USIU

BUS 3010 A & D

BUSINESS LAW

LAW AGENCY (Week 13)

AGENCY LAW
The law of agency in Kenya is basically that of the English Common Law. It deals with
the relationships that arise when one person, the agent, is used by another, the principal,
to perform certain tasks on his behalf.

CREATION OF THE AGENCY RELATIONSHIP

Agency may be created in four ways namely,
i. By contract
ii. By Ratification
iii. By Estoppel
iv. By operation of the law

Agency by Contract
This may either be by express contract which requires no special formality and may be
oral or in writing or it may be implied contract of agency. In the latter case, there is no
express contract but only a set of circumstances arid-conduct of the parties which
necessitate the implication of an agency relationship.

Agency by Ratification
Under ratification what the agent does on behalf of the principal is done at the same when
the agency relationship is non-existent. Later, however the principal on whose behalf
though without whose authority, the agent has acted accepts the agents acts and adopts it
just as if there had been the principal's prior authorization. Three conditions must be
fulfilled to constitute a valid ratification namely;

i. The agent whose act is sought to be ratified must have claimed to act for the
principal;
ii. At the time of action the agent must have had a competent principal;
iii. At the time of ratification the principal must be legally capable of doing the act in
question himself.

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Agency by Estoppel
Estoppel when applied to agency means that a person who by words or conduct has
allowed another to appear to the outside world to be his agent with the result that third
parties deal with him as his agent cannot afterwards refuse to accept or acknowledge this
apparent agency if to do so would cause injury to third parties. There are basically three
legal requirements for the application of estoppel. First, there must be a representation
either through a. statement or conduct on the part of the principal to the effect that the
agent has authority to act on his behalf. Secondly, there must be a reliance on that
representation by a third party-and finally, the third party must change his position as a
result of that reliance.

Agency by operation of the Law

There are two situations here namely, agency of necessity and agency arising from
cohabitation. Under agency of necessity there are certain accepted instances of historical
origin under English Law where the law creates a relationship of principal and agent
irrespective of the agreement of the parties. The most notable examples are those of a
master of a ship and a deserted wife. In the former case if the cargo or the ship is
threatened with perishing in an emergency and the master cannot communicate with the
owners of the ship or the cargo he may sell or pledge the ship and or cargo and his acts
although unauthorised will bind the owners, his principals. In the latter case a deserted
wife, so long as the husband's conduct is wrongful, has the right to pledge her husband's
credit for necessaries.

Under agency arising out of cohabitation, the relationship of principal and agent exists
between husband and wife as long as they are living together. The wife is presumed to
have the husband's authority to pledge his credit for the purpose of purchase of
necessaries.

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Similarly there is the agency of a mistress wherein as long as there is cohabitation
between a man and a woman in circumstances in which the outside world is allowed to
think that they are husband and wife, the woman will be in the same position as a wife to
pledge the man's credit for purposes of the purchase of necessaries..

THE SCOPE OF THE AGENCY RELATIONSHIP

By scope of the agency relationship is meant the exact nature and extent of the power
which is possessed by the agent and it is explained in terms of the artificial notion of law
as the agent's authority. Because of the different types of situations in which agency
relationships arises there are various categories of authority namely:

1) Actual or real priority

2) Apparent authority
3) Presumed authority

Actual or Real Authority

This refers to the authority which the agent has in fact been given by the principal under a
contract or agreement made between them. It may be subdivided into three categories
namely, express, implied, usual or customary authority. Under express authority the
agents authority may be specifically created and limited by the terms of the agreement or
contract which gives rise to the agency relationship and it may be contained in a deed
(power of attorney) or in oral or written authorization.

Secondly, the agents authority may be implied from the nature of the business which he is
employed to transact. Generally, every agent has implied authority to do everything
necessary for, and ordinarily incidental to the carrying out of his express authority
according to the usual way in which such authority is executed. Usual authority is that
which an agent in the trade, business, profession or place in which the particular agent is

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employed would normally or customarily possess, unless expressly stated to the contrary
by the principal. It is based upon the settled trade, business or professional usages and
customs.
Finally, under customary authority, where an agent is employed to act for his principal in
a certain place, market or business then he is impliedly authorised to act according to the
usages and customs of such place, market or business.

Apparent Authority
This is an authority which an agent has not been given by the principal but which the law
regards the agent as possessing despite the principal's lack of consent to his exercising
such authority. This is because the principal by his conduct has allowed the agent to
appear to have authority, or to have a greater authority than was in fact given to him. It
arises as a result of the operation of the legal doctrine of estoppel where it must be shown
that the principal's conduct was such as to mislead third parties and to induce them to rely
upon the existence of the agency to their detriment. In this situation the agent will bind
the principal by what he does.

Presumed Authority
This type of authority depends upon what the law presumes the principal would have
agreed to the agent's doing had he been free to give instructions to the agent. It is
therefore created by the law and does not depend upon any express or implied consent
from the principal nor does it result from the principals representations. The authority
arises in situations of necessity, deserted wife and agency of a wife or mistress.

THE OBLIGATION OF THE AGENCY RELATIONSHIP

The Duties of the Agent

There are two types of duties of the agent viz;

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 i. Those arising from agreement which may be express or implied duties; and
ii. Those that arise from the fiduciary nature of the agency relationship. Express
duties are stipulated in the contract and any acts done outside the scope of the
powers conferred will not bind the principal.
iii. Implied duties include; the duty to perform what he has contractually undertaken
to perform. As regards the duty of obedience, the agent must act in accordance
with, the authority given by the principal expressly implied, or customarily. The
agent in the performance of his duties must exercise due care and skill, the
standard of care being that which an agent in his position would usually possess
and exercise. The agent should not delegate his duties to a sub-agent unless the
law or by contract or by contract or the nature of the business makes it inevitable.
The agent must respect the principals title to goods, money or land possessed by
the agent on behalf of the principal.
iv. The agent has a duty to account for all monies paid to the use of

The second category of duties of the agent are those arising from the fiduciary nature of
the relationship. These duties are equitable in nature arise from the fact that the agency
relationship is one of trust and Firstly, there is a duty of fidelity. Where the agent is in a
position in which his own interest may affect the performance of his duty to the principal,
the agent is obliged to make all the material and therefore, important and relevant
circumstances known so that the principal, with such full knowledge can then choose
whether to consent to the agents acting or not. Failure to do this may lead the principal to
set aside the transaction and claim from the agent any profit obtained. The agent may not
use information acquired in the course of his employment for his personal benefit. The
agent must also not make secret profits out of the agency relationship. Secret profit refers
to any financial advantage which the agent receives over and above what he is entitled to
receive from the principal as commission. If he does so the principal can repudiate the
contract of agency.

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The Principal’s duties
The Principal' duties are basically two; namely, that of remuneration and secondly, that of
indemnity. The principal must pay the agent remuneration or commission. This is either
express or implied in the agency contract. Secondly, the principal is under a duty to
indemnify or compensate his agent against losses, liabilities and the costs incurred in the
performance of the undertaking.

REMEDIES
As far as the principal is concerned three remedies are available to him against the agent.
First, he can dismiss the agent for misconduct or if the agent is guilty of breach of any of
the duties for which he was employed to perform, and the agent then loses his right to be
paid.

Secondly the principal can sue the agent for breach of any of the duties and seek damages
for breach of contract or in tort for damages for negligence. Again the principal can sue
under conversion where the agent has failed to hand over property; can sue for agent to
account for secret profits received and, where the property of the principal has '' become
mixed with that of the agent, tracing in equity. Thirdly, the principal can institute
criminal proceedings if the agents conduct amounts to a criminal offence such as bribery
or misappropriation of funds.

On the part of the agent, he has a right of action for damages for breach of contract if the
agent earns his commission and is not paid. The agent can also enforce his right to be
indemnified for expenses incurred by action. Secondly, if the principal sues the agent for
breach of any of the duties, the agent can counter-claim or set-off such claim or the
amount due to him as remuneration or indemnity. If the set-off or counter-claim is
proved, the principal loses the suit and pays the balance, if any. Thirdly, if the agent
lawfully has goods that he is supposed to pass to the principal and the principal fails to
pay his commission, the agent has a right of lien over property.

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EFFECTS OF AGENCY

Contracts by Agents
For purposes of determining the rights and liabilities of the parties where an agent has
contracted on behalf of a principal, a distinction is made between two kinds of principal,
the disclosed and the undisclosed principal. The disclosed principal category includes the
named principal, that is one whose name has been revealed to the third party by the agent
and the third party thus knows that the agent is contracting on behalf of a particular
principal; and the unnamed principal, that is one whose existence, but not identity or
name, has been revealed to the third party. The undisclosed principal is one whose
identity has not been given to the third party and the fact that the agent is acting on behalf
of the principal is not revealed to the third party. The third party thus thinks that he is
contracting personally with the agent.

Where the agent contracts as agent for a named principal he incurs neither rights nor
liabilities under the contract except in certain cases. These, are first, where he executes a
deed in his own name wherein he is liable on the deed; second, where he is in fact the
principal but contracts as agent; thirdly where he signs a bill of exchange in his own
name and finally, where the custom of a trade makes the agent liable.

Where the agent contracts as agent for an unnamed principal he is not personally liable
on the contract. However if he does not on the face of the contract indicate that he is
merely an agent, he will be liable and the third party may elect to sue either him or the
principal.

In cases where the agent contracts as agent for an undisclosed principal, the latter can
step in and sue the third party and hence can be personally liable to the third party. If the
third party discovers the principal he may choose to sue either the agent or the principal.

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These rights of the undisclosed principal to intervene and of the third party to elect are
not available firstly, if their exercise goes against the terms of the contract between the
third party and the agent and secondly, if the agent was unauthorised or exceeded his
authority.

TERMINATION OF AGENCY
There are two ways in which an agency relationship may be brought to an end namely: by
act of the parties; and, by operation of the law. The parties to the agency relationship can
terminate it by agreement between themselves to discharge that relationship or by the
withdrawal of either party from the original agreement by notice of revocation of the
agency in the case of a principal or notice of renunciation of the agency by the agent. The
above general rules are subject to some qualifications. First, where the purpose of the
agency is to secure beneficial interest in favour of the agent which the principal owes the
agent, the principal cannot revoke the agency. Secondly, where the agent has incurred
personal liability as a result of acting for the principal within the scope of his authority
the principal cannot revoke the agency so as to escape liability to indemnify the agent.
Thirdly, the agent will be indemnified or be given commission for what he has already
done or earned before revocation.

Termination by operation of the law, may occur in the following

i. Once the transaction which the agent has undertaken to perform is completed, the
agency automatically terminates.
ii. If the period for which it was created comes to an end, the agency relationship
ceases.
iii. If the subject matter of the agency is destroyed or otherwise ceases to exist the
agency is terminated
iv. If the agent or principal dies, becomes insane or goes bankrupt the relationship is
terminated.

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The foregoing rules on termination apply to agency created by act of parties. In agency
created by operation of the law the following rules apply;

i. An agency of necessity terminates once the necessity which brought it into

existence ceases.
ii. In the case of a deserted wife, her right to pledge her husband’s credit ends if she
obtains sufficient means from him or elsewhere or if she is guilty of adultery
unless the husband allows, overlooks or forgives the adultery.
iii. Agency arising from cohabitation or that of a mistress ceases to exist when the
parties stop cohabiting.

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