The law of agency governs the relationship between a principal (who authorises another to act on their behalf) and an agent (who acts pursuant to that authority). The agent’s authority to bind the principal may be actual — either express (specifically conferred) or implied (arising from the nature of the agent’s appointment or from conduct) — or apparent (also called ostensible authority), which arises when the principal has by words or conduct represented to a third party that the agent has authority they may not in fact possess.
A principal is bound by acts done within the agent’s actual or apparent authority. Where an agent acts outside both actual and apparent authority, the principal is not bound — unless they subsequently ratify the act. Ratification must be made with full knowledge of the material facts, must be of the act as a whole, and must be made within a reasonable time.
An agent owes several duties to the principal: to act within the scope of authority, to act with reasonable care and skill, to avoid conflicts of interest, and to account for any profit made in the course of the agency. An agent who makes a secret profit without disclosing it to the principal is liable to account for and return that profit.
Q1. A property broker is appointed to sell a house. The broker sells the house for Rs. 1.2 crore but had agreed with the buyer to receive a secret commission of Rs. 2 lakh from the buyer in addition to the seller’s fee. What is the broker’s liability?
- None, because the broker completed the sale as instructed
- The broker must account for and return the Rs. 2 lakh secret profit to the principal (the seller)
- The broker must reduce their fee to the seller by Rs. 2 lakh
- The broker is criminally liable for fraud regardless of whether the seller suffered any loss
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Answer: B. The broker must account for and return the Rs. 2 lakh secret profit to the principal (the seller)
The passage states: 'An agent who makes a secret profit without disclosing it to the principal is liable to account for and return that profit.'
Q2. A company’s regional manager has no authority to enter contracts exceeding Rs. 10 lakh. The company consistently permits the manager to enter contracts exceeding this limit without objection, leading a supplier to believe the manager has authority for larger contracts. The manager enters a Rs. 20 lakh contract with the supplier. Is the company bound?
- No, because the manager had no actual authority to enter the contract
- Yes, because the company’s consistent conduct created apparent authority for the manager to enter larger contracts
- No, because apparent authority cannot exceed the limits expressly set by the principal
- Yes, but only if the company ratifies the contract within 30 days
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Answer: B. Yes, because the company’s consistent conduct created apparent authority for the manager to enter larger contracts
Apparent authority arises when 'the principal has by words or conduct represented to a third party that the agent has authority they may not in fact possess.' The company's consistent acquiescence created exactly this representation.
Q3. An agent, without any authority, purchases goods on behalf of their principal. The principal, upon learning of the purchase, decides it was a good deal and confirms the purchase. This is an example of:
- Implied authority arising from the nature of the agent’s appointment
- Apparent authority arising from the principal’s past conduct
- Ratification of an unauthorised act by the principal
- A novation of the original contract between the agent and the seller
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Answer: C. Ratification of an unauthorised act by the principal
The passage defines ratification as what happens when a principal subsequently approves an act done outside both actual and apparent authority. The principal confirms the purchase after the fact — this is ratification.
Q4. Ratification of an unauthorised act under the law of agency is only effective if:
- The third party agrees to the ratification
- The agent had disclosed to the third party that they were acting without authority
- The ratification is made with full knowledge of the material facts, of the act as a whole, and within a reasonable time
- The principal notifies the agent of the ratification in writing
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Answer: C. The ratification is made with full knowledge of the material facts, of the act as a whole, and within a reasonable time
The passage states: 'Ratification must be made with full knowledge of the material facts, must be of the act as a whole, and must be made within a reasonable time.'
Q5. Which of the following best describes ‘implied actual authority’ of an agent?
- Authority that the principal has expressly granted in writing
- Authority that a third party believes the agent has, based on the principal’s representations
- Authority arising from the nature of the agent’s appointment or from conduct, even without express conferral
- Authority that an agent assumes they have without any instruction from the principal
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Answer: C. Authority arising from the nature of the agent’s appointment or from conduct, even without express conferral
The passage distinguishes: express authority (specifically conferred) and implied authority ('arising from the nature of the agent's appointment or from conduct'). Implied actual authority is actual (given by the principal) but inferred from context rather than stated.
Q6. An agent acts within their apparent authority but contrary to the principal’s private instructions. A third party who had no knowledge of the private instructions enters a contract with the agent. Is the principal bound?
- No — the agent violated the principal’s instructions and therefore cannot bind the principal
- Yes — the principal is bound because the agent acted within apparent authority, which is what a third party is entitled to rely upon
- No — the third party should have verified the agent’s authority before contracting
- Yes, but only if the principal subsequently ratifies the contract
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Answer: B. Yes — the principal is bound because the agent acted within apparent authority, which is what a third party is entitled to rely upon
The passage states: 'A principal is bound by acts done within the agent's actual or apparent authority.' Apparent authority is what a third party can legitimately rely upon. The private instructions between principal and agent do not affect the third party's rights.
Q7. What is the significance of the distinction between the principal-agent relationship and a relationship of employment in the context of agency law?
- Agents are always independent contractors, while employees always act within employment scope
- Agency creates authority to bind the principal in contract with third parties; employment is concerned with the employer’s liability for the employee’s torts
- Both relationships are identical in law and the terms are used interchangeably
- Agents owe no duty of care, while employees owe a fiduciary duty
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Answer: B. Agency creates authority to bind the principal in contract with third parties; employment is concerned with the employer’s liability for the employee’s torts
Agency law is specifically about the agent's authority to create legal relations between the principal and third parties. Employment law concerns the employer's duties to the employee and liability for torts. These are distinct legal relationships with different consequences.
