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SEMESTER FALL 2011 
Business & Labor Law (MGT611) 
Assignment No. 02 
Due Date: December 23, 2011 Marks: 15

Abstract: 

In general terms, Agency refers to the relationship which exists between two persons, the Principal 
and the Agent in which the Agent has to perform different duties/ functions as per instructions of the 
principal and also enters into contract with the third party / parties on behalf of the principal. The 
relationship of agency plays an important role in business and commercial dealings. This relationship 
is legal created by virtue of agreement between Principal and Agent. 

Agency may be created in the following ways: 

1. By consent 
2. By operation of law 
3. By estoppel 
4. By ratification 

Please identify how agency can be created through these ways in the given cases? 

Case 01: 

Mr. Mohsen deals in trading of Branded and none branded computer hardware and shipped a large 
quantity of computer hardware by three trucks from Lahore to Karachi. On the way to Karachi, one 
truck seriously met an accident. The truck driver could not establish contract with Mr. Mohsen. 
However he found that a large quality of computer hardware damaged. He visited to the nearest 
market and get repaired some hardware and sold it at market rate. 

Case 02: 

Mr. Aslam is working as an agent of Mr. Salman from last 10 years and carrying different business 
transactions with many business personals. Due to the conduct of Mr. Salman (principal), Mr. Munir 
(third party) believes that Mr. Aslam is an agent of Mr. Salman and under this impression Mr. Munir 
enters into an agreement with Mr. Aslam. Later on Mr. Salman terminated the agency relationship 
with Mr. Aslam, however this was not in the knowledge of Mr. Munir and he continued his 
commercial dealings with Mr. Munir. 

Case 03: 

Mr. Sajid, an agent of Mr. Shrafat lends Rs 500,000 to Mr. Mohsen. Mr. Mohsen is paying monthly 
profit to Mr. Sajid. Who has rendered accounts in this respect to the principal, Mr. Shrafat. By 
accepting the profits, Mr. Shrafat conduct implies an approval of the amount of loan provided by his 
agent, although without his authority. 


The Requirement: 

1. You are required to identify the most appropriate way in each case through which agency can 
be created. 
2. Support your answer by providing logical reasons. 

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SEMESTER FALL 2011

Business & Labor Law (MGT611)

Assignment No. 02

 

Abstract:

In general terms, Agency refers to the relationship which exists between two persons, the Principal and the Agent in which the Agent has to perform different duties/ functions as per instructions of the principal and also enters into contract with the third party / parties on behalf of the principal. The relationship of agency plays an important role in business and commercial dealings. This relationship is legal created by virtue of agreement between Principal and Agent.

Agency may be created in the following ways:

1. By consent

2. By operation of law

3. By estoppel

4. By ratification

Please identify how agency can be created through these ways in the given cases?

 

Case 01:

Mr. Mohsen deals in trading of Branded and none branded computer hardware and shipped a large quantity of computer hardware by three trucks from Lahore to Karachi. On the way to Karachi, one truck seriously met an accident. The truck driver could not establish contract with Mr. Mohsen. However he found that a large quality of computer hardware damaged. He visited to the nearest market and get repaired some hardware and sold it at market rate

 

Solution:

 

The relationship of agency shall be governed under the provision of section 189. An agent has authority, in an emergency; to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances. This agency is under the Operation of Law.

 

 

Case 02:

Mr. Aslam is working as an agent of Mr. Salman from last 10 years and carrying different business transactions with many business personals. Due to the conduct of Mr. Salman (principal), Mr. Munir (third party) believes that Mr. Aslam is an agent of Mr. Salman and under this impression Mr. Munir enters into an agreement with Mr. Aslam. Later on Mr. Salman terminated the agency relationship with Mr. Aslam, however this was not in the knowledge of Mr. Munir and he continued his commercial dealings with Mr. Munir.

 

 

Solution:

 

Under the principle of estoppels, Mr. Aslam cannot claim that Mr. Kaleem is not his agent, as far as these transactions are concerned.

Mr. Salman enters into an agreement with Mr. Kaleem. The transaction is in the knowledge of Mr. Aslam. Mr. Aslam does not intimate Mr. Salman that Mr. Kaleem is not his agent. Mr. Aslam under the principle of estoppels cannot claim that Mr. Kaleem is not his agent.

Mr. Salman was entering into business dealings with Mr. Kaleem, treating Mr. Kaleem as an authorized agent of Mr. Aslam. Mr. Kaleem entered into some agreements which were beyond the authority vested in him by the Principal, Mr. Aslam. Mr. Salman is not aware of this fact. Mr. Aslam (Principal) under the principle of estoppels cannot claim that he cannot own the acts of his agent, Mr. Kaleem which are beyond his (agent) authority.

 

 

Case 03:

Mr. Sajid, an agent of Mr. Shrafat lends Rs 500,000 to Mr. Mohsen. Mr. Mohsen is paying monthly profit to Mr. Sajid. Who has rendered accounts in this respect to the principal, Mr. Shrafat? By accepting the profits, Mr. Shrafat conduct implies an approval of the amount of loan provided by his agent, although without his authority.

 

Solution:

 

Agent does not have authority for the loan of 500,000 Rs but he gave the loan to the third party and also receiving the profit on that loan. He have shown in the accounts that loan and also shown profit on it. Agent also maintains the accounts and also those have been rendered to the principal and principal have not raise any objection. When he accepting the profits on the accounts of that loan which was un-authorized, it means that the principal have allowed or give the authority to the agent for the loan. And therefore, he has ratified that transaction. This arrangement is known as ratification.

SEMESTER FALL 2011

Business & Labor Law (MGT611)

Assignment No. 02

 

Abstract:

In general terms, Agency refers to the relationship which exists between two persons, the Principal and the Agent in which the Agent has to perform different duties/ functions as per instructions of the principal and also enters into contract with the third party / parties on behalf of the principal. The relationship of agency plays an important role in business and commercial dealings. This relationship is legal created by virtue of agreement between Principal and Agent.

Agency may be created in the following ways:

1. By consent

2. By operation of law

3. By estoppel

4. By ratification

Please identify how agency can be created through these ways in the given cases?

 

Case 01:

Mr. Mohsen deals in trading of Branded and none branded computer hardware and shipped a large quantity of computer hardware by three trucks from Lahore to Karachi. On the way to Karachi, one truck seriously met an accident. The truck driver could not establish contract with Mr. Mohsen. However he found that a large quality of computer hardware damaged. He visited to the nearest market and get repaired some hardware and sold it at market rate

 

Solution:

 

The relationship of agency shall be governed under the provision of section 189. An agent has authority, in an emergency; to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances. This agency is under the Operation of Law.

 

 

Case 02:

Mr. Aslam is working as an agent of Mr. Salman from last 10 years and carrying different business transactions with many business personals. Due to the conduct of Mr. Salman (principal), Mr. Munir (third party) believes that Mr. Aslam is an agent of Mr. Salman and under this impression Mr. Munir enters into an agreement with Mr. Aslam. Later on Mr. Salman terminated the agency relationship with Mr. Aslam, however this was not in the knowledge of Mr. Munir and he continued his commercial dealings with Mr. Munir.

 

 

Solution:

 

Under the principle of estoppels, Mr. Aslam cannot claim that Mr. Kaleem is not his agent, as far as these transactions are concerned.

Mr. Salman enters into an agreement with Mr. Kaleem. The transaction is in the knowledge of Mr. Aslam. Mr. Aslam does not intimate Mr. Salman that Mr. Kaleem is not his agent. Mr. Aslam under the principle of estoppels cannot claim that Mr. Kaleem is not his agent.

Mr. Salman was entering into business dealings with Mr. Kaleem, treating Mr. Kaleem as an authorized agent of Mr. Aslam. Mr. Kaleem entered into some agreements which were beyond the authority vested in him by the Principal, Mr. Aslam. Mr. Salman is not aware of this fact. Mr. Aslam (Principal) under the principle of estoppels cannot claim that he cannot own the acts of his agent, Mr. Kaleem which are beyond his (agent) authority.

 

 

Case 03:

Mr. Sajid, an agent of Mr. Shrafat lends Rs 500,000 to Mr. Mohsen. Mr. Mohsen is paying monthly profit to Mr. Sajid. Who has rendered accounts in this respect to the principal, Mr. Shrafat? By accepting the profits, Mr. Shrafat conduct implies an approval of the amount of loan provided by his agent, although without his authority.

 

Solution:

 

Agent does not have authority for the loan of 500,000 Rs but he gave the loan to the third party and also receiving the profit on that loan. He have shown in the accounts that loan and also shown profit on it. Agent also maintains the accounts and also those have been rendered to the principal and principal have not raise any objection. When he accepting the profits on the accounts of that loan which was un-authorized, it means that the principal have allowed or give the authority to the agent for the loan. And therefore, he has ratified that transaction. This arrangement is known as ratification.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SOLUTION:

Agency may be created in the following ways:

By consent

By operation of law

By estoppel

By ratification

Agency by Consent:

Consent may be express or implied.

Express Agency:

Such agency is created by words either spoken or written. In business transactions, this relationship is usually established through writing an agreement

Implied Agency:

An authority is referred to as implied when it is inferred from the conduct of the parties or circumstances of the case.

A definition of express and implied authority as contained in section 187 of the Act is given below:

An authority is said to be express when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accounted for circumstances of the case.

Types of Agent:

The agents may be classified as under:

Public Agents- these are representatives of a State

Private Agents—these agents represent individuals or companies

General Agents- these agents pertaining to a business, vocation or profession

Special Agents—such agents are appointed for a specific transaction.

Co-Agents– Such Agents act along with Principal.

Duties of the Agent:

Duties of agent are contained in sec 211 to 218 of the Contract Act. Some of the important duties are given below:

To follow principal’s instructions

To show required skill and diligence

Agent to render proper accounts

Agent to pass on any benefits derived by him

Agent’s duty in conducting principal’s business. (sec 211)

An agent is bound to conduct the business of his principal according to the directions given by the principal, or, in the absence of any such directions, according to the custom which prevails in doing business of the same kind at the place where the agent conducts such business. When the agent acts otherwise, if any loss be sustained, he must make it good to his principal, and, if any profit accrues, he must account for it.

Illustrations

(a) A, an agent engaged in carrying on for B, a business, in which it is the custom to invest from time to time, at interest, the moneys which may be in hand, omits to make such investments. A must make good to B the interest usually obtained by such investments. (b) B, a broker, in whose business it is not the custom to sell on credit, sells goods of A, on credit to C, whose credit at the time was very high. C before payment becomes insolvent. B must make good the loss to A.

(c) An agent, instructed to warehouse goods at a particular place, warehouse a portion of them at another place, where they are destroyed, without negligence. He is liable to the principal for the value of the goods destroyed.

(d) An agent, instructed to insure goods, neglects to do so. He is liable to the principal for their value in the event of their being lost.

(e) A broker, entrusted with goods for sale, sells them by auction at an inadequate price, not having made an estimate of the value in accordance with the custom of the particular trade. He must make good the loss.

(f) An auctioneer, contrary to the usual custom, takes a bill of exchange in payment of the price of goods sold. He is liable to the principal for the amount of the bill in the event of its being dishonored.

(g) An agent, bound by his contract to keep proper books of account, omits to scrutinize, examine or check the accounts of his subordinates whom he implicitly trusts. Taking advantage of this, the subordinates commit gross frauds on him and his employers. The frauds and defalcations being due to the agent’s failure to perform his duty he is liable to make good the loss thereby caused.

Skill and diligence required from agent (sec 212)

An agent is bound to conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business, unless the principal has notice of his want of skill. The agent is always bound to act with reasonable diligence, and to use such skill as he possesses; and to make compensation to his principal in respect of the direct consequence of his own neglect, want of skill or misconduct, but not in respect of loss or damage which are indirectly or remotely caused by such neglect, want of skill or misconduct.

Illustrations

(a) A, a merchant in Islamabad, has an agent, B, in London to whom a sum of money is paid on A’s account, with orders to remit. B retains the money for a considerable time. A, in consequence of not receiving the money, becomes insolvent. B is liable for the money and interest from the day on which it ought to have been paid, according to the usual rate, and for any further direct loss—as e.g., by variation of rate of exchange–but not further.

(b) A, an agent for the sale of goods, having authority to sell on credit, sells to B on credit, without making the proper and usual inquiries as to the solvency of B. B, at the time of such sale, is insolvent. A must make compensation to his principal in respect of any loss thereby sustained.

(c) A, an insurance broker, employed by B to effect an insurance on a ship, omits to see that the usual clauses are inserted in the policy. The ship is afterwards lost. In consequence of the omission of the clauses nothing can be recovered from the underwriters. A is bound to make good the loss to B.) A, a merchant in England, directs B, his agent at Karachi who accepts the agency, to send him 100 bales of cotton by a certain ship. B, having it in his power to send the cotton, omits to do so. The ship arrives safely in England. Soon after her arrival, the price of cotton rises. B is bound to make good to A, the profit which he might have made by the 100 bales of cotton at the time the ship arrived, but not any profit he might have made by the subsequent rise.

Agent’s accounts (section 213)

An agent is bound to render proper accounts to his principal on demand.

Agent’s duty to communicate with principal (section 214)

It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in communicating with his principal, and in seeking to obtain his instructions. Agent is under a duty to consult principal in a “difficult” situation so as to save repudiation of his action by principal.

Right of principal when agent deals, on his own account, in business of agency without principal’s consent.( sec 215)

If an agent deals on his own account in the business of the agency, without first obtaining the consent of his principal and acquainting him with all material circumstances which have come to his own knowledge on the subject, the principal may repudiate the transaction, if the case shows either that any material fact has been dishonestly concealed from him by the agent, or that the dealings of the agent have been disadvantageous to him.

Principal’s right to benefit gained by agent dealing on his own account in business of agency (sec 216)

If an agent, without the knowledge of his principal, deals in the business of the agency on his own account instead of on account of his principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction.

Agent’s right of retaining out of sums received on principal’s account.( sec 217)

An agent may retain, out of any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of advances made or expenses properly incurred by him in conducting such business, and also such remuneration as may be payable to him for acting as agent.

Agent’s duty to pay sums received for principal (sec 218)

Subject to such deductions, the agent is bound to pay to his principal all sums received on his account.

Rights of the Agent:

These are discussed in the following paragraphs:

When agent’s remuneration becomes due-Sec 219:

In the absence of any special contract, payment for the performance of any act is not due to the agent until the completion of such act; but an agent may detain moneys received by him on account of goods sold, although the whole of the goods consigned to him for sale may not have been sold, or although the sale may not be actually complete.

Agent to be indemnified against consequences of lawful acts (sec 222)

The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him.

Agent to be indemnified against consequences of acts done in good faith (sec 223)

Where one person employees 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 cause an injury to the rights of third persons.

Compensation to agent for injury caused by principal’s neglect (sec 225)

The principal must make compensation to his agent in respect of injury caused to such agent by the principal’s neglect or want of skill.

Enforcement and consequences of agent’s contracts (sec 226)

Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and will have the same legal consequences as if the contracts had been entered into and the acts done by the principal in person.

Principal’s liability with regard to agreements caused by misrepresentation or fraud by agent: Sec 238

Misrepresentation made, or frauds committed, by agents acting in the course of their business for their principals, have the same effect on agreements made by such agents as if such misrepresentations or frauds had been made or committed by the principals; but misrepresentations made, or frauds committed, by agents, in matters which do not fall within their authority, do not affect their principals.

Scope of duties of Principal:

Duties of the principal are enumerated below:

Payment of remuneration to the agent

Not to prevent his agent from performing the duties/ acts assigned to him under the contract and for which remuneration is payable.

Any legitimate expenses which have been incurred by the agent in the course of performance of his duties are to be indemnified by the principal.

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