Agency Creation and Termination


a. Do, Re and Mi decided to form a partnership business selling cosmetics. However, the partnership agreement excludes Do from sharing any profit.

Is Do a partner within the requirement of a partnership? Give reasons for your answer. (5 marks)

b. Distinguish between apparent authority and actual authority in an agency relationship. (5 marks)

c. State the various ways an agency may be created and the circumstances when an agency agreement can be terminated. (10 marks)

(MIA QE 2008/9 Q3, 20 marks)
Although Partnership is not in the syllabus, it has appeared in previous examination. See 2013 Q7 here.

(a) --- Not within Syllabus. ---

(b) See Actual v Apparent Authority here.


(c) Creation of and termination of Agency.

The below sections refer to sections of Contracts Act, 1950.

An agent can be appointed express or implied (S.139) by his Principal.

Another way is by ratification which means an act, although earlier unauthorized but later admitted by the principal to become a contract (S.149).

Occasionally, an agency relationship can be created by necessity. This means during emergency, and when owner or principal is not contactable, the agent takes decision to act on behalf of the principal. The act which is done is done under an agency with agent's authority during an emergency (S.142).

See MIA QE 2009/9 Q3bi on appointment by necessity.

Finally, the apparent or ostensible authority that is presented during the transaction can create an agency contract under the circumstances of "estoppel" or "holding out". This means due to the conduct of the dealings (e.g. GM acts out of authority in a company or wife represents the husband) the act is considered a valid transaction due to apparent or ostensible authority.

Creation of agency was asked in:
MIA QE 2008/9 Q3 (a) with termination here.
MIA QE 2009/3 Q3 (a)
MIA QE 2010/9 Q4 (e)
MIA QE 2011/3 Q4 (a)
MIA QE 2012/9 Q2 (b)
MIA QE 2014/9 Q2 (a)
MIA QE 2015/3 Q2 (a)

Termination of an agency is however, more straightforward.

S.154 Termination of agency.
'An agency is terminated by the principal revoking his authority; or by the agent renouncing the business of the agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated or declared a bankrupt or an insolvent.'

Moreover, termination of the agency would have to follow some procedures. It doesn't mean principal can terminate the agency at any time to his liking.

This is especially true when the interest of agent is at stake. For example, an agent is to sell the property in order to get back his money from the principal who is also his debtor. Even at the termination of his principal debtor (or death of this principal /debtor), the agency is not terminated. This scenario is when agent has an interest in the subject-matter (S.155).

S.155 Termination of agency, where agent has an interest in subject-matter.
'Where the agent has himself an interest in the property which forms the subject-matter of the agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of such interest.'

The termination of agency is very much an essence of time, as certainly a contract when formed between A and C, B - being the agent has completed his duty and there is termination by completion. So, no more the need to perform another termination.

It is usually the issue of the agent half way performing his duty, and when the need of termination arises at this time that the termination or revocation becomes an argument in law.

S.157 Revocation where authority has been partly exercised.
'The principal cannot revoke the authority given to his agent after the authority has been partly exercised, so far as regards such acts and obligations as arise from acts already done in the agency.'

For example, an agent was asked to sell a property and after the deposit has been collected by the agent, the owner refused to sell and wanted to terminate the agency.

The agency was formed to undertake the selling of the property. Therefore, either it has never started or already fully completed, it is consider still partly exercised.

An analogy is like driving a car. The moment the car is fired up until it's engine has stopped, it is considered running on engine. When the engine is running, you need to have someone watching and controlling the car. You cannot just leave the car running without a driver (someone watching).

This is the same with agency. The job of the agent is to carry out the act - in the above case - selling the property. Only when the deposit is accepted by the buyer, the contract is formed and firmed, and the duty of the agent thus completed. Before the deposit is accepted, the duty of the agent is only partly exercised.

In short, a car running cannot be stopped until safe to park. Similarly, an agency half exercised cannot be revoked.

Furthermore, if there is agreement that the agency should continue for any period of time, its termination prematurely would require compensation to the agent. This is vice versa, when an agent renounces his role as an agent - quits, he has to compensate the principal for damage done, usually lost of income or opportunities.

S.158 Compensation for revocation by principal or renunciation by agent.
'Where there is an express or implied contract that the agency should be continued for any period of time, the principal must make compensation to the agent, or the agent to the principal, as the case may be, for any previous revocation or renunciation of the agency without sufficient cause.'

S.159 further on explains the Notice of revocation or renunciation.

It is required to have reasonable notice given for revocation or renunciation. Otherwise, the damage thereby resulting to the principal or agent, must be made good.

When there is death of principal occurring, S.162 provides that the agent is bound to take all steps for the protection and preservation of the interests entrusted to him, although the agency is terminated.

If there are any sub-agents, S.163 goes on further to specify that termination of agency terminates all sub-agents appointed for that agency.

S.154 - 163 Contracts Act, 1950.