CMA Laws and Ethics Laws of Agency Question and Answers

Laws of Agency

Question 1.  Law of Agency

  • As per Section. 182,

An agent is a person employed –

    • to do any act for another, or
    • to represent in dealing with third persons.”
  • Principal is a person for whom such an act is done, or who is so represented.
  • Agent s.cts as a mere connecting link between the principal and third party.
  • It is based on two rules:
    • A person can do through an agent, whatever he can do himself.
    • The act of the agent is the act of the principal.

Question 2. Essential elements

  • Two parties are required
  • Agreement between parties is necessary
  • No consideration is required.

Question 3. Modes of Creation of Agency

1. Section. 187: Express Agency

  • It la created either by words spoken or in writing
  • Example – Power of Attorney (it may be general or special)

2. Implied Agency – Agency created by the conduct of parties. It can be in the following terms:

Section. 237: Agency by Estoppel:

  • If a person by his conduct, words spoken or written leads another to believe that a certain person Is acting as his agent, he is estoppel later on from denying such facts.
  • For example, Wife as an agent, when a married woman lives with her husband, there is a presumption that she has the authority to pledge his credit for necessities.

Read and Learn More CMA Laws and Ethics Paper

This Presumption is not held where the husband shows that :

  1. He had expressly warned the tradesman not to supply goods to his wife on his credit,
  2. He had expressly forbidden the wife to pledge his goods,
  3. His wife was already supplied with sufficient articles
  4. She was supplied with sufficient allowance Wife as an agent

3. Agency by Holding out:

  • Under this, the principal plays a positive role.
  • It occurs when anyone holds himself out as an agent of another
  • It happens through wilful conduct
  • Example In the case of partnerships.

Section. 189:

4. Agency by necessity: In case of emergency, the agents can exceed their powers and can take all the stops to minimize their principal’s loss.

5. Agency by ratification

  1. The principal is not bound by the act of the agent If the agent acts:
    • On behalf of another without his consent or knowledge
    • Exceeding his authority.
  2. Principals can create it by subsequent ratification.
  3. known as ex post facto agency therefore agency arising after the event.
  4. The principal becomes bound.

Question 4. Agency by ratification Is Possible If the following conditions are satisfied

  1. The act must have been done on behalf of the named or identifiable principal.
  2. The principal must be in existence at the time of the contract.
  3. The principal must be competent to contract at the time of making the contract.
  4. The principal must have full knowledge of the facts.
  5. The contract can be ratified only as a whole.
  6. It can be done through a lawful contract.
  7. It must be done within a reasonable time.
  8. It should not cause any damage to a third party.

Question 5. Extent of Agent’s Authority 

It is governed by two principles:

  • Section. 188: Agents’ authority in normal circumstances.

The agent has the power and authority to do all the acts lawful and necessary in the normal circumstances in the discharge of his functions.

  • Agent’s authority in an emergency.

The agent has the authority in an emergency to do all such acts as a man of ordinary prudence for protecting his principal from losses under similar circumstances. It includes:

  1. Actual or Real Authority.
  2. Ostensible or Apparent Authority.

Question 6. Special Agent.

  • Appointed to do any specific act or function
  • Does not have unlimited authority
  • Act outside its authority
  • Does not bind the principal.

Question 7. General Agent

  • Appointed to do all transactions given by the principal.
  • Can be assumed to have Unlimited authority

Question 8. Other Types of Agents

1. Sub Agent

As per Section. 190, the Sub-agent’s appointment is not lawful as the agent is a delegate and a delegatee cannot further delegate.

  • As per Section. 191,
    • A sub-agent is a person-
  1. Employed by, and
  2. Acting under the control of the original agent in the business of the agency.

2. Substituted Agent

As per Section. 194,

When the principal appoints an agent, and if that agent identifies another person to carry out the acts ordered by the principal, then the second person is not to be treated as a sub-agent but only as an agent of the original principal.

3. Mercantile Agents

As per Section. 2 (9) of the Sales of Goods Act, 1930 “Mercantile Agent is an agent having in the ordinary course of business as such an authority either

  1. To sell goods, or
  2. Consign goods for sale, or
  3. To buy goods, or
  4. To raise money for the security of goods.

Question 9. Bankers

  • Relationship of debtor and creditor with their customers.
  • Agent of the customer when he buys or sells securities, collects bills, etc. on| the customer’s behalf.
  • Has a general lien on all goods and securities in his possession.

Question 10. Duties of Agent

  1. Section. 21: To conduct the principal’s business according to his directions.
  2. Section. 212: He must always act as a person with skill and diligence.
  3. Section. 213: He has to maintain and render proper accounts to the principal whenever demanded.
  4. Section. 214: To communicate and obtain instructions in case of difficulty.
  5. Section. 215: He must not deal on his account.
  6. Section. 216: Must not make any secret profit.
  7. Section. 217 And 218: To account for money received for the principal.

Not to use the information obtained in the course of agency against the principal.

An agent cannot delegate his authority to a subagent generally. The general rule for this is delegates protest delegate a delegatee cannot further delegate

Question 11. Rights of an Agent

  • Section. 217: Rights of Retention.
  • Section. 219: Right to receive agreed remuneration.
  • Section. 221: Right of lien on principal’s property.
  • Section. 222: Right of indemnification for lawful acts.
  • Section. 223: Right of indemnification against acts done in good faith.
  • Section. 225: Right to be compensated for any injury caused due to the principal’s negligence.

Question 12. Principle’s liability for the agent’s act to Third Parties

There are 3 circumstances in which an agent may contract namely

  1. The agent acts for the named principal (disclosed principal)
  2. The agent acts for an undisclosed principal
  3. The agent acts for a concealed principal
  • Section. 226: Acts within the scope of actual apparent authority., it bounds the principal.
  • Section. 227: Acts over the agent’s authority are separable, they bind the principal.
  • Section. 228: Acts over the agent’s authority are not separable, the principal is not bound by them.
  • Section. 229: The Principal is bound by notice given to the principal.
  • Section. 2-38: The principal is bound for any fraud or misrepresentation committed by the agent:
    • During the business hours
    • Within his authority
  • Admission made by an agent is deemed to be admission made by the principal.
  • Unnamed principal, the principal becomes liable for being discovered.

Question 13. Personal liability of the Agent

  1. It is also known as the Doctrine of implied warranty of authority.
  2. It happens under the following circumstances:
    • where the agent signs the negotiable instrument without indicating that he is signing for the Principal.
    • where the contract expressly provides so.
    • where the agent works for a foreign principal.
    • where the agent acts for a Principal who cannot be sued.
    • where a Government servant enters into a contract on behalf of the Union of India.
    • where according to usage in trade in certain kinds of business, agents are personally liable.
    • where the agency is coupled with interest
    • If the agent is working for an undisclosed principal.
    • If the amount is received or paid by the agent under mistake or coercion.

Question 14. Termination of Agency

  • Agreement between principal and agent- Performance of contract
  • Revocation of authority by the principal – Expiration of the period
  • Revocation of authority by agent.
  • Death/insanity of principal or agent
  • Insolvency of principal
  • Dissolution of company
  • Destruction of the subject-matter

Question 15. When Termination of Agency Takes Effect

  1. Section. 208: As regards the agent, when it becomes known to him.
  2. As regards third parties, when it comes to their knowledge.

Section. 210: Termination of, the agent’s authority terminates the sub-agent authority

Section. 209: The agent must protect his principal’s interest when the principal dies or becomes of unsound mind.

Question 16.Irrevocable Agency

Revocation of the agency is not possible in the following cases:

  • Section. 202: where the agency is coupled with an interest.
  • Section. 204: where the authority has been partly exercised.
  • where the agency has incurred personal liability.

Laws of Agency Descriptive Question And Answers

Question 1. State the circumstances when an agent is personally liable for the contracts entered into by him on behalf of the principal.

  • The general rule of the Indian Contracts Act, of 1872 states that:
  • Only the principal can enforce and can be held liable for a contract entered into by an agent.
  • The agent is not personally liable for a contract entered into by him on behalf of the principal.

The following are the exceptions to the above rule:

  1. Foreign Principal: When an agent acts for the sale or purchase of goods for a principal resident abroad i.e., foreign principal.
  2. Personal liability by agreement: Where it is expressly provided in the contract that the agent shall be personally liable.
  3. Undisclosed principal: Where the agent does not disclose the name or identity of the principal.
  4. The principal cannot be sued: Where the principal is disclosed but cannot be sued, for example, foreign sovereigns, ambassadors, etc.
  5. Non-existence of Principal: When the principal is not in existence at the time when the act was done, therefore the agent acted for a non-existent principal.
  6. Agent’s liability: When the agent exceeds his authority or commits a breach of warranty of authority.
  7. Pretended Agent: When he acts as a pretended agent.
  8. Mistake or Fraud: When he receives or pays money by mistake or fraud.
  9. Agent signs an agreement without mentioning that he is an agent: Where an agent signs a negotiable instrument without ‘ mentioning that he is signing as an agent.
  10. Trade or customs: Where the usage of trade or customs makes an agent personally liable.

Laws of Agency Practical Question And Answers

Question 1. Comment on the following based on legal provisions: (g) Mr. A being an agent of Mr. P (who is the owner of the land) agrees for money, to obtain for Mr. B a lease of P’s land but without the knowledge of ‘P’. Discuss the validity of this agreement.

  • When an act is done by one person on behalf of another but without his knowledge or authority, the latter may elect either to ratify or disown such Act (sec 196 of the Indian Contract Act, 1872).
  • In the instant case, if a lease is granted by “A” in favor of B on the fact ’ coming to the knowledge of the P, he may either decide to ratify the lease agreement or to disown it.
  • If the P decides to ratify the lease, then it would be a valid contract.

Question 2. Jayanta, the owner of the car handovers the car with a key to Partha (the mercantile agent) to sell the car at a price not below INR 1,00,000. Partha (the agent) sold at INR 90,000 to Amitava who bought in good faith and without notice of reserve price or any fraud. Partha misappropriated the money also. Jayanta filed a suit against Amitava to recover the car. Advise with reasons whether Jayanta can succeed.

  • Amitava purchased the goods in good faith and he was not aware that the agent had not complied with the conditions of sale as set by the owner Jayanta.
  • In this case, the agent Partha has not fulfilled the condition that the sale should not be below INR 1,00,000 but this is not the fault of the buyer
  • Amitava was not aware of the agreement between the original owner Jayanta and his agent Partha.
  • Jayanta cannot recover the car from Amative as a sale by his agent is a valid sale. Jayanta can sue his agent Partha but cannot sue Amative.

Question 3. Bimal at Durgapur under instruction from Amal of Kolkata contracts with Kamal to deliver an electric oven to him. Amal does not send the oven to Bimal and Kamal sues Bimal for breach of contract. Bimal informs Amal of the suit and as per Amar’s advice, Bimal defends the suit. Bimal is compelled to pay damages, and costs and incurs expenses Amal refuses. Advise Bimal.

  • As per Section 222 of the Indian Contract Act, of 1872, the principal is bound to indemnify an Agent against the consequences of all Lawful acts done by the agent in the exercise of the authority conferred upon him.
  • Sec. 223 further provides where one person employs another to do an act, and the agent does the act in good faith, the employer is liable to indemnify the agent against the consequences of that act, though it causes an injury to the rights of third persons.
  • Given the above, Amal is liable to Bimal for such damage, cost & expenses.

Leave a Comment