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"Agency is the relationship between two legal persons, natural or artificial, whereby one person (the principal) appoints another (the agent) to act on his behalf in affecting a transaction."

(Richard Card, Jennifer James; Law for Accountancy Students; 6th edition; 1997, p477)

a)i) The agency may arise in one of the following ways:

By agreement

It is possible for the agency to arise by two ways of agreement, express or implied. There very often will be a contract but it is not necessary in order for the agency to arise. (Chaudhry v Prabhakar (1988) 3 All ER 718, (1989) 1 WLR 29, CA) All that is necessary is a desire to appoint A as agent and A’s consent to act as such.

"If the parties have not expressly agreed to become principal and agent, it may be possible to find an implied agreement based on their conduct or relationship. If the parties have so conducted themselves towards one another that it would be reasonable for them to assume that they have consented to act as principal and agent, they are deemed to be principal and agent. (Ashford Shire Council v Dependable Motors Pty Ltd (1961) AC 336, (1961) 1 All ER 96, PC)"

(Richard Card, Jennifer James; Law for Accountancy Students; 6th edition; 1997, p479)

By estoppel

"The agency can arise by estoppel where there is a representation made by the principal to the third party that the agent has authority to undertake certain acts on behalf of that principal. The arisen of agency by estoppel requires three criteria to be satisfied: firstly, there must be a representation by the principal; secondly, that representation must be relied on; thirdly, the third party who deals with the agent must not know that the agent is acting without authority. (Charrington Fuel Oil Ltd v Parvant Co Ltd (1988))" (Margaret and Ivor Griffiths; Commercial Law; 2nd edition; 2001)

By ratification

In some situations, a principal can choose to adopt and ratify transactions which were made entirely without his authority. Where someone has pretended to be his agent and used his name, the principal can subsequently ratify the transaction so as to obtain the benefit and undertake the obligation agreed. Four conditions must be satisfied: the agent must have used the principal’s name and claimed to act for him; the principal must have existed and had contractual capacity at the time when the agent acted; the principal must have known all material facts when he ratified; an illegal or void act cannot be ratified.

The example could be this case: Re Tiedemann and Ledermann Freres (1899)

By operation of law

"A person (the agent) may acquire authority from the pressure of necessity. Four conditions must be satisfied: first, the agent must have been placed in control of something belonging to the principal. Second, a genuine emergency must have arisen, which threatens the property. Thirdly, it must be impossible for the agent to obtain the principal’s instructions in time. Fourth, the agent must have acted in good faith in a genuine attempt to protect the property. Great Northern Railway Co. v Swaffield (1874)"

(Marsh and Soulsby; Business Law; 8th edition; 2002)

a)ii) An agent’s acts can bind his principal if, and only if, the agent has authority to do so. An agent’s authority may have various forms.

Actual authority

This is what the principal expressly or impliedly gives the agent the right to do on his behalf. There is actual authority arising from express creation, operation of law, or ratification.

"Express authority comes from the principal’s specific instructions. It these are ambiguous, the agent must seek clarification but, if he cannot contact the principal, he is justify in acting in good faith on a reasonable interpretation of his instructions, even if this turns out not to be what the principal intended.

Implied authority. An agent also has implied authority to do things which are normally incidental to carrying out his express instructions. More importantly, where by ordinary business practice it is usual for a particular type of agent to carry out certain functions, the principal, will be taken impliedly to have authorised this." (Marsh and Soulsby; Business Law; 8th edition; 2002; p58)

Apparent or ostensible authority

This authority is arising from a rule of evidence (estoppel).

"Sometimes an agent can have power to do things which he has no right to do. This can occur particularly where there have been undisclosed restrictions on a professional or business agent’s "usual" authority. The principal has placed the agent in a position where he appears to the world to have the powers usual to such an agent. If there are no suspicious circumstances, the principal is bound to the third party even if the agent disobeys the instructions given to him by the principal. (Waugh v Clifford & Sons Ltd (1982))

A third party can also rely on an agent’s usual and apparent authority when the agent has misused his position. (Panorama Developments Ltd v Fidelis Fabrics Ltd (1971))

Sometimes ostensible authority can arise from estoppel. The principal has held out another as having authority and, as a result, a third party has been deceived. (Eastern Distributors Ltd v Goldring (1957))

Sometimes similar may occur even if the principal is undisclosed. (Watteau v Fenwick (1893))"

(Marsh and Soulsby; Business Law; 8th edition; 2002; p58)

a)iii) "If a person acts as agent, knowing that he has no actual authority, he is liable to the third party for breach of warranty of authority if he has represented to the third party that he had authority and the third party relied on that representation and thereby suffered loss. (Collen v Wright (1857) 8 E & B 647)

Purporting to act as agent constitutes a representation of authority, unless the third party knew or ought to have known of the lack of authority. (Halbot v Lens (1901) 1 Ch 344)

Even if an agent who lacks authority genuinely and reasonably believes he ahs it, when he ahs not, he may be liable to the third party. (Younge v Toynbee (1910) 1 KB 215, CA) The third party can sue the agent even if he has not entered into a contract, provided he has altered his position in reliance on the representation.

If the representation made by an agent is one of law, not fact, he is not liable if it is untrue. (Beattie v Lord Ebury (1872) 7 Ch App 777) An action for breach of warranty cannot lie if the principal ratifies the unauthorised act.

The amount of damages which may be awarded under this head is the amount which would put the third party in the same position as if the representation (of authority) had been true. (Richardson v Williamson and Lawson (1871) LR 6 QB 276) Therefore, where the third party could recover nothing from the principal, even if the agent had had authority, he can recover nothing for breach of warranty of authority." (Richard Card, Jennifer James; Law for Accountancy Students; 6th edition; 1997, p502)

b) Problem Question

"It is the duty of the seller to deliver the goods, and of the buyer to accept and pay for them, in accordance with the terms of the contract of sale." Sale of Goods Act 1979 part IV, section 27

According to our situation there has been an offer which was accepted by parties, the seller and the buyer. The contract has been made when the buyer agreed to buy the goods and paid a price set by the seller. Three sheep and two goats were sold and therefore the contact was formed. Section 29 of the Sale of Goods Act states that "apart from any such contract, express or implied, the place of delivery is the seller’s place of business if he has one, and if not, his residence; except that, if the contract is for the sale of specific goods, which to the knowledge of the parties when the contract is made are in some other place, then that place is the place of delivery". In our case there was an agreement between the parties which specified that the seller will deliver the goods the next day after the sale was made to a specific place (Sarah’s desert market place).

Sale of Goods Act 1979 part IV, section 37 states: "when the seller is ready and willing to deliver the goods, and requests the buyer to take delivery, and the buyer does not within a reasonable time after such request take delivery of the goods, he is liable to the seller for any loss occasioned by his neglect or refusal to take delivery, and also for a reasonable charge for the care and custody of the goods".

The Abraham’s (seller’s) herders arrived at the desert market but there was no one to receive the animals. Therefore Abraham fulfilled his duties to the buyer by delivering the goods to a specific place and at the date which was agreed with the buyer. However Isaac (the buyer) didn’t arrive to collect the goods which mean according to the Act that the agreement was broken and that the buyer is liable to the seller for any care and custody of the goods.

As the goods are the animals and cannot be left unattended the herders asked a passing shepherd to care for them. Three days later when the buyer arrived he refused to pay for the food and care of the animals, arguing that Abraham must pay. There are many legal issues which suggest that he should not pay. Firstly, Sale of Goods Act 1979 part IV, section 37 concerns about the buyer liability of not taking delivery of the goods. By this section Isaac is liable and has to pay for the animals. Secondly, section 20 of the Act states that "any loss, prima facie, falls on the party who is owner at that time". Section 18, therefore, sets the rules. Rule 1 could be applied to our situation. It says that "where there is an unconditional contract for the sale of specific goods, in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment or time of delivery, or both, be postponed." Isaac paid for the animals and the contract has been drawn and therefore we can assume that the goods where in his ownership which means he is responsible for them and therefore is liable for the payment of the animal’s care and food. In addition Abraham’s herders left a massage for Isaac. This was an additional care to fulfill the agreement of delivering the goods.

In light all of these issues which where discussed above the other important issue aroused: the agency of necessity. In order for this issue to arise four conditions must be met. First, the agent must have been placed in control of something belonging to the principal. In our case the Isaac’s animals (something belonging to the principal) have been placed in control of the shepherd (the agent).

Second, a genuine emergency must have arisen, which threatens the property; the agency of necessity arise when the goods are perishable. The clear examples of goods being perishable are leading cases like Couturier v Hastie (1856) 8 Exch 40, concerning the a cargo of grain which was fermenting, Sims & Co v Midland Railway (1913) 1 KB 103, concerning butter which was melting in hot weather, and most recently, the China Pacific SA v Food Corporation of India, The Winson (1982) AC 939; (1981) 3 All ER 688 case.

Third, it must be impossible for the agent to obtain the principal’s instructions in time. Fourth, the agent must have acted in good faith in a genuine attempt to protect the property. According to our case all four of the conditions are satisfied and therefore the agency of necessity aroused.

The English law historically based on the precedent system which is also known as judge-made law. Therefore the decision of the court is usually based on the previous similar case which in our example is Great Northern Railway v Swaffield (1874) LR 9 Ex 132. A horse had been delivered by the railway to one of its stations, for collection, but had not been collected. It was held that the agency of necessity arose, so that the railway company was acting as agents for the owner when it paid for the horse to be stabled and could claim reimbursement of his expense from the owner.

According to this previous case which is really similar to our situation the outcome therefore should be the same i.e. the buyer is liable to the shepherd and thus has to pay for the food and care of his animals.

c) Sole trader

A sole trader is an individual who owns and operates his or her own business. Although there may be one or two employees, this person makes the final decisions the running of the business. A sole trader is the only one who benefits financially from success but must face the burden of any failure. In the eyes of the law the individual and the business are the same. The owner has unlimited liability for any debts that result from running the firm. If a sole trader cannot pay his or her bills the courts can allow their personal assets to be seized by creditors in order to meet outstanding debts.

There are no formal rules to follow when establishing a sole trader, or administrative costs to pay. Complete confidentiality can be maintained because accounts are not published. The main disadvantages facing sole trader are the limited sources of finance available, long hours of work involved and the unlimited liability.


The Partnership Act 1890, section 1, defines a partnership as "the relation which subsists between persons carrying on a business in common with a view to profit".

When a partnership is created, the parties often draw up a deed of partnership which includes the provision of capital, management, and the sharing of profits. By the Companies Act 1985, section 716; an unlimited partnership must not normally have more than 20 members.

This type of business is quite suitable for my friends as a good relationship between the members is required. Unlike sole trader the partners share the business which mean share the control, decision making and profits/loses. All partners are jointly and severally liable for the firm’s debts. "Partners owe statutory duties of good faith to each other. Section 28 imposes a statutory duty to account: "partners are bound to render true accounts and full information of all things affecting the partnership to any partner or his representative" (Law v Law (1905) 1 Ch 140, CA). Section 29 deals with secret or unauthorised profits: "Every partner must account to the firm for any benefit derived by him without the consent of the other partners from any transaction concerning the partnership property, name or business connection". (Pathirana v Pathirana (1967) AC 233)"

(Marsh and Soulsby; Business Law; 8th edition; 2002; p58)

Disadvantages Firstly, the financial benefit derived from running the business will have to be divided between the partners equally or according to their agreement. On the other hand all losses will be split up between partners in proportion to the percentage of capital invested. Secondly, the firm is liable for wrongs committed by the individual partner. By Section 10, where one partner commits an act which is wrong in itself, as opposed to being outside his authority, the firm will be civilly liable for any harm caused, and criminally for any penalty incurred if either the act was done with the actual authority of his fellow partners or the act was within his usual authority, in the ordinary course of the firm’s business. (Hamlyn v Houston & Co. (1903) 1 KB 81) Thirdly, Section 9 states the obvious and rules that every partner is liable, jointly with his co-partners, for all debts and obligations of his firm which are incurred while he is a partner.

And lastly, the unlimited liability which states that each partner is responsible for the business debts. However, the new Act was introduced which helped to deal with the problems of unlimited liability.

The Limited Liability Partnership Act 2000

"Since April 2001 it has been possible to create a new business organisation called a limited liability partnership (LLP). The difference between the ‘normal’ partnership and LLP is as follows.

  • There is no limit on the number of partners
  • An LLP is a corporate body with separate legal personality, like a company. Contracts are made with LLP, and the LLP that can sue or be sued. The property of the body belongs to the LLP, not to the members, and the LLP will continue in existence notwithstanding the death or retirement of a partner, or any other change in membership.
  • Above all, the members have limited liability. If the firm cannot pay all its debts, the individual partners normally have no further liability from their own resources.

Also it must be publicly formed and supervised by the Registrar of Companies. A registration document must be sent to the Registrar of Companies. After the LLP is incorporated, the Registrar continues to exercise some controls." (Marsh and Soulsby; Business Law; 8th edition; 2002)


There are many types of companies which could be put in different categories such as limited and unlimited or private and public companies.

Unlimited companies are those who are responsible to all the debts of the business which could be payable from the member’s private resources. These types of companies are rare.

Limited companies could be limited by guarantee where each member guarantees that if company is wound up he will contribute up to a certain amount towards the payment of its debts and liquidation costs. Another could be limited by shares where each member holds on or more shares, for which he pays the company. A shareholder’s liability to the company is normally limited to such part of the issue price as is not yet paid. The great majority of shares are fully paid up, and such shareholders therefore have no liability at all for the company’s debts. (Salomon v Salomon & Co Ltd (1897) AC 22)

A public limited company must be limited by shares and must meet the requirements of the Companies Act 1985 such as it must have a nominal share capital of a least the authorised minimum of £50,000.

A private company must not offer its shares for sale to the public and it has no minimum share capital

In conclusion, for my friends I would recommend to set up a business as a LLP. All of its requirements are much less complex and onerous than those for companies. Moreover, the internal requirements are much simpler. There need not be a board of directors. There are no statutory rules for types of meeting and resolution. The partners may have a written agreement between themselves about some of the matters, but such an agreement is a matter for the partners themselves, and it is private unlike the Articles of Association of a company. The liability is limited so it is not the responsibility of the partners to pay for the debts of the company from their own private resources.


Richard Card, Jennifer James; Law for Accountancy Students; 6th edition; 1997

Marsh and Soulsby; Business Law; 8th edition; 2002

Margaret and Ivor Griffiths; Commercial Law; 2nd edition; 2001

Roland Fletcher; Commercial Law; 150 Leading Cases; 2002

William Capstick; Lecture Notes

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