Agency: Creation, Authority, Liability & Termination

TAKEAWAYS:

• An agent acts on behalf of a principal under a legal relationship, binding the principal to third parties within the agent’s authority.
• Express authority (written/verbal) and implied authority (reasonable actions) define an agent’s powers, while apparent authority arises from the principal’s actions.
• The fiduciary duty requires agents to act in the principal’s best interest, avoid conflicts of interest, and disclose material facts.
• Termination occurs by mutual agreement, death, insanity, or breach, but the agent’s acts before termination may still bind the principal.
• Liability rules differ: principals are liable for agents’ authorized acts, while agents are personally liable for unauthorized acts unless indemnified.
• Real-world examples: Daraz’s delivery agents (implied authority), Nabil Bank’s loan officers (fiduciary duty), and Pathao’s drivers (apparent authority).

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1. Definition and Nature of Agency

Agency is a consensual relationship where one party (the agent) acts on behalf of another (the principal) to create legal relations with third parties. This relationship is governed by Contract Act, 2063 (2016) in Nepal and common law principles.

Key Elements of Agency:

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2. Creation of Agency

Agency can be created in three ways:

A. Express Agency

• Created by clear written or oral agreement (e.g., employment contracts, power of attorney).
• Example: A Nepali businessman appoints a lawyer to represent him in a court case under a signed agreement.

B. Implied Agency

• Arises from conduct or circumstances where the principal’s actions imply agency.
• Example: A Daraz delivery agent picking up orders from a warehouse and delivering them to customers implies authority to act on behalf of Daraz.

C. Agency by Ratification

• Occurs when the principal approves an unauthorized act after it has been committed.
• Example: If a Nabil Bank employee (without authority) approves a loan, the bank can later ratify the act to bind itself.

WORKED EXAMPLE: Pathao Driver’s Authority A Pathao driver picks up a passenger but unilaterally increases the fare by 20%. Is Pathao liable?

• Analysis:
  • The driver had implied authority to transport passengers but no authority to alter fares.
  • If Pathao ratifies the act (e.g., by keeping the extra money), it becomes binding.
  • Otherwise, Pathao is not liable, but the driver may be personally liable.

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3. Authority of an Agent

An agent’s authority determines the scope of their actions. There are three types:

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4. Duties of an Agent

Agents owe fiduciary duties to principals, meaning they must act in the principal’s best interest. Key duties include:

WORKED EXAMPLE: Nabil Bank Loan Officer’s Conflict of Interest A Nabil Bank loan officer recommends a loan to a friend’s business without disclosing the relationship.

• Breach: Violates the duty of loyalty (conflict of interest).
• Consequence: Bank can terminate the agent and sue for damages.

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5. Liability in Agency

A. Principal’s Liability

• Fully Liable for acts of the agent within authority (express, implied, or apparent).
• Not Liable for unauthorized acts unless:
  • The principal ratifies the act.
  • The agent had apparent authority.

Example: If a Khalti customer support agent (without authority) promises a refund, Khalti is not liable unless it later approves the refund.

B. Agent’s Liability

• Personally Liable for unauthorized acts unless indemnified by the principal.
• Not Liable for authorized acts (unless the principal is undisclosed).

Example: A Pathao driver causing an accident while delivering a ride is personally liable unless Pathao indemnifies them.

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6. Termination of Agency

Agency can terminate in six ways:

WORKED EXAMPLE: Daraz Delivery Agent Termination A Daraz delivery agent is fired for stealing goods. How does termination occur?

• Method: Breach of Contract (failure to fulfill duty of loyalty).
• Effect:
  • Agent loses authority to act on behalf of Daraz.
  • Daraz can sue for damages and recover stolen goods.

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In the Real World

1. Daraz (E-commerce Platform)

   • Idea Used: Implied Authority & Apparent Authority
   • How? Daraz delivery agents have implied authority to handle packages but apparent authority to represent Daraz when interacting with customers. If an agent promises a refund, Daraz may be bound if the customer reasonably believes the agent has authority.

2. Nabil Bank (Financial Services)

   • Idea Used: Fiduciary Duty & Ratification
   • How? Loan officers act as agents with a fiduciary duty to assess loans fairly. If an officer unauthorizedly approves a loan, the bank can later ratify the decision to bind itself, but the officer risks termination for breach.

3. Pathao (Ride-Hailing App)

   • Idea Used: Apparent Authority & Liability
   • How? Passengers assume Pathao drivers have apparent authority to provide safe rides. If a driver causes an accident, Pathao may be vicariously liable if the driver was acting within the scope of employment.

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Exam Tip

1. Define Agency Clearly: Always start with the three elements (consent, control, fiduciary duty) in exam answers.
2. Distinguish Authority Types: Use real examples (Daraz, Nabil Bank, Pathao) to explain express, implied, and apparent authority.
3. Fiduciary Duty is Key: Exams often test conflicts of interest—always mention loyalty, disclosure, and obedience.
4. Liability Questions: Use the decision tree (authorized vs. unauthorized acts) to structure answers.
5. Termination Scenarios: Practice short-answer questions on how agency ends (e.g., death, breach, mutual agreement).
6. Case Studies: Expect Nepali business scenarios (e.g., a Khalti agent misusing funds or a Nepal Rastra Bank employee forging signatures).

Common Exam Mistakes to Avoid:

• Confusing implied authority with apparent authority.
• Forgetting that ratification makes an unauthorized act binding.
• Ignoring fiduciary duties in liability questions.

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Final Visual Summary: