Test: Agency - CA Foundation MCQ

Normally, Agents are entitled to be paid for their services,  But, in certain circumstances, a gratuitous agent i.e. someone who is not paid for their service, may also be an Agent.

This is a case of agency created by estoppel between Company X and the third Party.

Even though the shares are sold at market, Hari is in breach of his agency duties, due to conflict of interest.

Agents have a number of duties but they do not have a duty to take a commission.

In a disclosed agency, the agent indicates expressly or through conduct that he is acting as an agent. The actual name of the principal need not be disclosed.
Where a third party is not informed of the existence of the principal and believes the agent is acting on his own behalf, is an undisclosed Agency.

An agency agreement may be created by estoppel, necessity or ratification. Where a principal retrospectively ratifies an agreement, after it has been made on his behalf, then an agency by ratification is created.

An unpaid (gratuitous) agent will have no duty to act as no Consideration has been provided by the principal, but if he does act, he must do so in accordance with the instructions set out by the principal.
In this case, Cute has provided no Consideration. But Consideration is not essential to create an agency agreement. So, a valid agency is created.
Even though Govind is a gratuitous agent, he must do in accordance with instructions set out by the principal. So, Cute can take action against Govind for breach of his agency duties?

The authority of an agent may be actual, express, implied or apparent (ostensible) authority. If a third party relies on the representations of the principal that the agent has apparent authority, the principal will be bound by the agreement.
The Agent may act on behalf of principal, if the Principal represents to a third party that an agent has authority to act, though, in fact he does not.

In this case, an undisclosed agency has been created. So, the third party, Fakir can take action against either the agent (Shilpa) or the principal (Dipak).

Some agency agreements such as a Lasting Power of Attorney cannot be revoked once registered with the Office of the Public Guardian and the principal no longer has his mental capacity.
Hence the Option A that an agency agreement can always be terminated by a principal is correct, as the Statement is incorrect. All other staements are correct.

• Agent exceeds his authority: When an agent acts beyond the scope of his authority, the principal is not liable for the agent's actions. This means that if the agent goes beyond what he is permitted to do, the principal cannot be held responsible for any consequences that may arise.

• Authority of agency coupled with interest: An agency is irrevocable if the authority of the agent is coupled with an interest. This means that the agent has a personal interest in the outcome of the agency relationship, such as receiving payment or benefits. In such cases, the agency cannot be revoked by the principal.


• Agent has incurred personal liability: If the agent has incurred personal liability in carrying out their duties, the agency becomes irrevocable. This means that the agent is personally responsible for any debts or obligations arising from the agency relationship, and the principal cannot simply revoke the agency to avoid liability.


• Both (a) and (b): The correct answer is both (a) and (b) because an agency is irrevocable when the authority of the agent is coupled with an interest, and when the agent has incurred personal liability.

• Agent's Duty: A, as an agent, has a duty to act in the best interest of B and carry out the business in a diligent manner.


• Customary Practice: It is customary in the business to invest the available moneys at interest from time to time.


• Omission to Invest: A's failure to make such investments is a breach of duty as it goes against the customary practice.


• Liability for Interest: A must make good to B the interest usually obtained by such investments because it is part of the normal course of business and any losses incurred by not following this practice should be compensated.


• Legal Obligation: A is legally obligated to compensate B for the interest that would have been earned if the investments were made as per the customary practice.

• If the termination be unreasonable: The court may intervene if the termination of the agency is found to be unreasonable, meaning that it lacks a valid justification or rationale.


• If the termination be arbitrary: Judicial intervention may occur if the termination is arbitrary, meaning that it is done without any proper reasoning or basis.


• If the termination be unconscionable: If the termination is deemed unconscionable, meaning that it is so unfair or unreasonable that it shocks the conscience, the court may step in to address the issue.


• All of them: When any of the above reasons are present in the termination of an agency with public authority, it is likely to attract judicial intervention in the form of a writ petition.

• 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 performance of contract: When the agency contract is completed, the agency automatically comes to an end. This is the most common way for an agency to terminate.


• By agreement between the principal and the agent: Both parties can mutually agree to terminate the agency relationship at any time. This can be done through a written agreement or a verbal understanding.


• By renunciation of his authority by the agent: If the agent decides to renounce his authority or resign from the agency, the agency relationship will come to an end. The agent must notify the principal of his decision to resign.

Therefore, all of the above reasons can lead to the termination of an agency relationship. It is important for both parties to follow the proper procedures outlined in the agency contract to ensure a smooth and legal termination.

• Termination of agency contract: When the contract of agency is terminated, the authority of the agent to act on behalf of the principal also comes to an end.


• Third party contract: If a third party enters into a contract with the agent without knowing about the termination of the agency contract, the situation becomes complex.


• Binding on the principal: In such a scenario, the contract entered into by the agent with the third party will still be binding on the principal.


• Doctrine of Estoppel: This principle is based on the idea that the principal cannot deny the existence of the agency relationship to a third party if they have allowed the agent to appear as their representative and enter into contracts on their behalf.


• Legal consequences: The principal will be held responsible for the actions of the agent, even if the agency contract was terminated without the knowledge of the third party.

• Agent's Authority: A, as an agent, has the authority to sell goods on credit, but this authority does not absolve him from the responsibility of conducting proper inquiries into the solvency of the buyer.



• Negligence: A's failure to inquire about B's solvency before extending credit constitutes negligence on the part of the agent.



• Insolvency of B: Since B was insolvent at the time of the sale, it was crucial for A to verify B's financial status to avoid any potential loss for the principal.



• Compensation: A must make compensation to his principal for any loss sustained due to his negligence in not conducting the necessary inquiries before the sale to an insolvent party.

• Duty to communicate: The agent must be under a duty to communicate any material information to the principal. This ensures that the agent is responsible for passing on important information relevant to the proceedings.


• Material information: The information that the agent is required to communicate must be material, meaning it is significant and relevant to the proceedings at hand. This ensures that only important information is shared with the principal.


• Obtained in the course of business: The information must have been obtained in the course of the business for which the agent has been engaged. This ensures that the information is directly related to the business activities being conducted by the agent on behalf of the principal.


• No fraud on the principal: The agent must not be privy to any fraud being committed against the principal. This ensures that the agent is acting in good faith and is not misleading or deceiving the principal in any way.

• Doctrine of Apparent Authority: This legal doctrine applies in situations where a person allows another individual who is not their agent to appear as their agent.


• Examples:
  
  
  
  • Allowing someone to act on your behalf without actually giving them authority.
  
  
  • Allowing someone to conduct business on your behalf without explicitly stating their limitations.
  
  
  
  


• Principal-Agent Relationship: In this context, the doctrine of apparent authority can also apply when a principal allows their agent to appear to have more authority than they actually possess.


• Examples:
  
  
  
  • A principal representing their agent as having more power or authority than they truly do.
  
  
  • Creating a situation where third parties believe the agent has more authority than they have been granted.
  
  
  
  


• Limiting Agent's Authority: The doctrine also comes into play when a principal reserves or limits the authority of an agent, but fails to communicate this to third parties.


• Examples:
  
  
  
  • Restricting an agent's ability to act on certain matters but not informing external parties of these limitations.
  
  
  • Failing to disclose the boundaries of an agent's authority, leading third parties to believe the agent has broader powers.
  
  
  
  


• Terminated Authority: Lastly, apparent authority can apply when a principal allows it to appear that an agent still has authority even after their actual authority has been terminated.


• Examples:
  
  
  
  • Continuing to let an agent represent the principal even though their authority has been officially revoked.
  
  
  • Creating confusion among third parties by not clarifying the agent's current status to them.