DBA class notes Compiled by Njihia Kaburu Law of Business Organizations I: Agency i) Types of agents ii) Authority of an agent

iii) Rights and duties of the parties iv) Termination of agency AGENCY This is the relationship that exists between a person (Principal) who has given authority to another (agent) to act on his behalf. No businessman can today transact all his commercial undertaking by himself, not even a modest trader. It is inevitable that in order to achieve certain goals a person must depend on the services of other persons, thereby creating an agency relationship. In our ordinary daily lives we act as principles and agents in relation to our relatives and friends, carrying our various errands on behalf of each other. This extends to our simple as well as more sophisticated business deals. Modern commerce thus revolves and thrives around agency, the power to affect the principals legal position with regard to a third party. TYPES OF AN AGENT 1. Partners: partners act as agents for one another. A partner therefore binds the rest of the partners when he acts in the usual course of business. 2. Company Directors: Directors are given authority by the company to act on its behalf. They are thus capable of binding it to third parties under a contract. 3. Factors (Mercantile agent): he engages to sell the goods on behalf of the principal in return for commission and is given possession of the goods. 4. Brokers: he acts as an intermediary and arranges for his principal to contract with a third party. 5. Auctioneers: engaged to sell goods on auction on behalf of the principal. 6. Commercial agents: independent agent with continuing authority for sale and purchase of goods. Regulation of agency in Kenya As has been alluded to, an agency is founded on contractual relationships. In Kenya contracts are governed by the Law of Contract Act,4 whose main objective was to apply the English common law contract to Kenya. It stipulates in part: Save as may be provided by any written law for the time being in force, the common law of England relating to contract, as modified by the doctrines of equity, by [certain specified] Acts of Parliament of the United Kingdom to the extent and subject to the [specified] modifications shall extend and apply to Kenya FORMATION OF AGENCY (Types of Agencies) An agency relationship is created by mutual consent in most cases. This consent does not have to be formal or written. The relationship arises as a result of any of the following: a) Express Agreement: this is where the principal expressly confers authority on the agent to act on his behalf, specifying the scope of his authority. This may be orally or in writing. Commercially, its mainly in writing. Some kind of agents must be appointed in writing e.g. power of attorney (this must be in form of a deed). b) Implied Agreement: authority is implied either by conduct (employer-employee if employee signs on employers behalf) or relationship between the parties (husband and wife for domestic contracts). c) Ratification: this occurs if after someone has already acted on behalf of the principal, the principal approves of or adopts his acts as though they were done with his authority even though this is not the reality. There are conditions for ratification: o The principal must have existed (e.g. promoters of unregistered companies). o Ratifications should be made in reasonable time.
4 Chapter 23, and Laws of Kenya

DBA class notes Compiled by Njihia Kaburu o The ratification must be of the whole transaction not part of it. o The principal must have had legal capacity to contract at the time of the contract (minors, bankrupt, insolvent). o The principal must clearly and sufficiently communicate ratification to the third party. o The act must be capable of ratification (not illegal e.g. suicide bomb). o Principal must have knowledge of all material facts at the ratification time. Upon ratification, the position is that the agency relationship was established before the contract was formed. It must have been clear to the third party that the agent was not acting on his own behalf. Again, only an unnamed principal can ratify a contract but not an undisclosed one. d) Estoppel: this occurs when a principal holds out a person as an agent to third parties. He is later estopped from denying his agency. Though the person held out lacks authority to act as an agent, he binds the principal to the third party that acts on the representation of the principal. e) Necessity: he acts in emergency situation to avoid greater loss to his principal. However, the agent must show that the authority of the principal could not have been acquired by exercise of due diligence. E.g. goods when owner not contactable and there is a fire or ship captain sells out perishable goods b4 they go bad. AUTHORITY OF THE AGENT The principal usually places clear limits on how far the agent has the authority to act for him. As far as the agent sticks to this, any contract arising bind the third party to the principal. Three distinct sources of authority can be identified: Express Authority This is authority explicitly given by the principal to the agent to perform certain acts, along with powers necessary to do so. Often its made in writing, but may be verbal. The extent depends on construction of the words used on appointment. If an agent acts outside his express authority, he may be liable to the principal and third parties for breach of warranty of authority. Implied Authority This may be implied from the nature of the agents activities or as a matter of practice/trade usage/custom. Express authority may sometime exclude/override implied authority but only between principal and agent. For third parties, they may assume implied authority on the agent unless they are aware of contrary: Watteau v Fenwick (1893) F an owner of a hotel engaged the previous owner (H) to manage it. Watteau sold cigars to H on credit though F had instructed H not to buy cigars on credit. Held: though H had no actual authority, it was within the usual authority of a hotel manager to buy cigars on credit. W could therefore claim this even though H no longer had actual authority. Actual Authority Refers to both express and implied authority, distinguishing them from apparent authority. Apparent/Ostensible Authority This may be greater that actual authority. This is the authority which the principal represents to third parties that he has given to the agent. This authority arises if: Where the person allows another person who is not his agent to appear as if he is The principal has represented/allowed agent to represent to both the agent and a third party that the agent has more extensive authority than is really the case. Where principal has revoked the agents authority but the third party is not aware. 2

DBA class notes Compiled by Njihia Kaburu Its (unlike implied authority) however not restricted to what is usual and incidental. The principal may expressly or by inference from his conduct confer on the agent much wider ostensible authority. To create a wider ostensible authority: o The principal must make a representation as to wider than usual authority. o The representation must be one of fact and not law. o The representation must be made to a third party. o The third party must have relied on the representation o The third party must have altered their position (even for the better) as a result of relying on the representation. FIDUCIARY DUTIES OF AN AGENT 1. He must carry out his work strictly in accordance with the principals instructions. 2. He must act in good faith and for the benefit of the principal. 3. He must maintain proper account of all the transactions that he has carried out. 4. He must exercise reasonable care and skill while performing his duties. 5. He must not disclose the secrecy of the principals business. 6. He must carry out his duties personally and should not delegate them to someone lese unless he was authorized by the principal to do so or he feels that the work will be done more efficiently and cheaply if delegated. 7. He must not allow his personal interest to conflict that of the principal and if it happens, he should uphold the interest of the principal. 8. He must not compete with the business of the principal. 9. He must not accept any secret commissions/bribe. If he does so, the principal reserves the right to terminate the agency and withhold any commission due to him, recover the secret profit/bribe and even inform the police so that they institute criminal proceedings against the agent. REMEDIES TO PRINCIPAL FOR BREACH Where an agent is in breach of his fiduciary duty, the following remedies are available. The principal can repudiate the contract with the third party. The agent can be dismissed without notice. The principal may refuse to pay any money belonging to the agent and even recover monies paid. The principal can recover the secret profit made or any bride that was given. Boston deep sea fishing & ice Co v Ansell (1888) Ansell, an MD of the claimant company accepted a commission/ bribe from a supplier so as to award tender on behalf of company. On being found out, he was dismissed. The company was allowed to recover the commissions paid to him since the defendant was in breach of his fiduciary duty as an agent. PRINCIPALS LIABILITY TO THE AGENT The agent has the right: To claim remuneration or commission for services performed. Usually, the amount is stated in the agency agreement. Where its not stated and its a commercial agreement, the court implies a term into the contract requiring reasonable amount to be paid. To claim an indemnity against the principal for all expenses reasonably incurred in carrying out his obligations. To exercise lien over the principals property. Lien allows the agent to retain possession of Ps property that is lawfully in his (agents) possession until all outstanding debts owed to him (agent) e.g. arrears of remuneration etc. are paid by the principal. AGENTS LIABILITY TO THIRD PARTIES 3

DBA class notes Compiled by Njihia Kaburu The basic rule of agency states that any contract entered into by the agent within the authority given binds the principal and not the agent. This in effect means that an agent contracting for his principal within his actual/apparent authority generally has no liability on the contract and is not entitled to enforce it. However, there are situations when an agent may be held personally liable to third parties and thus can enforce the contract. These include: a) Where agent breaches warranty of authority When an agent acts without authority from the principal, he incurs personal liability against third parties. This can only be waived if principal ratifies the agents actions. Sometimes the agent may have authority but he exceeds his real as well as apparent authority. Such agent incurs personal liability since the principal will not be bound by unauthorized contracts made for him. Third parties can thus sue the agent for breach of warranty of authority. The agent is liable to the third party for the excess part, if it can be separated from the authorized part, otherwise for the whole transaction. Example A may purport to enter into contract with Z on behalf of H. A warrants or guarantees to Z that H exists and he has capacity to enter into the contract, and that A has authority from H to make the contract for him. If any of these implied warranties proves to be untrue, then (unless H ratifies the contract) Z may claim for damages from A for his loss. However, Z must have been unaware that A had no authority to make the contract. A is liable even if he was himself unaware that he lacked authority e.g. because H died. Kelner v Baxter (1866) The promoters of a company were liable since they made a contract for a company which did not exist i.e. was not incorporated at the time of contract. The principal was non-existent thus could not ratify the contract. b) Where agent acts for an unnamed principal The agent incurs liability against third parties when he declines to disclose the identity of the principal or he could not do so maybe due to sudden death. c) Where agent acts for undisclosed principal Where an agent acts for an undisclosed principal and the contract is in his own name, he is personally liable to third parties. However, if the party comes to know of the existence of the principal, he may hold either agent or principal or both of them liable. d) Where agent acts for a principal who cannot be sued An agent incurs personal liability if he acts for a principal who though disclosed cannot be sued. E.g. where he acts for an ambassador or a foreign sovereign. Similarly, if promoters contract for a projected company, they are personally liable for the company is not existent at time of contract, thus cant be sued. e) Where there is trade usage or custom Certain business practices and customs may require the agent to accept personal liability and be entitled e.g. an investor holds a stock broker personally liable as per custom of trade in stock exchanges. f) Where the agent expressly agrees. An agent may by his own volition assume liability to third parties in reference to his actions or omissions. This happens if he expressly agrees so in a contract with a third party. g) Where agent acts for a foreign principal Where an agent contracts for the sale or purchase of goods for a merchant residing abroad, he is presumed to be personally liable. h) Collateral contracts If an agent enters into a collateral contract with the third party whom he has contracted on the principals behalf relating to the agents special interest, there is a separate liability and entitlement to enforcement on that collateral contract, since the agent is actually the principal of that interest. i) Joint Liability 4

DBA class notes Compiled by Njihia Kaburu Certain occasions raise joint liability on both agent and principal. This occurs when the agent did not disclose that he acted for a principal. j) Fictitious principal The agent assumes personal liability if he acts for a fictitious- non existent principal. k) Insistence by third party If third parties insist that the agent accepts responsibility, he may assume such liability. l) Acting on own behalf If the agent is acting on his own behalf even though he purports to act for a principal, he assumes liability against third parties. Generally, a third party may hold either the agent, or his principal or both of them liable. i.e. the liability of the principal and the agent is joint and several in some cases. This means that even when the agent is personally liable, the principal is also liable to third parties. A third party can thus choose either to sue both the agent and principal jointly or sue each of them separately. However, its important to note that in instances a, b, d and g above, the third party can hold only the agent personally liable and not the principal. DISCHARGE OF CONTRACT OF AGENCY A contract of agency can be brought to an end through two basic means; by act of parties or operation of law: Termination by act of parties a) Discharge by agreement Agency is created through agreement. The same parties to the agreement can thus end it through amicable agreement. b) Revocation by principal The principal may also end the agency at any time before the agent has exercised his authority so as to bind the principal (unless the agency is irrevocable) upon giving reasonable notice to the agent to revoke the authority given. Before revoking the authority, the principal must however pay any commission due to the agent or any loss/ damage which the agent may have suffered. Further, revocation is express or implied. Express is through writing. It may also be implied in conduct of principal e.g. if A authorizes B to let his house but goes ahead (a) and lets it himself. Revocation by principal is however subject to certain conditions: Incase of a continuous agency, principal may revoke it for the future, but not acts already done. For future, he is bound to give reasonable notice to both agent and third parties, otherwise he pays for agents losses and still liable to third parties. For Fixed agencies, if the principal revokes before the fixed time lapses, he must have sufficient cause. Minus this, he is bound to pay damages to agent despite having issued adequate notice. Agency is irrevocable if: Where agent himself has interest in subject matter of agency, the agency is said to be coupled with interest. Its created with object of securing an interest of agent e.g. appoint agent to collect rent so as to service debts owed to him, receivership etc. the principal confers an interest on the agent and thus the agency cannot be revoked unilaterally during subsistence of the interest, in absence of an express contract to the contrary. Where an agent has incurred personal liability in accordance with terms of the agency contract, the principal is not allowed to revoke the agency, leaving the agent exposed to risk or liability he has incurred. 5

DBA class notes Compiled by Njihia Kaburu Revocation is however insufficient for the principal to escape liability. He should further inform third parties who have previously dealt with the agent of the change of circumstances. This is crucial when a partner leaves a partnership (next topic). c) Secret Commission/Bribe (Termination) If the agent accepts any undeclared (secret) commission or bribe, the principal reserves the right to terminate the agency. (Kelner v Baxter) d) Renunciation by the agent The agent may also end it by giving reasonable notice to the principal to renounce the authority given to him because a person can never be compelled to continue as agent against his will. Before renunciation, the agent must return all the money, goods, and documents in his possession to the principal. However, he must give reasonable notice, failure to which he is held liable for losses and damages arising, and also for fixed period agencies, he must have sufficient cause or compensate the principal for resulting losses if any. Termination by operation of the Law a) By court order The court has powers to order that an agency relationship be brought to an end. The court may terminate agency for any reason it deems fit but it mainly occurs if the purpose of the agency business has subsequently become illegal e.g. trading in ivory. b) Death/Insanity/Bankruptcy If either the principal or the agent dies, becomes bankrupt or insane, the agency automatically terminates. The agent must however take all reasonable steps for the protection of the interests of the late principal entrusted to him. c) Expiry of time If the agency has been contracted for a certain time period e.g. one year, it ends once the period for which it was set expires even though the business of the agency may not have terminated. d) Destruction of the subject matter An agency created to deal with a certain subject matter terminates automatically upon destruction of that subject matter. E.g. if house destroyed by fire, cant collect rent on non-existent houses. e) Completion of the business of agency If the agent was appointed to carry out a specific job e.g. sell car for the principal, the agency automatically comes to an end when the purpose has been fully achieved (the car is sold). Similarly, a lawyers brief ends with judgment in a case. Termination brings the actual authority of the agent to an end. However, third parties are allowed to enforce contracts made later by the agent until they are actively or constructively informed of the termination of the agency relationship. COMPILED BY: Francis Njihia Kaburu. IMIS, LL.B (Hons.), LL.M, Ph.D (cont), Lecturer, Business Department, MMUST. ******************************************watch space****************************************** this