Capacity to Become an Agent and a Principal — Lecture Note

1. Introduction — why capacity matters

Capacity determines whether a person can validly enter into legal

relationships and whether others will be bound by or may enforce those
relationships. In agency law we ask two related but distinct questions:

1. Who can act as an agent (i.e., be appointed to perform acts on behalf

of another)?

2. Who can be a principal (i.e., a person on whose behalf the agent acts
and who will be bound by the agent’s acts)?

The answers differ: capacity to act as an agent is generally wider than

capacity to be a principal.

2. Relevant statutory background (general framework)

 Agency rules in the subcontinent are derived from the Indian Contract
Act, 1872 (sections on agency). Bangladesh courts follow the same
principles unless local statute/case law modifies them.

 Capacity to contract generally follows Contract Act principles

(competency to contract): a person must be of the age of majority, of
sound mind, and not disqualified by law to contract.

 Section 11 – Competency of Parties: Only persons of the age of

majority (18 years under the Majority Act, 1875), of sound mind, and
not disqualified by law are competent to contract.

 Section 182 – Definitions of 'agent' and 'principal'.

 Section 183 – Who may employ an agent (capacity to be a principal).
 Section 184 – Who may be an agent – indicates that minors or persons
of unsound mind may be agents unless expressly disqualified.
 Sections 186–188 – Express and implied authority.

 Sections 213 onwards – Termination of agency.

 Section 232 – Effect where the agent does not disclose principal.
3. Capacity to be a Principal (i.e., capacity to have an agent act for
you)

A person must be competent to contract to be a principal whose contracts

(through an agent) are enforceable. Traditional categories of incapacity
include:

(a) Minors

 A contract entered into by a minor is void ab initio; therefore, a minor

generally cannot be a principal who authorizes binding contracts. If
a purported principal is a minor, third parties cannot enforce contracts
said to be made for the minor (because the minor cannot be bound in
contract).

 Leading authority (classic common law position): Mohori Bibee v.

Dharmodas Ghose — minor’s contract void. (This case is a
foundational authority for the rule that minors cannot be bound by
contracts.)

(b) Persons of unsound mind

 A person unable to understand the nature and effect of a contract

cannot be a principal whose agent’s acts create enforceable
obligations.

(c) Corporations and ultra-vires

 Corporations (companies) act through agents (directors, managers).

Their capacity to be principals depends on the company’s constitution
(memorandum/articles) and the Companies Act. Acts outside corporate
objects may be ultra vires and not binding on the company (classic
rule: Ashbury Railway Carriage & Iron Co v Riche — ultra vires
doctrine). Modern company law has limited the harshness of ultra
vires, but the general point remains: a company’s capacity to be a
principal depends on company law and its internal authorizations.

(d) Persons disqualified by statute

 E.g., foreign sovereigns, alien enemies, bankrupts (in specific

circumstances), or persons disqualified by a special statute may lack
capacity to be principals in particular transactions.
Key point: If the principal lacks capacity to contract, third parties cannot
enforce contracts said to have been entered into on the principal’s behalf —
subject to equitable and statutory exceptions.

Example 1: A (17-year-old) is appointed by B to buy office equipment. A signs

a contract with Supplier S on B’s behalf. B is bound; A is not personally liable.
Example 2: Company C’s articles limit borrowing to Tk. 1 crore. Director D
borrows Tk. 3 crore. If lender relied on ostensible authority, C may be bound.
Example 3: Minor M manages Shop S and signs a lease. Shop S is bound; M is
not personally liable.

4. Capacity to be an Agent (i.e., to perform tasks on behalf of

another)

The law is generally more flexible about who may act as an agent.

(a) Minors as Agents

 A minor may be appointed as an agent to perform acts on behalf

of a principal. The principal may be bound by the agent’s acts so long
as the agent’s acts are within the authority delegated and are
otherwise lawful.

 Caveat: A minor acting as agent cannot himself be made personally

liable on contracts he signs for the principal (because he lacks
contractual capacity). But the principal can be bound by the agent’s
authorized acts. Also, third parties dealing with a minor agent may face
difficulty in obtaining personal remedies against the minor agent if the
minor is not personally liable.

 Practically: appointing a minor as an agent is permitted but risky —

principals, third parties, and courts examine the substance of authority
and protection of third parties.

(b) Persons of unsound mind as agents

 Generally a person of unsound mind cannot validly enter into

contracts, but he may perform ministerial acts as an agent if such acts
do not require contractual capacity. However, allowing an unsound
person to act as an agent for complex transactions is problematic.
(c) Corporations and others as agents

 Corporations can be appointed agents; their authority is exercised

through their officers. Agency by firms, companies, partnerships is
common, subject to internal capacity.

Key point: Agency depends principally on the authority given to the agent
and whether third parties can reasonably rely on that authority (actual vs
apparent authority). The agent’s personal contractual capacity is relevant
only to the agent’s own personal liability.

5. Types of Authority (connection to capacity)

Knowing who can be agent/principal is tied to types of authority:

 Actual (express or implied) authority: authority actually conferred

by principal on agent. If principal has capacity and confers authority,
principal is bound.

 Apparent (ostensible) authority: principal may be bound where the

principal’s conduct leads a third party to reasonably believe the agent
has authority — even if the agent lacks actual authority. Case law on
ostensible authority is central (see Freeman & Lockyer v Buckhurst
Park Properties).

 Authority by necessity / ratification: If an agent acts without

authority, a principal who later ratifies the act (and who had capacity
at the time) will be bound. An incapable person cannot ratify a contract
(because ratification is itself an adoption of an act).

6. Leading cases (brief summaries useful for class)

I list classic authorities frequently relied on in Commonwealth jurisdictions

(used in Bangladesh courts by analogy). If you want precise Bangladesh
citator references I can fetch them.

1. Mohori Bibee v. Dharmodas Ghose (landmark): Held that a contract

entered into by a minor is void; minors cannot be held liable on
contracts they enter. (Establishes the foundational rule about minors
and capacity to contract/principalship.)
 2. Ashbury Railway Carriage & Iron Co v. Riche (classic company
law/ultra vires): A contract beyond a company’s objects is ultra vires
and void against the company. Relevance: whether a company (as
principal) had capacity to enter the transaction.

3. Watteau v. Fenwick (1893) (English): Held principal liable for acts of

agent that were within the usual authority of an agent of that
character, even though the agent had acted beyond actual authority.
This case is often cited in discussions of implied authority and
situations where third parties rely on the agent’s apparent scope of
authority.

4. Freeman & Lockyer v. Buckhurst Park Properties Ltd (1964)

(House of Lords): Affirms the doctrine of ostensible (apparent)
authority — a principal (including a company) may be bound where
the principal’s conduct makes it reasonable for a third party to assume
the agent is authorized.

5. Lloyd v. Grace, Smith & Co (1912): Principal held liable for

fraudulent acts of agent where those acts were within the authority
given and were part of the agent’s employment; illustrates principal
liability for agent’s torts/frauds when within scope.

6. Agency and minors — practical proposition: While jurisdictions

differ in approach to minor-agents, common law practice recognizes
that a minor may act as agent; the risk is usually on the principal and
third parties — courts look to the fairness of enforcing contracts and
protection of minors.

7. Practical classroom examples & short hypotheticals

1. A (a 17-year-old) is appointed by B (an adult) as B’s agent to buy office

equipment. A signs a contract with Supplier S on B’s behalf. Who is
bound?

o B (principal) will be bound by the contract if A had authority; A

(minor) is not personally bound (cannot be sued on the contract)
unless he separately assumes liability in a way recognized by
law.
 2. Company C’s articles limit directors’ power to borrow only up to Tk. 1
crore. Director D borrows Tk. 3 crore without board approval by using a
corporate letterhead and dealing with Lender L. Is the company bound?

o Depends on whether lender had reasonable grounds to believe D

had authority (apparent authority) and on local company law
(ultra vires concerns). Classic answer: if lender relied on
ostensible authority, company may be bound (Freeman &
Lockyer principles), but ultra vires and internal limitations may
restrict remedies.

3. Minor M acts as manager of Shop S and signs a lease for new premises
committing S. Is landlord able to enforce against S and/or M?

o S (the principal who appointed M) may be bound by M’s

authorized acts. M (minor) will likely not be personally bound to
perform contractual obligations (subject to jurisdictional rules).

8. Practical rules for lawyers and students (checklist)

 Always check who is the contracting party (principal) and whether

they have capacity to be bound.

 If the contracting party is a company, check the memorandum/articles

and Companies Act limitations (ultra vires issues).

 Check whether agent had actual authority, apparent authority, or

whether the principal later ratified the act.

 When minors or persons of unsound mind are involved, identify who

will be personally liable and whether third parties have protection
(equitable remedies, restitution).

 For exam answers, clearly separate (A) capacity of the principal and
(B) capacity of the agent — they are distinct legal questions.

9. Suggested structure for an exam answer

1. Define capacity and identify relevant statutes (Contract Act —

competency to contract).

2. State rule about minors (Mohori Bibee) and unsound mind.

 3. Explain agent vs principal distinction and cite that minors may be
agents (explain consequences).

4. Discuss actual/apparent authority and ratification (cases: Freeman &

Lockyer, Watteau).

5. Apply facts, discuss remedies, conclude.

10. Suggested further reading & authorities to cite in answers

 Indian Contract Act provisions on agency (sections dealing with

agency) — adopted in Bangladesh practice.

 Mohori Bibee v. Dharmodas Ghose (minority rule).

 Freeman & Lockyer v. Buckhurst Park Properties Ltd (apparent

authority).

 Watteau v. Fenwick (agent’s usual authority).

 Ashbury Railway Carriage & Iron Co v Riche (ultra vires / corporate

capacity).

 Lloyd v Grace, Smith & Co. (liability for agent’s fraud within scope).

11. Sample short essay question (20 marks)

“Discuss the capacity of minors to act as agents and to be principals. In your

answer explain the legal consequences for (a) the minor-agent, (b) the
principal, and (c) third parties who contract with the agent.”
(Answer should define capacity, cite Mohori Bibee, discuss that minors
cannot be principals but may be agents, explain principal’s liability and
agent’s personal non-liability, and consider apparent authority and protection
for third parties.)

EXAM STRUCTURE:

1) Define capacity under Contract Act.

2) Distinguish between capacity of principal and agent.
3) Explain statutory provisions (Sections 11, 182–184, etc.).
4) Cite case law.
5) Apply to problem facts.
6) Conclude clearly