A sales representative agrees a discount you never approved. A clearing agent files a declaration you never saw. A "regional manager" signs a supply contract on your letterhead. A relative negotiates on your behalf and gives an undertaking.
In each case the question is the same: are you bound? Under Pakistani law, very often you are.
The basic rule
Chapter X of the Contract Act 1872 governs agency. An agent is a person employed to do an act for another, or to represent another in dealings with third persons.
The consequences follow from that:
- Acts of the agent within authority bind the principal as if done personally
- The principal is liable to third parties for those acts
- The agent owes duties of care, obedience, disclosure and accounting, and must not make a secret profit
- The agent is generally not personally liable on a contract made for a disclosed principal — with exceptions
No written appointment is needed. Agency can arise from conduct, and this is where businesses get caught.
Actual, apparent and ratified authority
Actual authority — what you expressly or impliedly authorised.
Apparent (ostensible) authority — what you held the agent out as being authorised to do. This is the dangerous one. If a third party reasonably believed the agent could bind you, because of the position you gave them, the title on their card, the office they sat in, or the deals you honoured before, you can be bound by acts you never authorised.
The internal instruction limiting the agent's authority does not help you unless the third party knew of it.
Ratification — you can be bound by adopting an unauthorised act afterwards. Note that ratification can be implied: accepting the benefit of an unauthorised contract while objecting to its terms is the classic way principals ratify without meaning to. If you do not accept a deal your agent made, say so promptly and in writing, and do not take the benefit of it.
Agency by necessity and by estoppel exist in narrower circumstances.
Controlling the exposure
- Define authority in writing — monetary limits, product scope, territory, and an express statement that the agent may not conclude contracts
- Tell counterparties what your agents can and cannot do, in your standard terms and on your documents
- Control titles. Calling someone "director" or "country head" creates apparent authority regardless of the internal reality
- Withdraw the indicia of authority when an agent leaves — letterheads, business cards, email addresses, stamps, and above all any power of attorney
- Require that contracts above a threshold be signed only by named persons, and say so in your terms
Agent, distributor, or employee?
Three different relationships with different consequences:
Agent — acts for you, does not take title, earns commission, and binds you.
Distributor — buys and resells on its own account. Does not bind you, and takes its own credit risk. See dealership and distribution agreements.
Employee — an employment relationship with statutory rights attached, whatever the contract is called. See employment contracts.
Labelling does not decide it — the substance of the arrangement does. A "commission agent" working exclusively for you, under your direction, on your premises, may well be an employee, with gratuity, leave and social security consequences.
Commission disputes
The recurring fight: an agent introduces a customer, the principal deals directly thereafter, and commission stops.
What decides it:
- Is commission payable on introduction or on conclusion of business?
- Does it continue on repeat orders from an introduced customer, and for how long?
- Is it payable on orders received but not yet paid for?
- What happens to commission on business concluded after termination — the pipeline question, which is where most of the money is
- Is the agency exclusive, and does the principal owe commission on direct sales into the territory?
Silence on these produces litigation. A page of drafting prevents it.
The agent also has real obligations: to account, to disclose conflicts, and not to take a secret commission from the other side — a serious breach that forfeits entitlement and can found a claim.
Terminating an agent
Termination is generally permitted on the terms agreed, and where nothing is agreed, on reasonable notice.
Two constraints matter:
An agency coupled with an interest — where the agent has an interest in the subject matter — is not freely revocable.
Termination in breach exposes you to a claim for commission and for damages over the notice period.
Practically, on termination: confirm it in writing, notify customers that the agent no longer represents you, revoke any power of attorney formally and give notice of the revocation, recover documents and stock, and settle the commission account. An agent who is still holding themselves out as yours to customers who have not been told is a continuing liability.
Clearing agents, freight forwarders and brokers
A particular exposure for importers. A clearing agent's declaration is made on your behalf, and the liability for a misdeclaration falls on the importer. "The agent handled it" is not a defence to customs.
Control it: check the declaration before filing, keep copies, and have a written agreement setting out the agent's obligations and indemnity. See customs valuation and duty demands, permits and restricted imports and logistics, warehousing and freight contracts.
Powers of attorney are agency in its strongest form
A power of attorney is a formal grant of authority, and third parties are entitled to rely on it until it is revoked and the revocation is notified. Give the narrowest power that does the job, and revoke it properly the moment it has been used.
See powers of attorney from abroad and property scams against overseas Pakistanis.
How the firm can help
We draft agency, commission and representation agreements with clear limits on authority, advise principals faced with contracts their agents had no business signing, pursue and defend commission claims, and manage terminations so they do not create liabilities of their own.
See corporate and commercial, or contact the firm.