Agency

A company can sign a contract only through people. A busy owner cannot be everywhere. A seller of goods may want someone else to find buyers. In each case, one person authorises another to deal with third parties on his behalf, and the law calls that relationship agency.

The law of agency decides who is bound by what the agent does, what the agent owes the principal, and what the principal owes the agent. Agency is also the reason partners bind each other, and the reason a company secretary can bind his company.

Examiners ask for the types of agent, the ways agency is created, the rights and duties of the parties, and the effect of the agent’s contracts.

This topic covers the meaning and effect of agency, how agency differs from trust, guarantee, bailment and employment, capacity, the classes of agent, the creation of agency (including necessity, estoppel and ratification), the forms of authority, the rights and duties of the agent and the principal, the effect of contracts made by agents, and the termination of agency.

The meaning and effect of agency

Agency is part of the law of contract, and it is an exception to the doctrine of privity. It is a consensual relationship between two persons, the principal and the agent. The agent is expressly or impliedly authorised by the principal to act for him in dealings with third parties. The syllabus says agency may arise in three ways:

1. by the agreement of the parties, contractual or not, express or implied;
2. by the principal’s later ratification of an act done on his behalf by a purported agent without prior authority; and
3. by operation of law under the doctrine of necessity.

The effect

When an agent makes a contract for his principal, two results follow. First, a relationship is created between the principal and the third party. Second, reciprocal rights and liabilities arise between them. The agent is the one who acts, but he does not act for himself. The law of agency is concerned not with the contract the agent made but with the relationship between agent and principal.

Agency and similar relationships

Capacity

Two kinds of capacity matter: the capacity to act as principal, and the capacity of both parties to enter the relationship. The liability of the principal or the agent to a third party depends on the contractual capacity of the person sued.

• If the principal becomes insane or bankrupt, the agency ends.
• A company cannot appoint an agent to do acts that are ultra vires its memorandum.
• A person who lacks capacity to contract may still act as an agent. An infant may act as agent for a competent principal. But a person with capacity may not act as agent for an infant or insane person in contracts that they are not competent to make.

Classes of agent

There are three main classes, which depend on the agent’s scope of authority or duties. May 2023 asked for six types of agent (6 marks), November 2015 for four, and November 2014 for three, explained.

The four special agents

1. Factor. A mercantile agent who, in the course of his business, has authority to sell goods, consign goods, or raise money on security of goods. He has possession of the goods.
2. Broker. Has no possession of goods and only negotiates contracts for another, for a commission called brokerage. (November 2016 asked for short notes on a broker and an auctioneer.)
3. Auctioneer. A person licensed by law and authorised to sell the goods or property of another at a public sale. He may or may not have possession of the goods. He is a double agent, because he acts for both seller and buyer.
4. Del credere agent. An agent who, for a higher rate of commission, promises to indemnify the principal if the third party fails to pay or deliver under the contract. He is a surety of the buyer. May 2015 (4 marks) and November 2023 (2 marks) asked for this.

The six types asked for in May 2023 are therefore: general agent, universal agent, special agent, factor, broker, auctioneer and del credere agent, of which any six earn the marks.

Creation of agency

1. Express appointment. An agent may be appointed verbally or in writing. There is no particular form: it may be by deed, in writing, or by word of mouth.
2. Implied agency. Created by inference. For example, a partner who makes a contract for the firm is assumed to act as agent of the other partners. It may be implied by necessity or by estoppel.
3. Agency of necessity. Arises in an emergency where a person must act to prevent irreparable loss to another. It is implied where: (i) it is impossible or impracticable to communicate with the owner to get instructions; (ii) there is real or imminent commercial necessity; and (iii) the agent has acted in the best interest of the principal. May 2018 asked for the three conditions.
4. Agency by estoppel. A person is generally not bound by the acts of someone who acts without his authority. But where the natural consequence of a person’s conduct is to portray someone as his agent, and an innocent third party contracts with that person as a result, the first person is stopped from denying the agency.
5. Apparent agency. Arises when the principal has not taken due care to prevent someone from portraying himself as having authority to act as his agent.
6. Agency by ratification. Strictly a way in which agency may arise. Ratification is the principal’s affirmation of an act done by a person who, at the time, had not been appointed to act.

November 2016 Section A asked what agency could be created by, and the answer was estoppel.

Conditions for ratification

1. At the time of the contract the agent must purport to act for his future principal.
2. The principal must have been in existence and had capacity when the agent purported to act.
3. The principal must be competent at both the date of the contract and the date of ratification.
4. The principal must have had full knowledge of all the material facts when ratifying, or have shown an intention to ratify regardless of his ignorance.
5. The contract must be valid, not void ab initio.
6. The principal must ratify within a reasonable time.

Forms of authority

The nature of the authority given decides what kind of agency exists.

• An agent’s authority cannot exceed the principal’s own power to act.
• Where an agent acts outside his authority but in good faith, the principal is bound.
• An agent who has no authority at all is personally liable and must indemnify the third party in damages.
• An illegal act of the agent does not bind the principal. The agent is not paid for it or indemnified.

Rights and duties

Rights of an agent

May 2016 and May 2017 asked for three rights, and November 2020 Section A asked for the right to reimbursement of expenses (indemnity). The syllabus gives six:

1. to indemnity from the principal for costs reasonably incurred in performing his duty;
2. to be paid his reward or commission for work done under the principal’s authority;
3. to have his lawful actions ratified by the principal;
4. to have his disclosed principal assume responsibility and liability for his authorised acts;
5. to enforce contracts arising from the agency against third parties; and
6. to a lien over the principal’s goods for unpaid commission and other money due from performing his duties.

Duties of an agent

November 2017 (3 duties), November 2020 (5 duties) and November 2021 (two duties breached by Brenda) all asked this. The agent owes the principal the duty to:

1. follow the principal’s directions and instructions in conducting his business;
2. not delegate his authority unless expressly authorised;
3. act in good faith;
4. avoid a conflict of interest and duty;
5. exercise due care and skill;
6. make no secret profit;
7. not disclose confidential information about the principal to third parties; and
8. render an account to the principal when due.

Duties of the principal

November 2023 asked for two. The principal must:

1. pay the agent’s fees or commission;
2. indemnify the agent for lawful acts done on his behalf;
3. ratify the agent’s acts as the case may be;
4. assume responsibility and liability for the agent’s authorised acts, if he is a disclosed principal; and
5. as a general rule be liable to third parties on all contracts the agent makes under the agency, whether the principal is disclosed or not.

Effect of contracts made by agents

The effect depends on whether the third party knew he was dealing with a principal and whether the principal was disclosed. March/July 2020 asked for the first two (3 marks each).

Termination of agency

By acts of the parties

The parties may end the agency by mutual agreement, or either may end it unilaterally: the principal by revocation, the agent by renunciation of authority. This is without prejudice to any rights or liabilities already created.

By operation of law

1. the death of either party;
2. either party becoming insane;
3. either party becoming bankrupt;
4. frustration, where the subject matter no longer exists;
5. the subject matter found to be illegal from the start;
6. expiry or lapse of time; or
7. subsequent illegality of the transaction or of the status or capacity of either party.

Working through the rules

Which type of agency?

Who is liable?

Commission of a del credere agent

A del credere agent sells goods worth ₦5,000,000 for a principal, at 5% commission, but the buyer does not pay. The agent must indemnify the principal for the price, as he guaranteed the buyer’s payment, and is paid a higher rate to take the risk. An ordinary agent would lose nothing, because he is not a surety.

Worked problems

Problem 1: James and Tony

1. House A. Agency by express authority. It may be verbal or in writing.
2. House B. Agency by ratification. The principal approves an act the agent did without authority. Tony purported to act for James, James existed and had capacity, knew the material facts, the act was valid, and he ratified within a reasonable time.

Problem 2: Brenda

1. No conflict of interest. An agent must not put himself in a position where his interest conflicts with his duty. Selling to herself does.
2. No secret profit, and good faith. She hid the purchase behind her brother.
3. Remedies. The principal may set aside the sale, recover any profit she made, and refuse to pay her commission.

Problem 3: the secretary who hired cars

1. The rule. A principal is bound by the acts of an agent within his apparent authority, where the principal held him out as having authority.
2. The application. The company appointed the secretary, so it held him out as having authority to make such administrative contracts (Panorama Developments v Fidelis Furnishing Fabrics).
3. Advice. The company must pay. It may then claim against the secretary for breach of his duties as agent.

Problem 4: no authority at all

1. The rule. An agent who has no authority at all is personally liable and must indemnify the third party in damages.
2. Ratification. Adeola could ratify within a reasonable time, if it had full knowledge, and the agency would then arise. It refuses.
3. Advice. The seller may recover damages from Uche.

Questions that have been asked on this topic, and how to answer them

Common mistakes in the exam

• Saying agency can only be created in writing. There is no particular form.
• Mixing up a broker and a factor. The broker has no possession of goods.
• Saying a del credere agent is paid less. He is paid a higher commission for the risk.
• Saying an agent for a named principal is liable on the contract. He is not.
• Forgetting that, for an undisclosed principal, the third party may sue either.
• Listing fewer than six conditions of ratification, or forgetting full knowledge and reasonable time.
• Saying the principal is never bound by acts outside authority. He is bound if the agent acted in good faith or within apparent authority.
• Forgetting that an agent with no authority is personally liable.
• Saying death does not end an agency.

Quick revision

• Agency: consensual, exception to privity. Arises by agreement, ratification or necessity.
• Classes: general, universal, special (factor, broker, auctioneer, del credere).
• Creation: express, implied, necessity (three conditions), estoppel, apparent, ratification (six conditions).
• Authority: actual, implied, apparent. Agent with no authority is personally liable.
• Agent’s rights: indemnity, commission, ratification, principal liable, enforce, lien. Duties: instructions, no delegation, good faith, no conflict, care, no secret profit, confidentiality, account.
• Named and unnamed principals: principal alone. Undisclosed: either. Termination: acts of parties, or operation of law (death, insanity, bankruptcy, frustration, illegality, expiry).

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Section A style: multiple choice

Section B style: written questions

Model answers

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