not
uncommon for one person to act as an agent for another without consideration. For example,
 Abe asks Byron to run some errands for him: to buy some lumber on his account at the local
lumberyard. Such a gratuitous agency gives rise to no different results than the more common
contractual agency.

Formalities
Most oral agency contracts are legally binding; the law does not require that they be reduced
to writing. In practice, many agency contracts are written to avoid problems of proof. And there
are situations where an agency contract must be in writing: (1) if the agreed-on purpose of the
agency cannot be fulfilled within one year or if the agency relationship is to last more than one
year; (2) in many states, an agreement to pay a commission to a real estate broker; (3) in
many states, authority given to an agent to sell real estate; and (4) in several states, contracts
between companies and sales representatives.

Even when the agency contract is not required to be in writing, contracts that agents make
with third parties often must be in writing. Thus Section 2-201 of the Uniform Commercial
Code specifically requires contracts for the sale of goods for the price of five hundred dollars
or more to be in writing and “signed by the party against whom enforcement is sought or by his
authorized agent.”

Capacity
A contract is void or voidable when one of the parties lacks capacity to make one. If both
principal and agent lack capacity—for example, a minor appoints another minor to negotiate or
sign an agreement—there can be no question of the contract’s voidability. But suppose only
one or the other lacks capacity. Generally, the law focuses on the principal. If the principal is a
minor or otherwise lacks capacity, the contract can be avoided even if the agent is fully
competent. There are, however, a few situations in which the capacity of the agent is
important. Thus a mentally incompetent agent cannot bind a principal.

4. Explain the Agency Created by Operation of Law.

Ans: Most agencies are made by contract, but agency also may arise impliedly or apparently.

Implied Agency

In areas of social need, courts have declared an agency to exist in the absence of an
agreement. The agency relationship then is said to have been implied “by operation of law.”
Children in most states may purchase necessary items—food or medical services—on the
parent’s account. Long-standing social policy deems it desirable for the head of a family to
support his dependents, and the courts will put the expense on the family head in order to
provide for the dependents’ welfare. The courts achieve this result by supposing the dependent
to be the family head’s agent, thus allowing creditors to sue the family head for the debt.
Implied agencies also arise where one person behaves as an agent would and the “principal,”
knowing that the “agent” is behaving so, acquiesces, allowing the person to hold himself out as
an agent.

5. Explain the Agency by ratification.

Ans: Agency by ratification arises when a person (the principal) ratifies (that is, approves
and adopts) an act which has already been done in his name and on his behalf by another
person (the agent) who in fact, had no actual authority (whether express or implied) to act
on his (the principal's) behalf when the act was done.

Ratification by itself only creates an agency relationship between the principal and the agent
in respect of the act ratified by the principal, but not in respect of any other act, whether past
or future.

The person who ratifies an act of another person must have been in existence and have the
legal capacity to carry out that act himself both at the time when the act was done and at the
time of ratification. A person may lack legal capacity on grounds of bankruptcy, infancy or
mental incapacity.

6. Explain the Agency of necessity.

Ans: Agency of necessity arises when a person ("A") is faced with an emergency in which the
property of another person ("B") is in imminent jeopardy and it becomes necessary, in order to
preserve the property for A to act for and on behalf of B. In this case, A acts as an agent of
necessity of B.

Agency of necessity arises only when it is practically impossible for the agent to communicate
with the principal before the agent acts on behalf of the principal. (This would be difficult to
establish with today's advanced communication systems and is the reason why agency of
necessity does not often arise.)

Authority to act in case of emergencies cannot usually prevail over express instructions to the
contrary given by the principal.

7. Explain Agents.

AnS:.An agent is a person who acts in the name of and on behalf of another, having been
given and assumed some degree of authority to do so. Most organized human activity—and
virtually all commercial activity—is carried on through agency. No corporation would be
possible, even in theory, without such a concept. We might say “General Motors is building
cars in China,” for example, but we can’t shake hands with General Motors. “The General,” as
people say, exists and works through agents. Likewise, partnerships and other business
organizations rely extensively on agents to conduct their business. Indeed, it is not an
exaggeration to say that agency is the cornerstone of enterprise organization. In a partnership
 each partner is a general agent, while under corporation law the officers and all employees are
agents of the corporation.

The existence of agents does not, however, require a whole new law of torts or contracts. A
tort is no less harmful when committed by an agent; a contract is no less binding when
negotiated by an agent. What does need to be taken into account, though, is the manner in
which an agent acts on behalf of his principal and toward a third party.
.

8. Explain the Difference Between an Agent and Servant.

ANs: Difference Between an Agent and Servant
1. Authority to create contractual relationship: Apart from acting on behalf of his/her
principal, an agent has the authority to create contractual relations between the principal and a
third party. A servant ordinarily, has no such authority.
2. Control and Supervision: A servant is bound to work under direct control and supervision
of his employer. A ‘principal’ directs the agent as to what is to be done, but a master or
employer of a servant not only has that right, but also the right to direct how it is to be done.
3. Number of Masters: A servant usually serves only one master, but an agent may work
for several principals at the same time.
4. Remuneration: The mode of remuneration is usually different. Remuneration for a
servant is paid by way of salary or wages, whereas an agent generally gets his remuneration
in terms of commission calculated on the basis of the amount of business transacted.
5. Duty Assignment: A servant in certain cases to some extent may be assigned the duties
of an agent, and may act as one. For example, the secretary of a company is regarded as the
servant of the company, but in respect of the matters that come under his/her domain he/she
becomes an agent in their dealings with third persons. An agent as such never occupies the
position of a servant because whenever he acts, he acts on behalf of his principal and binds
him/her (principal) to third parties.
6. Liability: A principal is liable on contracts made by his agent within scope of authority.
But a master is answerable for any wrongful act of his servant if it is committed in the course of
the servant’s employment. .

9. Explain duties of an agent.

ANs: Following are the duties of agent:

1. It is the duty of an agent to execute the mandate of his principal.

2. It is the duty of an agent to take reasonable care of the property of the principal and not
to destroy the sale.
3. An agent is bound to render proper accounts to his principal on demand.
4. In case of difficulty, the agent must inform the principal and get instruction from him
before taking any steps in facing the difficulty or emergency.
5. It is the duty of agent not to deal on his own account.
 6. An agent should not make any secret profit out of his agency or agency agreement.
7. An agent must not delegate his authority to a different person, but perform the work of
agency himself..

10. Explain rights of agent.

Ans: Following are the rights of the agent:

1. Every agent is entitled to receive agreed remuneration, or if there is no agreement, a

reasonable remuneration.
2. An agent has the right to retain all money in respect of his remuneration, advances or
reasonable expenses incurred by him in conducting the business.
3. An agent has to be indemnified against the consequences of all lawful acts done by him in
the exercise of the authority conferred upon him.
4. It is the right of an agent to stop the goods in transit to the principal like an unpaid seller if
he has bought goods with his own money and the principal has become insolvent.

11. Explain Duties and Rights of the Principal.

Ans: Following are the duties of principal:

1. The principal is bound to indemnify the agent against the consequences of lawful acts done
by such agent in exercise of the authority conferred upon him.
2. The principal must make compensation to his agent in respect of injury caused to such
agent by the principal’s neglect or want of skill.

Following are the rights of Principal:

1. If the principal suffers any loss, he has a right to recover from his agent if it occurs due to
the following reasons;
2. Not any action of the agent according to the directions of his principal.
3. No following the customs of trade in the absence of directions.
4. No performing of his duties with skill, care or diligence.
5. If the agent without the knowledge and consent of the principal makes any secret profiles
out of the agency, the principal has a right to recover them from the agent.
6. If the principal shows that the agent has acted as a principal himself and not merely as an
agent, he has a right to refuse to indemnify the agent against loss suffered by the agent in
such transaction.
12. Explain ways of terminating of agency?
ANs: An agency or agency agreement could also be terminated in any of the subsequent
ways:
1. Agreement: An agency or agency agreement can be terminated at any time by a mutual
agreement between the principal and the agent. Therefore, the authority of an agent
terminates when the principal and therefore the agent complies with to terminate it.
2. Revocation by agent: An agency or agency agreement can be terminated or revoked by the
agent himself because a person cannot be compelled to work as an agent.
3. Revocation by principal: The principal can revoke the authority of the agent at any time
before the agent has exercised his authority.
4. Completion of business by agency: An agency or agency agreement comes to an end
automatically when the business of the agency is completed.
5. Expiry of time: If the agent is appointed for a fixed period, the agency comes to an end on
the expiry of the fixed period, even though the business may not have been completed.
6. Death: An agency or agency agreement terminates automatically on the death of the
principal or agent.
7. Insanity: An agency or agency agreement terminates automatically, where the principal or
the agent becomes of an unsound mind. When the principal becomes insane, the agent
cannot act for an individual of unsound mind.
8. Insolvency of principal: An agency or agency agreement is also terminated by the
insolvency of the principal.
9. Destruction of subject matter: An agency or agency agreement terminates on the
destruction of the subject matter of the Contract of Agency.
10. Alien enemy: If the principal and agent are citizens of two different countries and a war
breaks out between the two countries, the contract of agency(agency agreement) is
terminated..