Chapter 4
LAW OF CONTRACT
• TYPES OF CONTRACT
• DISCHARGE OF A CONTRACT
• REMEDIES FOR BREACH OF CONTRACT
Learning objectives
•
• By the end of the topic, the trainee should be
able to:
• explain the meaning of the term contract
• explain essentials of a valid contract
• identify types of contracts
• describe methods of discharging contracts
• e) explain remedies for breach of contracts
•
•
INTRODUCTION
• TYPES OF CONTRACTS
• ESSENTIALS OF A VALID CONTRACT
• DISCHARGE OF A CONTRACT
• REMEDIES FOR BREACH OF CONTRACT
INTRODUCTION
• A contract is an agreement made between two or
more persons that is intended to be legally
binding and enforceable.
• It creates rights and obligations/duties which
courts can recognize and enforce.
• An insurance contract is defined as an agreement
between the insured and the insurer whereby in
return for a premium, the insurer undertakes to
indemnify the insured against a financial loss.
Cont’d
• The law of contract is central to insurance.
• The binding nature of insurance contracts
provides a solid foundation for the business
and motivates people to buy policies with
confidence
TYPES OF CONTRACTS
1. Contracts of Record
Contracts of record consist of court judgments in civil cases and personal
recognizance's in criminal cases.
Court judgments
• Previous rights under a contract are merged in a judgment. The judgment
constitutes a contract of record. This can arise where one party owes the
other money under a contract. The creditor may sue the debtor to recover
the money. The court consequently delivers a judgment that the debtor
must pay the money and this is entered in the court records.
Recognizance's
• In criminal cases, a person may be convicted of an offence but set free on
condition that he will be of good behavior and keep the peace. He
however undertakes to pay to the state a certain sum of money if he fails
to observe the terms of cognizance. It is also a guarantee by a surety
where one is released on bail.
cont.
2. Specialty Contracts
• These are also known as contracts under seal or contracts by deed.
• They are formal contracts which must be in writing, signed and
witnessed, sealed and delivered. In business transactions, promises
are often made and performance follows later. Where one party
makes a promise without any consideration being given by the
other party, such promise must be made under seal for the
agreement to be legally binding. Specialty contracts include
conveyances of land and all leases over three years, bills of
exchange and promissory notes, representation of character of
credit worthiness among others.
3. Simple Contracts
Simple contracts
• They are informal contracts.
• They can be made orally, in writing, partly written and partly
oral or can be implied by conduct.
• Simple contracts must be supported by consideration.
• Most commercial contracts including insurance contracts are
simple contracts.
• An example of a contract that may be made orally occurs
when a person buys a newspaper in the street. A contract is
usually (but not always) expressed in writing when its purpose
is more formal, such as a service agreement between a
company and a director. An example of a contract made partly
orally and partly in writing occurs when an offer to sell goods
that has been made in a letter is accepted on telephone.
Cont’d
• An example of a contract reached through the
conduct of parties is seen when a traveler
picks up a newspaper at a railway station
bookstall and places a sum of money on the
table. Through this conduct, the traveler
wishes to make an agreement, which an
attendant
ESSENTIALS OF A VALID CONTRACT
• A simple contract must have six elements
present in order for it to be valid:
intention to create legal relations
offer and acceptance
consideration
 capacity to contract
formality
legality
Intention to Create Legal Relations
• Parties to the contract must be willing to be legally bound.
• Where parties have reached an agreement, there may be
no contract if their arrangement was not intended to be
legally binding.
• In commercial and business agreements, courts assume
them to be intended to be legally binding.
• Insurance contracts are examples of commercial contracts
and are always intended to create legal relations.
• Courts also assume that social arrangements, day to day
family (domestic) matters and contracts of engagement
(promise to marry) are not intended to have legal
consequences.
Offer and Acceptance
• There must be agreement for any contract to
be valid.
• For any parties to come to a meeting of minds,
consensus ad idem, there must be an offer
and an acceptance.
Offer
• Offer An offer is a proposal made by one party known as
the offeror to another called the offeree to sell or buy from
them.
• An offer must be distinguished from an invitation to treat.
An invitation to treat is an invitation to make an offer.
• They are also statements made during negotiations.
Advertisements, circulars and price marked goods in a shop
are invitations to treat. A blank proposal form and a
prospectus in insurance are also in this category.
• An offer can be made orally, in writing or by conduct.
• An offer can also be made to one person, a group of people
or the public as a whole.
Cont.
• When a person makes an offer to another, one
signifies a willingness to enter into a contract on
terms set out in the offer.
• An offer, if accepted, involves the intention to be
bound there and then.
• In bi-lateral contracts, an offer is made to a
specific person. In uni-lateral contracts an offer is
made to the public.
• Most commercial contracts are bi-lateral
contracts.
Ingredients of a valid offer:
• The terms of the offer must be certain and
clear
• The offer must be communicated meaning
that the other party must be made aware
• The offer must contemplate to give rise legal
relations
• The offeror may attach conditions
Termination of offer
An offer
• May lapse before it has been accepted. It is then too
late for any contracts to arise from the original offer;
• May lapse once accepted
• may lapse if either party dies before acceptance;
• may lapse after failure to accept in accordance with the
terms of the offer if a special mode of acceptance is
stipulated;
• may be revoked at any time before acceptance. The
general rule is that a revocation must be
communicated to the “offeree” before the “offeree”
has signified acceptance.
Cont’d
• is rejected if the person to whom the offer is
made rejects it outright, or if the person
makes a counter-offer, or if the person accepts
the offer subject to certain conditions.
• A counter-offer must be regarded as a refusal
of the original offer that thereupon lapses and
cannot be accepted afterwards.
• A counter-offer also amounts to a fresh offer
Acceptance
• An acceptance may be made orally, or in writing, or by conduct.
• An acceptance by conduct occurs where an offer is accepted by being
acted upon.
What constitutes valid acceptance?
An acceptance must be strictly in accordance with the terms of the offer,
because any variation constitutes a counter-offer and a consequent
rejection of the original offer.
 An acceptance should be made to the offeror and in accordance with
any special form prescribed to the “offeror.”
 Acceptance must be communicated to the offeror. However, where the
offeror requires some conduct to be taken then this will be binding.
Cont’d
• The party accepting the offer must make some outward
sign of acceptance and cannot be bound in advance by the
“offeror.”
• Where the offer states that acceptance by post is
acceptable, the posting rule applies.
• The posting rule states that acceptance is effected when
the letter of acceptance is posted even though it may stray
or may be delayed.
• However, the letter must be properly addressed and
adequately stamped and posted. The posting rule will also
apply where this is the most reasonable method of
acceptance in the circumstances.
Offer and acceptance insurance
• Either the proposer or the insurer may make an offer in
insurance.
• A duly filled proposal form constitutes an offer which
the insurer may accept by confirming cover or issuing
the policy or reject.
• On the other hand, the insurer may give a quotation
and this becomes an offer to the proposer which he
may accept by paying premium or decline
• An acceptance is only effective if the parties agree on
the essential terms of the contract which include
nature of risk, subject matter of insurance, premium
payable and duration of cover.
Cont’d
• When an insurance contract is renewed, a fresh
contract is formed. Fresh offer and acceptance
are therefore required.
• The renewal notice can be regarded as an offer
which the insured may accept or decline.
• When an insured has made alterations to the
subject matter, this should be disclosed to the
insurer and the insurer may accept or reject the
new risk e.g. in a Burglary policy, where there is a
change of location
Consideration
• Consideration is the price for the other party’s
promise.
• Contracts basically are begged on promises
made by each party e.g. in an insurance contract,
the insured promises to pay premium and the
insurer promises to provide indemnity in case of
a financial loss
• Consideration signifies some benefit or
advantage going to one party and some loss or
detriment suffered by another (Case of Currie vs.
Misa {1875})
Cont’d
• In many cases, the detriment to one party is a
benefit to the other and vice versa.
• Generally, the law will not enforce a promise not
supported by consideration.
• However, a legally binding agreement can come
into force prior to conferring consideration
provided there is a firm promise to do so.
• All simple contracts must be supported by
consideration.
Rules for consideration
1. Consideration need not be adequate but must have some
value i.e. it need not be worth what is given in exchange.
 If one made a bad bargain courts will not step in to help.
2. Consideration must be real or genuine i.e. with real benefit
or detriment.
3. Consideration must be not ‘past’.
 When services have been given for free in the past, a
promise made to pay for them afterwards is not good
consideration.
 It is given in exchange for the promise it supports i.e. the
two must be linked from the beginning.
Cont’d
4. The object of the consideration must be legal
i.e. not contrary to the law and not prohibited
by law or public policy e.g. payment to
murder.
5. Consideration must move from the promise
i.e. it cannot be enforced on a third party who
is not privy to the contract.
Consideration and insurance
• The consideration given by the insured in an insurance
contract is the premium payable and the insurer gives a
promise to pay claims.
• A valid insurance contract may come into force before
premium is actually paid provided there is a firm promise to
pay and the promise is regarded as good consideration as the
payment itself.
• Premium must be fixed and agreed prior to formation of
contract. Insurers may stipulate that the risk will not run until
premium is paid.
• Actual payment however must be made before insurers incur
any liability under the contract.
• The Insurance Act Cap. 487 makes the following provisions
with regard to premiums;
Insurance Act on premium
No insurer shall assume a risk in Kenya in respect of
insurance business unless and until:
• The premium payable is received;
• Premium is guaranteed to be paid by a bank licensed
under the Banking Act
• An advance deposit is made with the insurer to the
credit of the insured sufficient to cover the payment of
the entire amount of the premium together with the
premium
• The premium collected by an agent or a cheque
received by him shall be deposited with or dispatched
to the insurer immediately upon receipt.
Capacity to Contract
• Capacity relates to the legal right to enter into
a contract that is legally binding.
• Some categories of persons due to their age,
status, or mental instability have limited
contracting capacity i.e. minors, insane
persons, drunken persons, corporations and
married women.
Minors
• In most countries the law provides that a minor is a person who is
below the age of 18 years.
• Special rules govern contracts entered into by minors with the
intention of protecting them from entering into agreements that
may be disadvantageous to them.
• Contracts that are binding on minors are those for the supply of
necessaries e.g. food, clothing and shelter as well as contracts for
the minor’s benefit i.e. for education and training.
• What is a necessary to a minor depends on the minor’s station in
life.
• A minor should only pay reasonable price and should not be
exploited.
• Other contracts entered into by minors other than those for
necessaries may be void, voidable and unenforceable.
Insane Persons
These are persons who have declared judicially insane.
• Contracts entered into by mental patients for necessaries and those
entered into during lucid moments are valid and can be enforced
against them.
• Other contracts made by insane persons are voidable e.g. contracts
for disposal of property.
• A reasonable price should be charged for necessaries bought by an
insane person. For the court to declare a contract entered into by
an insane person voidable, he must prove:
 That they did not understand what they were doing at the time of
entering in the contract; and
 The other contracting party was aware and took advantage of their
status.
Drunken persons
• The rules governing drunken persons are the
same as those governing mental patients. The
person pleading drunkenness must prove the
following in order to avoid the contract:
That he was incapable of understanding the
implication of the transaction
The other party was aware of this fact and
took advantage
Formality
• Generally, the law does not require contracts to be in any form
• however certain contracts require some type of written
documentation.
• The importance of a written document is that it creates certainty on
what has been agreed and acts as a warning to those entering into
agreements not to take them lightly.
• Some contracts are required to be under seal for them to be legally
binding e.g. contracts for immovable property.
• Other contracts must be in writing e.g. hire purchase agreements,
bills of exchange, transfer of shares in a registered company among
others whereas others must be evidenced in writing or some form
of written document is required.
• An insurance cover may be given orally but the policy document is
eventually issued.
Cont’d
• There are a few exceptional cases of insurance
contracts where some formality is required
including:
 The Marine Insurance Act requires that marine
policies must be in writing.
 Contracts of guarantee e.g. fidelity guarantee
insurances must be evidenced in writing
 In Kenya, the Third Party Risks Act Cap. 405
require that a policyholder in a motor policy must
be issued with a certificate of insurance as
evidence that the policy of insurance is in force
Legality of a Contract
• A contract is not valid if its object is illegal and
such contract tainted with illegality is not
binding and cannot be enforced in a court of
law.
• There is need to distinguish void, voidable
and unenforceable contracts.
Cont.
Illegal Contracts
• An illegal contract is prohibited by law and may incur penalties. For example, a contract to
commit murder or to sell explosives, whose intentions are known to be to blow up public
facilities, would be illegal.
Void Contracts
• This is a contract where either one of the essential elements of a valid contract is missing or
there is no insurable interest or where there is fraudulent misrepresentation. It is no contract
at all and did not exist from inception (ab initio).
•
Such contract is not binding and cannot be enforced by a court of law. An illegal contract is
void.
Voidable Contracts
• Terms of a voidable agreement allow one party or both parties to refuse to be bound by the
terms of the agreement in certain circumstances.
•
This means that a voidable contract can be either enforced or repudiated by one of the
parties at its option. In this respect, non-disclosure of material fact gives an insurer the
option to avoid a contract.
Unenforceable
• An unenforceable contract is perfectly valid but cannot
be enforced in a court of law if one of the parties
refuses to carry out obligations under it.
• For example, a contract to undertake an operation with
a doctor may not be enforced if the doctor declines. An
unenforceable contract, however, can be used as a
defense to a claim.
 A contract may also not be enforceable where the
parties have agreed not to go to court to settle
disputes that may arise from it. They may for instance
state that disputes will be settled by arbitration.
DISCHARGE OF A CONTRACT
• A contract can be discharged through
performance, breach, agreement, or
frustration.
• We now explain each of these forms of a
discharge of a contract in some detail.
1. By Performance
• Performance is the discharge of the obligations expressed in the contract.
• A contract is performed after the parties have enjoyed their rights and
have fulfilled their duties under the contract because they will have met
the objects of the contract.
• In a sell of goods contract, performance is said to have taken place when
the buyer has paid and the seller has delivered the subject matter of the
sale. In insurance contracts, performance will be deemed to have occurred
when:
 The insured has paid the premiums and observed the terms and
conditions under the policy
 Payment of valid claims by the insurer
 Bearing of risks by the insurer for a specified period of time even if no
claims arise
2. Breach
• Breach is failure to perform. A major breach of
the contract by one of the parties discharges it,
but in that case, the aggrieved party may have
the right to sue for damages.
• In insurance, the insured may be in breach of a
warranty or a condition. Breach may also take the
form of:
 Failure by the insurer to pay a valid claim
 Unreasonable delay to repair the subject matter
following a loss
cont.
3. By Agreement
• Having entered into a contract by mutual consent, parties to a
contract may similarly agree to discharge each other and hence
bring the contract to an end.
• If both parties still have obligations to execute under the contract,
they may mutually agree to release each other from the
obligations.
4. By Frustration
• Frustration occurs when a supervening event makes a contract
impossible to perform.
• One such situation is destruction of the subject matter of the
contract or a non-occurrence of the event on which a contract
depends
D. REMEDIES FOR BREACH OF
CONTRACT
• A breach of contract by one party gives the
aggrieved party certain remedies which depend
on the extent and importance of the breach. The
injured party has one or more of the following
remedies available to them.
Damage
 This in the monetary compensation and the
purpose is to place the aggrieved party in the
position he would have been in had the contract
been performed.
D. REMEDIES FOR BREACH OF
CONTRACT
Refusal to further performance
• Where there is breach, one party may regard the contract as terminated and refuse to
further performance
Specific performance
• This will be allowed where damages are not adequate. A party is compelled by the
court to carry out the terms of the contract to finality.
Injunction
• This is a court order restraining the doing, continuance or repetition of the wrongful
act which causes injury to another.
Quantum meruit
• This is where the court computes the award payable based or equivalent to the work
done.
Questions
Q1. Distinguish between contracts of record and simple contracts.
Q2. In what ways does an offer terminate?
Q3. What is consideration?
Q4. Who has capacity to contract?
Q5. What is the difference between a void contract and a voidable contract?
Q6. What is meant by frustration in a contract?
Q7. Outline the remedies for breach of contract.
Chapter 5
LAW OF AGENCY
• CREATION OF AGENCY
• KINDS OF AGENTS
• DUTIES OF AGENTS
• REMEDIES FOR BEACH OF DUTY
• RIGHTS OF AGENTS
• AUTHORITY OF AGENTS
• RELATIONSHIP BETWEEN THE PRINCIPAL AND THE
THIRD PARTY
• RELATIONSHIP BETWEEN AGENTS AND THE THIRD
PARTY
• TERMINATION OF AGENCY
INTRODUCTION
• The Law of Agency is based on the principle that one who
does something through another does it oneself.
• An agent is a person who acts on behalf of another known
as the principal in dealing with third parties.
• The agent is therefore a mechanism through which the
principal acts.
• Once a contract is concluded, the agent has no further
interest in the arrangement.
• The Insurance Act Cap. 487 of the laws of Kenya defines an
insurance agent as, ‘A person, not being a salaried
employee of an insurer, who in consideration of a
commission, solicits or procures insurance business for an
insurer or a broker’.
Cont’d
• An insurance agent is therefore a person who brings
together the insurer and the insured for purposes of
completing the insurance contract.
• The scope of the agent’s authority must be clearly
defined.
• Acts of an agent done within his scope of authority
binds the principal into contractual relations with the
third party.
• An agent may have authority to bind the principal in
connection with one specified transaction or with a
series of transactions of a particular kind or with all the
principal’s affairs.
CREATION OF AGENCY
• The relationship between a principal and an
agent can arise through;
 consent
 the application of the doctrine of apparent
authority,
 necessity
 ratification or the application of the rule “of the
undisclosed principal.”
1. Agreement/consent
• This is the most common way of creating an agency
relationship.
• The appointment may be express (in writing or an
informal oral agreement) or implied by conduct of the
parties and the relationship between them.
• Where he is to execute a deed on behalf of the
principal, appointment must be by deed.
• This is known as power of attorney.
• The agreement is known as the contract of agency and
sets out in detail the authority and power of the agent,
the duties to be performed, the period of agreement
and the rights of the agent.
2. Apparent Authority
• When a third party deals with an agent, often the party cannot
know the precise limit of the agent’s authority.
• For example, a member of the public cannot be expected to know
the extent, if any, to which an insurance agent is entitled to give
temporary cover.
• The third party, therefore, is bound to rely on what appears to be
the authority of the agent.
• The law recognizes this reliance through apparent authority.
• This means that a principal is bound, not only by acts that are
within the express authority of the agent, but also by acts that are
within the agent’s apparent authority.
• There, therefore, could be circumstances where the agent has no
authority at all but the third party is justified in presuming that the
agent has the authority.
3. Necessity
• This arises where a person is entrusted with goods
belonging to another and an emergency makes it necessary
to do something to preserve them.
• The action taken is by reason of genuine emergency to
save/protect principal’s goods which are in danger o
perishing or deteriorating consequently preventing a loss.
• However, one must prove that it was impossible to obtain
the owner’s instructions in time before he qualifies as an
agent of necessity.
• For example, should a live animal be conveyed to a railway
station where no one is waiting to take charge of it, the
railway officials may have to tend it and feed it in order to
preserve its life.
• In such circumstances, the railway company becomes an
agent of necessity and the owner of the animal becomes
liable to compensate the company.
4. Ratification
• There are occasions when an agent will act outside the scope of what
is permitted in terms of an agency agreement.
• An option open to the principal is that the principal accepts the act as
having been done on the principal’s behalf.
• This is called ratification. Sometimes, ratification may be either
expressed or implied from the conduct where the principal takes the
benefit of the act with the knowledge of the circumstances in which it
is done.
Rules for a valid ratification
• The person performing the act must purport to do it as an agent and
not on one’s own behalf;
• The principal must be the person whom the agent had in mind at the
time the latter performed that act (though the principal need not be
named);
• At the time of ratifying the act, the principal must have full knowledge
of the circumstances relevant to the act or must have waived further
inquiry;
Cont’d
• The principal must have been in existence at the time
the authorized act was performed;
• The principal must have had the capacity to perform
the act at the time it was performed;
• Ratification must take place within a reasonable time;
• The whole contract must be ratified; and
• For an act to be ratified the agent must contract as an
agent and have a named principal in mind. Where an
agent exceeds its authority and the principal is not
disclosed, the contract cannot be ratified.
Cont’d
• A valid ratification is generally retrospective to
the date of the original act.
• Sometimes, an agent may make an offer in
respect of something that is outside the scope of
the agent’s authority, subject to ratification by
the principal whom the agent has in mind; if the
offer is accepted, the principal still has the right
to ratify the act.
• If the principal does not, there would be no valid
contract.
B. KINDS OF AGENTS
Universal Agent
• A universal agent has full powers to perform any act on behalf of the
principal. The manager of an overseas branch of a company may be a
universal agent if his or her powers are sufficiently wide.
General Agent
• A general agent is empowered to act for his or her principal in certain
specified capacities.
• This kind of agent includes persons such as shop managers and company
officials.
Special Agent
• A special agent is empowered to perform one act or class of acts. For
example: An insurance agent is normally employed to obtain new business
and receive premiums on behalf of the company but is not usually
empowered to admit liabilities under claims.
• A motor assessor and investigator are employed to perform specific duties
on behalf of insurance companies.
Del Credere Agent
• This is an agent who guarantees payment to the principal
and is liable to pay the principal if the third party fails to
meet their obligation.
• As they take additional liability, commissions paid to Del
Credere agents are higher.
Brokers
• An agent who negotiates and contracts for the purchase
and sale of goods and other property is known as a broker
(not to be confused with insurance brokers), for example, a
stock-broker and a share-broker.
• Brokers are agents of both parties for whom the brokers
are acting, and may bind both to the extent to which the
brokers are authorised but they do not have actual
possession of the goods, neither do they appear as
principals.
Mercantile Agent
• A mercantile agent is one who in the ordinary course of
business has actual possession or documents of title to
the goods belonging to the principal.
• He has power to sell or raise money using the
goods/title documents as security.
• He possesses the goods, can sell them in his name and
has insurable interest in the goods.
• He has a general lien on the goods with regard to any
unpaid expenses or commission.
• The essential point is that a mercantile agent has
possession with the owner’s consent.
Auctioneer
• An auctioneer is a licensed agent who
undertakes to sell by public auction properties
over which the auctioneer may or may not
have possession.
• The auctioneer is an agent of sellers but
carries out sales by auction only, and has to be
specifically authorised to deal with purchase
for the purposes of signing the memorandum
required to bind the purchase
DUTIES OF AGENTS
The duties of an agent are obedience, care and skill, personal
performance, good faith, and accounting for money received.
Obedience
• The agent must carry out his duties according to the principal’s
instructions.
• However, the instructions should be legal and reasonable.
• They should also seek for clarifications when the instructions are
not clear.
• Secondly agents should not exceed their authority even if it would
be in the principal’s benefit to do so or perform acts that are illegal
or unlawful.
• An agent will be held liable in damages for breach of contract
where they act contrary to the terms of the agency agreement
Care and skill
• Agents must use reasonable care, skill and diligence in the
performance of their duties lest they become liable for the principal’s
losses.
• The standard of care and skill expected of an agent is that which is
possessed by persons in similar business.
• Insurance brokers are professionals and the standard of care and skill
expected of them is higher than that of insurance agents.
Personal Performance
• Generally, agents may not delegate their duties.
• Delegation of duties is possible in the following circumstances,
however, where:
 The principal expressly authorises the agent to delegate all or some of
their functions;
Cont.
 Delegation is implied from the circumstances of the
case - this is true of many business transactions; or
 It is recognised that agents will delegate all or part of
the work to, for instance, their employees where the
delegation relates to some purely administrative
functions.
 In all these circumstances, agents are liable to the
principal for work delegated for any of their personal
fault.
 Additionally, they are liable to the principal for any
fault on the part of the person or persons to whom
they have delegated the duty.
Good Faith
• An agent’s relationship with the principal is one of trust.
• It, therefore, follows that agents must not allow their own
interests to conflict with the duties towards their principal.
• They are entitled to accept their normal remuneration, such
as commission.
• If they receive bribes or secret commissions from a third
party, however, they are liable for prosecution under law.
• They may then be instantly dismissed and forfeit their rights
under a contract, and the principal is entitled to repudiate any
contract by an agent who has been bribed.
Cont’d
• It is implicit that agents must not make use of
confidential information that comes to them as agents
for the purpose of obtaining some personal benefit.
• Even after the termination of the agency such
information may not be used.
• There is an additional requirement that if agents are
employed to sell something on behalf of their
principal, they cannot buy the thing themselves unless
they disclose this fully to the principal as this would
obviously lead to a potential conflict of interest
Accounting for Money Received
• Agents must remit to the principal all the money
they have received on behalf of the principal.
• They must keep the principal’s property distinct
from their own and must keep proper accounts—
to be produced on request—of transactions on
behalf of the principal.
• The insurance Act provides that premium
received by an agent either in cash or cheque
should be passed over to the insurer immediately
upon receipt
D. REMEDIES FOR BREACH OF DUTY
OF AN AGENT
When an agent is in breach of duty, the principal can:
 Sue the agent for damages for breach of contract;
 In certain circumstances, sue the agent in tort. This
may occur when the agent has refused to return the
principal’s property;
 Sue the agent to recover any secret money received by
the agent;
 Sue for an account if the agent fails to keep proper
accounts of the agency transaction; or
 Dismiss the agent without compensation.
RIGHTS OF AGENTS
• Agents have, broadly speaking, three rights in relation to their
employment as agents: indemnity, remuneration, and lien.
Indemnity
• If agents incur liability or pay out money in the performance of their
duties as agents, they have a right to be indemnified by the principal.
The only exception to this is if an agency agreement provides
otherwise.
• They, however, lose their right to indemnity (or reimbursement of
expenses) if
 Their acts are not authorised or ratified by the principal;
 They are in breach of their duties as agents;
 They incur liability or expend money solely as a result of their own
fault; or
 The act in respect of which they claim indemnity is illegal, unless they
can show that they were unaware of the illegality.
Remuneration
• Where there is an express or implied agreement as to
remuneration, the agent must be paid for work done
normally in the form of commission.
• It will be said to be implied where the agent is in
business and does work which would not usually be
done for nothing.
• The commission payable is usually expressed in the
agreement or may be based on the commercial or
professional rates.
• The event on which the payment of commission
depends must happen before it is paid.
Lien
• This is the right to retain goods of another over payment of a debt
.e.g. banks exercising lien over one account of a customer where
the other account is overdrawn.
• Agents exercise this right where the principal has failed to pay
indemnity or commission due.
• There are two types of lien i.e. general and particular.
• A lien may be particular lien, which is a right to retain particular
goods in respect of which payment is due or a general lien, which is
a right to retain any property as security.
• The agent has a right to only retain the goods but not to sell them.
Should they wish to sell, they must obtain a court order allowing
them to do so.
• Lien comes to an end when the principal pays or offers to pay the
sum due
F. AUTHORITY OF AGENTS
Agents’ authority may be express, implied, usual, or apparent.
Express Authority
• Express actual authority arises from instructions given and they form part
of the agency agreement. They may be oral or in writing or
• it may be under seal.
Implied Authority
• Implied authority is the authority to do anything incidental to or necessary
for the carrying out of the express authority. It is the authority that is
inferred from ordinary course of dealings.
Usual Authority
• Both express and implied authority that an agent possesses carry with
them a usual authority to perform acts that are usual in a particular trade
or profession. If there are certain customs of trade then the agent has a
usual authority to comply with these customs.
Apparent Authority
• This is authority that third parties presume the agent has
while dealing with him in the ordinary course of business.
• A principal is responsible for acts that are within the
apparent authority of the agent.
• This is so even if they are not within the actual authority. If
the principal acts in any way that appears to a third party
that a particular person is his or her agent, this will make
the principal liable.
• The representation is made to the person who seeks to
hold the principal liable.
• A principal may be held liable on the grounds of apparent
authority even if agents act fraudulently and for their own
benefit.
TERMINATION OF AN AGENCY
Way of terminating agency relationship;
• Lapse of time; Where an agency has been created for a
specified period of time, the agency comes to an end once
the time has passed.
• Bankruptcy of the principal or agent
• Revocation/withdrawal of authority: The principal may
revoke the agent’s authority at any time. This may amount
to a breach where no notice is given and this is a
requirement under the agency agreement.
• By agreement between the parties: An agency is formed by
agreement and can also be dissolved by agreement if both
parties wish to terminate the relationship.
Cont.
• Death of either the principal or the agent
terminates the agency relationship.
• Insanity of the principal or the agent brings the
relationship to an end.
• Frustration e.g. where the subject matter of the
agency is destroyed or becomes impossible to
fulfill or the objects of the agency become illegal
• Renunciation by the agent: An agent may
renounce his duties thus terminating the
relationship. This may amount to breach of
contract and the agent may be sued for breach.
Consequences of termination
• It should be noted that not all the consequences flowing
from the agency relationship will cease immediately when
the agency is terminated. The following will survive:
 The agent has a right to commission already earned or to
indemnity in respect of expenses previously incurred.
 Where there was breach of duty by the agent, the right by
the principal to sue the agent still remains
 Where the principal revokes instructions but does not
notify third parties, he will be liable for the agent’s actions
under apparent/ostensible authority. On termination of the
agent, the principal remains liable to third parties
Conclusion
• Generally insurance brokers operate as agents of the
policyholder whereas insurance agents operate as agents of
the insurer.
• Most insurance contracts are formed through agents ,
agents operate within a legal framework, which helps
streamline their transactions in business and relationships
with others.
• Since agents bring together two parties into a contractual
relationship that has legal and financial implications, their
actions must be regulated to ensure law and order and
fairness to the contracting parties.
• This is why it is important to understand the law of agency.
Questions
• Q1. State four ways in which an agency may be created.
• Q2. What is the difference between a broker and a mercantile agent?
• Q3. Outline the importance of the duty of personal performance.
• Q4. Discuss the rights of an agent.
• Q5. Differentiate between express and apparent authority.
• Q6. What is the liability of a principal in cases of undisclosed principal?
• Q7. How can an agency be terminated?