Group 4 (agencies) mercantile law
OYEBARE WINNER. AKM24B11/11
NAKIBIRANGO RITAH. .. AKM 24B11/115
NAMARA PROSS. .AKM24B11/042
NAKALYOWA MARIAM AKM24B11/092
AHEEBWA RYAN. AKM24B11/007
MUWANGUZI JACOB AKM24B11/078
ZZIWA PATRICK. AKM24B11/106
KUTESA GLADYS KATRINA AKM24B11/110
Area of emphasis
Relationship between the principal and third parties
Relationship between a third party and an agent
Termination of Agency
Effects of termination of agency.
RELATIONSHIP BETWEEN THE PRINCIPAL AND THIRD PARTIES
The rights of the principal against a third party depend on the distinction between
disclosed and undisclosed principals.
A disclosed principal is one whose existence the third party is aware of at the time of
contracting or whose name the third party knows. An undisclosed principal is one
whose existence the third party is unaware of at the time of contracting.
Generally, once a contract has been made on behalf of his principal, the agent drops
out of the transaction and privity of contract exists between the principal and the third
party.
Disclosed principal
The general rule is that a disclosed principal can sue a third party and likewise the third
party can sue the disclosed principal. The agent generally incurs neither rights nor
liabilities under the contract. In the case of Tot Ram v. Mistry Waryam Singh, the
agent was asked by his uncle the principal to obtain transport from the plaintiff a third
party to take Y to Kampala. The third party knew that the agent had negotiated the
contract on behalf of the principal. Unfortunately, the principal later left the country and
gave the third party a cheque that was later dishonored. The third party sued on the
contract. It was held that the agent was not liable.
Undisclosed principal
An undisclosed principal can sue a third party however this right is limited to two main
respects:
a) Where the agent discloses the fact that he is merely an agent but conceals the
identity of the principal. Here the agent drops out in the normal way provided he makes
it clear when contracting that he does so merely as an agent. If he fails to do so, he is
personally liable on the contract.
b) Where the agent conceals the agency altogether and appears to be acting on his
own behalf. Here, the third party can enforce the contract against the agent or when he
discovers his identity and existence, against the principal.
The third party thus has an option whether to compel the agent to accept personal
liability or to shift liability to the principal as soon as his identity is revealed.
However, it should be noted that;
i) The third party can’t enforce the contract against both the agent and the principal. If
he sues one he can’t later sue the other
ii) The third party may be estopped from suing the principal at all if he allows the
principal to think he has settled matters satisfactorily with the agent e.g. by
unreasonably delaying in taking action against the principal after his identity is revealed.
RELATIONSHIP BETWEEN A THIRD PARTY AND AN AGENT
The general rule is that an agent is neither liable under nor entitled to enforce a contract
he makes on behalf of his principal. However, there are exceptions to this rule;
a) Where the agent contracts personally
An agent is liable if he in fact intended to undertake personal liability under the contract.
Thus, in the case of Basma v. Weeks (1950) an agent who was described as a party to
a written contract and who signed it without any qualification that he was signing on
behalf of the principal was held to be liable under the contract even if the third party
knew he was contracting as agent.
However, in the case of Mahony v. Kekule (1854) it was held that an agent who is
described as agent and signs as agent is not liable.
Section 162 (1) of the contracts act provides that where an agent enters into a contract
with a person who does not know or does not have reason to believe that he or she is
an agent, the principal may require the performance of the contract; but the other
contracting party shall have, as against the principal, the same rights as he or she
would have against the agent, if the agent had been the principal.
b) Trade usage or custom
An agent may be personally liable or entitled if that is the usual course of business
either between particular parties or in relation to a particular class of agents e.g.
formerly where the agent acted for an overseas principal, there was a presumption that
the agent accepted personal responsibility, this presumption no longer exists and the
agent is not personally liable in such a case unless it can be shown that he volunteered
to accept personal liability. (Where he/she freely accepts personal liability)
c) Principal is undisclosed
An agent is both entitled and liable under the contract where the principal is
undisclosed. Under Section 162 (2) of the contract act where a principal discloses
himself or herself before a contract is completed, the other contracting party can show
that he or she would not have entered into a contract if he or she had known who the
principal in the contract was or if he or she had known that the agent was not the
principal.
d) Agent in fact is the principal
If an agent purports to be acting for an unnamed principal when he is in fact acting for
himself, he can enforce the contract for his benefit. Like in the case of Schmaltz v.
Avery (1851) a person was described in a charter party as “agent for the freighters”. He
was held personally liable after it was proved that he was in fact the freighter. However,
if he purports to act for a named principal, he can only enforce the contract after giving
notice to the third party that he acted on his own behalf.
e) Principal is non-existent
Where the agent contracts on behalf of a nonexistent principal, he is himself personally
liable. In the case of Kelner Vs Baxter (1866) the promoters of a company were held
personally liable on a contract made by them on behalf of a company which had not yet
been formed. However, where the principal (company) is later registered/incorporated
and it adopts/ ratifies such a contract, it will be liable as if the agent had instructions to
enter into the said contract. See S.54 of the Companies Act
f)Bills of exchange
These include cheques, promissory notes etc. Where the agent signs a bill of exchange
in his own name, he is personally liable on it. To avoid this, he should make it perfectly
clear that he is signing merely as agent e.g. by signing “for and on behalf of” a named
principal. Section 164 of the contracts act provides for joint liability of an agent and
principal to a third party. It states that where an agent is personally liable, a person
dealing with the agent may hold the agent or principal or both of them liable.
Note that any person who holds out as an agent shall not be entitled to require the
performance of a contract, where that person was not acting on as an agent but on his
or her own account.
A person who fraudulently represents himself or herself as an authorized agent of
another person and induces a third person to deal with him or her as the agent, is liable
to compensate the third person in respect of any loss or damage incurred, where the
alleged principal does not ratify the acts.
TERMINATION OF AGENCY
In this section we shall consider the different ways through which an agency relationship
can cease to exist/can be terminated/come to an end and the effect of such termination.
Section 134 Contract Act provides that an agency may be terminated by;
a) Mutual agreement
b) A principal revoking his or her authority
c) An agent renouncing the business of the agency
d) The business of the agency being completed
e) Death of the principal or an agent.
f)A principal or an agent becoming of unsoundmind
g) A principal being adjudicated insolvent under the law
h) The purpose of the agency being frustrated.
a) Mutual agreement
An agency may be terminated by mutual agreement like any other contract.
Since the agency relationship is normally created by an agreement between the
principal and agent, it could similarly be terminated by both of them agreeing to end the
relationship. This is so even if there is an agreement that the relationship will last for a
given period or indeed should be irrevocable. The agreement as to termination may be
contained in the contract creating the agency.
b) Revocation
Section 137 Contract Act provides that revocation of the agent’s authority by the
principal shall not take place where authority is partly exercised, with respect to acts
and obligations that arise from acts already done under the agency. Section 138
attracts compensation where an agency is revoked without reasonable cause contrary
to an express or implied contract that the agency is to continue for a given period of
time.
However, since normally an agency is created for the benefit of the principal, he is free
at any time to revoke it or to revoke any other authority granted to the agent. Such
revocation may well constitute a breach of contract. The effect of this is that even if the
revocation is effective, the principal may be liable in damages to the agent for breach of
contract.
The principal must however give reasonable notice of such revocation to the agent
before the actual termination of the agency.
The revocation may be in writing or oral per Section 140 of the contract act irrespective
of whether the original agreement was contained in a deed. The principal must also take
steps to inform the third parties of the revocation of the agency, otherwise he will
continue to be held liable for the transactions entered into by the agent after the
revocation of the agency. In Alexander Logios v. Attorney General of Nigeria (1938)
it was held that although the principal has a right of revocation, a third party with whom
the agent had dealt was entitled to assume that the agency was still subsisting since no
step was taken to inform him that the agency had been revoked and warning him not to
deal further with the agent on the principal’s behalf.
The agent may be dismissed summarily if he is found guilty of any misconduct or
breach of duty to his principal. No formality is required for revocation. Revocation is
effective if the principal informs the agent or the third party personally per Section 141
of the contract act . Revocation may be by word of mouth or by the principal intervening
in the course of negotiation by the agent and informing the party concerned. Where the
agency was created by written authority for instance by a power of attorney, the
principal’s revocation should also be effected in the same way.
A revocation may be implied where the principal withdraws all necessary facilities
originally provided to the agent for proper execution of the agency. Thus, until the
principal takes such action, the agent or third party is justified in assuming that the
agency is still in existence.
c) Renunciation by agent
Renunciation by an agent occurs where the agent personally terminates the agency
relationship between him and the principal. An agent has an implied power in all agency
relationships to terminate the agency before it ends unless it is stated in the agency
contract that the agency is irrevocable.
Similar to revocation by the principal, renunciation of authority by the agent may amount
to breach of the agency contract by the agent and render the agent liable in damages to
the principal.
In addition, the agent must give reasonable notice of renunciation of the agency to the
principal according to Section 139 of the contract act However, the agent may revoke
his authority without notice where the principal is guilty of misconduct or breach of his
duties to the agent.
Renunciation by the agent may be in writing, by word of mouth or simply refusing to act
in accordance with the agency.
d) Closure of Business
A principal’s closure of business terminates the agency relationship. However, a major
question arises as to whether the principal is liable to pay compensation to the gent for
his removal of the opportunity for the latter to earn commission. This however largely
depends on the terms of the agreement and on the customary way of doing things in a
given trade.
e) By performance
Where the agent was appointed to carry out a particular/specific transaction, his
authority will terminate when that transaction is accomplished e.g. the authority of an
auctioneer engaged to sell specific property terminates after the sale of the property.
f) Effluxion of time
The agency will end when the period for which it was created expires. This will be so
regardless of whether the task for which the agency was created has been carried out
or not. Where no time is fixed by the parties as to how long the
agency is to run, a reasonable time for the duration of such agency is implied and the
authority will terminate at the end of such reasonable time. What is a reasonable time
will depend on the facts of a particular case and the surrounding circumstances.
g) Frustration
If property, which is the subject matter of the agency is destroyed, or otherwise ceases
to exist, the agency will automatically terminate. Such events include; instances where
the subject matter of the agency is destroyed or otherwise ceases to exist. However, in
such case, regardless of the end of the agency, the agent may still be entitled to a
commission or remuneration. Thus, in the case of Turner v. Goldsmith (1891) the
agent was employed on a commission basis by the principal to sell shirts. The
principal’s factory, at which the shirts were manufactured, was accidentally burnt down.
It was held that the principal was liable to pay the agent a reasonable sum representing
what he would have been likely to earn by way of commission.
h) Death of principal or agent
If either the principal or the agent dies, the agency is terminated. This is because the
agency relationship is confidential and personal. The effect of death is that the rights of
the parties are frozen at the time of death. In the case of Pool v. Pool (1889), it was held
that if the principal died, the agent could not recover expenses incurred after the death
even if he had no knowledge of the death of the principal.
i) Insanity of the principal or agent
The insanity or other legal incapacity of the principal or agent will in ordinary
circumstances terminate the agency. This is because the insane person can’t validly
contract so as to appoint or act as agent.
j) Bankruptcy of the principal or agent
Since agency is a personal relationship, when a person becomes bankrupt, his rights
vest or are transferred to the trustee in bankruptcy. As a result, the agency is affected in
this way and ceases to have a personal touch. Where the principal is bankrupt, the
agency is terminated unless the agent’s authority is irrevocable.
k) Agency by Necessity
Since the agent’s authority under this kind of agency does not arise from any
agreement but comes about as a result of circumstances which justify his acting as
agent, it is clear that this form of agency is not terminated by agreement. It terminates
when the necessity which brought it into being has disappeared.
EFFECT OF TERMINATION OF THE AGENCY RELATIONSHIP
Between the Agent & the Principal
On termination, the agent ceases to have authority to act on behalf of the principal.
However, this does not divest the parties of the rights which may have accrued between
them before the termination of the agency relationship.
As such, the principal can sue for breaches of contract or negligence committed by the
agent before the agency was terminated.
And the agent can sue for remuneration earned before the revocation, and possibly for
remuneration which would have been earned had the agency not been terminated.
Between the Agent & third parties
The third parties have to receive a notice of revocation of the agency.
Unilateral revocation by the principal will not affect the third parties as long as the agent
is acting in the usual way he ordinarily carries on his business, unless and until the third
party has notice of the fact that the agent’s authority has been terminated. However,
once proper notice has been communicated, the gent ceases to have authority to bind
the principal by any transaction which he may enter into with third parties after notice of
revocation has been received.
If the agent acts after such notice, he will be personally liable in respect of any such
transactions, either because he must be taken to have contracted in his own behalf, or
because he contracted as agent. In the latter case, he will be liable for breach of the
implied warranty of authority.
