All questions of Unit 9: Agency for CA Foundation Exam

• The nature of act or business for which he has been appointed: The authority of an agent is determined by the specific tasks or business purposes for which they have been appointed.


• Things which are incidental to the business or are usually done in carrying it out: An agent may have implied authority to carry out tasks that are necessary or customary in the course of their business.


• The usual customs and usages of the trade: The customs and practices of a particular trade or industry may also define the scope of an agent's authority.


• All of them: The extent of an agent's authority can be a combination of express and implied powers, as well as industry customs and practices.

By considering these factors, it is possible to determine the full extent of an agent's authority in carrying out their duties.

Understanding the Scenario
In this case, A, acting as an agent, sells goods to B on credit without conducting the necessary inquiries into B's solvency. At the time of the sale, B is insolvent, leading to potential losses for A's principal.
Legal Responsibility of the Agent
- As an agent, A has a fiduciary duty to act in the best interest of the principal.
- This includes making reasonable inquiries about a buyer's ability to pay, particularly when selling on credit.
Consequences of Negligence
- By failing to assess B's creditworthiness, A has acted negligently.
- This negligence directly contributes to the principal's loss when B defaults on payment due to insolvency.
Compensation to the Principal
- According to agency law, agents are liable for losses caused by their negligence or breach of duty.
- Since A did not fulfill his duty of inquiry, he is obliged to compensate the principal for the losses incurred from the sale to the insolvent B.
Conclusion
- Therefore, A must make compensation to his principal in respect of any loss thereby sustained.
- This ensures that agents adhere to their responsibilities and protect their principal's interests.
In summary, the correct answer is option 'C' because A’s negligence in not verifying B's solvency means he is liable for the resulting losses to the principal.

Incorrect Statement: All agents are entitled to be paid for their services.

Explanation:
An agency relationship is a legal relationship where one person, known as the agent, acts on behalf of another person, known as the principal. The agent is authorized to perform certain tasks and make decisions on behalf of the principal. This relationship is governed by the law of agency.

Agency Relationship:
There are several ways in which an agency relationship can be created. Some of the common ways include:

1. Express Agreement: An agency relationship can be created through an express agreement between the principal and the agent. This agreement can be in writing or oral.

2. Implication: An agency relationship can also be created by implication, where the conduct of the principal and the agent indicates that they intended to create such a relationship.

3. Necessity: An agency relationship may be created through necessity. This means that in certain circumstances, where it is not possible or practical for the principal to act on their own behalf, an agent may be appointed to act on their behalf. For example, if a person falls ill or is unable to attend a meeting, they may appoint an agent to represent them.

4. Estoppel: An agency relationship may be created through estoppel. Estoppel is a legal principle that prevents a person from denying or asserting something contrary to what they have previously stated or accepted as true. If a person acts as though someone is their agent, they may be estopped from denying that agency relationship.

Payment for Services:
While it is common for agents to be paid for their services, it is not a requirement for an agency relationship. In some cases, agents may work on a voluntary basis or may be compensated through other means, such as commission or a share of the profits. Therefore, the statement that all agents are entitled to be paid for their services is incorrect.

Conclusion:
In summary, the incorrect statement is that all agents are entitled to be paid for their services. While it is common for agents to be paid, it is not a requirement for an agency relationship. An agency relationship can be created through various means, including express agreement, implication, necessity, and estoppel.

Understanding Principal-Agent Liability
In the context of agency law, the principal is typically liable for the acts of the agent when those acts are performed within the scope of the agent’s authority. However, there are specific circumstances where the principal may not be liable, particularly when the agent acts beyond their given authority.
Key Points on Liability
- Agent Acts Within the Scope of Authority:
The principal is liable when the agent acts within the authority granted to them. This includes any actions the agent is allowed to take as per the agreement with the principal.
- Agent Exceeds Authority:
This is where the principal is NOT liable. If the agent goes beyond the scope of their authority—meaning they engage in actions or make decisions not authorized by the principal—the principal is not responsible for those acts. This limitation protects the principal from unauthorized commitments made by the agent.
- Fraud or Misrepresentation:
If the agent commits fraud or misrepresentation for the benefit of the principal, the principal may still be held liable under certain circumstances. However, if the actions were beyond the authority, the principal's liability may be minimized.
- Work Done Out of Authority but Accepted:
If the principal accepts work done by the agent that was outside their authority, the principal may assume some liability. This acceptance can create an implied authority, binding the principal to the agent's actions.
Conclusion
In summary, the principal is not liable for the agent's acts if the agent exceeds their authority, as this protects the principal from unauthorized actions that could lead to liability. Understanding these distinctions is crucial for both agents and principals in their business dealings.

Understanding Agency by Estoppel
Agency by estoppel occurs when a person (the principal) creates an appearance that another person (the agent) has authority to act on their behalf, and a third party relies on that appearance. In this scenario, the following points clarify why option 'B' is correct:
Key Characteristics of Agency by Estoppel:
- Implied Authority: Although Jai does not have express authority to enter contracts alone, he has acted with Harish's acquiescence, implying that Harish accepts Jai's role as the agent.
- Good Faith Reliance: The third party, acting in good faith, believes that Jai has the authority to bind X Ltd in contracts. This belief is based on the consistent practice of Jai entering contracts on behalf of the company.
- Principal's Conduct: Harish's failure to object or intervene when Jai enters contracts creates an impression that Jai has the authority to act on behalf of X Ltd. This is critical in establishing agency by estoppel.
Legal Implications:
- Binding Contracts: The contracts entered into by Jai, under the impression of authority, may be binding on X Ltd due to Harish’s passive acceptance of Jai’s actions.
- Protection for Third Parties: Agency by estoppel protects third parties who rely on the apparent authority of an agent, ensuring they are not left without recourse if the principal later denies the agency.
In conclusion, option 'B' (Agency by Estoppel) is the correct answer as it encapsulates the situation where Jai acts on behalf of X Ltd with implicit approval from Harish, creating a binding relationship with the third party.

Explanation:

Doctrine of Apparent Authority
The doctrine of apparent authority applies in situations where the actions or representations of a principal lead third parties to believe that an agent has authority to act on behalf of the principal, even if the agent does not actually possess such authority.

Key Points:
- Allowing another to appear as an agent: This applies when a person allows another who is not his agent to appear as his agent.
- Agent appearing to possess more authority: This applies when a principal allows his agent to appear to possess more authority than he actually has.
- Reserving or limiting agent's authority: This applies when the principal reserves or limits the authority of an agent without informing third parties.
- Allowing agent to appear to have authority after termination: This applies when the principal allows it to appear that the agent has authority even after the agent's authority has been terminated.
Therefore, the doctrine of apparent authority encompasses all these scenarios where the actions or inactions of the principal create a reasonable belief in third parties that the agent has authority to act on behalf of the principal.

Understanding Agency Duties
In this scenario, Govind is appointed as a gratuitous agent for Cute, meaning he is acting without any payment. However, even as a gratuitous agent, he still has certain duties toward his principal.
Key Duties of an Agent
- Follow Instructions: An agent must act according to the instructions given by the principal. In this case, Govind was instructed to collect rent and deposit it into the bank.
- Exercise Reasonable Care: An agent is expected to exercise a reasonable level of care while performing their duties, regardless of whether they are being paid or not.
Govind's Breach of Duty
- Failure to Deposit Rent: Govind collected the rent but failed to follow through with the instruction to deposit it into the bank. This constitutes a breach of his agency duties.
- Negligence in Care: Leaving the rent on the bus indicates a lack of reasonable care in safeguarding the money, further emphasizing the breach.
Legal Standing for Cute
- Gratuitous Agent Liability: Even though Govind is a gratuitous agent, he can still be held liable for failing to act according to the principal's instructions. The law recognizes that agents, regardless of compensation, have responsibilities towards their principals.
- Conclusion: Therefore, Cute can indeed take action against Govind for breach of his agency duties despite the lack of payment, as Govind did not fulfill his obligation to act in accordance with Cute's instructions.
In summary, the correct answer is option 'C' because it highlights the essential responsibilities of an agent, which are maintained even in the absence of compensation.

Understanding Apparent Authority
Apparent authority, also known as ostensible authority, arises when a principal creates the impression that an agent has the authority to act on their behalf, even if the agent lacks actual authority. This concept is crucial in agency law, particularly in protecting third parties who rely on the representations made by the principal.
Key Points of Apparent Authority
- Principal's Representation: Apparent authority occurs when the principal communicates to a third party that an agent has the power to act, regardless of the agent's actual authority.
- Reliance by Third Parties: Third parties must rely on the principal's representations. If they reasonably believe that the agent has the authority, the principal may be bound by the agent's actions.
- Example Scenario: If a company (the principal) publicly states that a particular employee (the agent) is authorized to negotiate contracts, the company cannot later deny the agent's authority if the employee enters a contract with a third party based on that representation.
Importance of Apparent Authority
- Legal Protection: Apparent authority protects third parties who may not have knowledge of the limitations placed on the agent's authority by the principal.
- Encourages Trust: This doctrine fosters trust in business dealings, as it ensures that representations made by a principal are honored, even if internal disagreements exist regarding the agent's authority.
In summary, apparent authority arises when a principal represents to a third party that an agent has authority to act, thereby binding the principal to the agent's actions, regardless of the agent's actual authority.

Understanding the Rule of Agency in Legal Proceedings
In agency law, certain conditions must be met for an agent to effectively receive notice on behalf of their principal. Each of the provided statements contributes to the validity of the agent's authority to receive material information during proceedings.
Key Conditions for Agency Notice

• I. The agent must be under a duty to communicate: The agent has a responsibility to relay pertinent information to the principal. If this duty exists, the principal can trust that the agent will fulfill this role effectively.
• II. The information must be material: The information received must be relevant and significant to the matter at hand. Material information can influence the proceedings and should be communicated to the principal.
• III. It must have been obtained in the course of business for which the agent has been engaged: The information must arise from the agent's activities related to the principal's business. This ensures that the agent's authority encompasses the context in which the information was acquired.
• IV. The agent is not privy to a fraud on the principal: If the agent is aware of fraudulent activity, they cannot rightfully represent the principal's interests. This condition protects the integrity of the agency relationship.

Conclusion
All four conditions are essential for the rule to operate effectively. They ensure that the agent's role is valid, trustworthy, and aligned with the interests of the principal. Thus, the correct answer is option 'D', as all the statements (I, II, III, IV) must be satisfied for the agent to receive notice on behalf of the principal.

Explanation:

Termination of Agency Contract
When the contract of agency is terminated, the agent no longer has the authority to act on behalf of the principal. This means that the agent cannot bind the principal to any new contracts or obligations.

Third Party Contract
If a third party enters into a contract with the agent without knowledge of the termination of the agency contract, the situation becomes more complex. In this case, the third party may believe that they are entering into a valid contract with the agent on behalf of the principal.

Binding on the Principal
According to the law of agency, if a third party enters into a contract with an agent who no longer has authority to act on behalf of the principal, the contract may still be binding on the principal. This is known as the doctrine of "apparent authority." If the third party had no knowledge of the termination of the agency contract and believed in good faith that the agent had the authority to act on behalf of the principal, the principal may still be held liable for the contract.
Therefore, in the given scenario, the contract entered into by the third party with the agent would be binding on the principal, even though the agency contract had been terminated. This is to protect the innocent third party who entered into the contract in good faith.
In conclusion, when a third party enters into a contract with an agent without knowledge of the termination of the agency contract, the contract may still be binding on the principal under the doctrine of apparent authority.