INTRODUCTION
A consensual relationship created by contract or by
law where one party, the principal, grants authority for another party, the
agent, to act on behalf of and under the control of the principal to deal with
a third party. An agency relationship is fiduciary in nature, and the actions
and words of an agent exchanged with a third party bind the principal.
An agreement creating an agency relationship may be
express or implied, and both the agent and principal may be either an
individual or an entity, such as a corporation or partnership.
Under the law of agency, if a person is injured in a
traffic accident with a delivery truck, the truck driver's employer may be
liable to the injured person even if the employer was not directly responsible
for the accident. That is because the employer and the driver are in a
relationship known as principal-agent, in which the driver, as the agent, is
authorized to act on behalf of the employer, who is the principal.
The law of agency allows one person to employ another
to do her or his work, sell her or his goods, and acquire property on her or
his behalf as if the employer were present and acting in person. The principal
may authorize the agent to perform a variety of tasks or may restrict the agent
to specific functions, but regardless of the amount, or scope, of authority
given to the agent, the agent represents the principal and is subject to the
principal's control. More important, the principal is liable for the
consequences of acts that the agent has been directed to perform.
A voluntary, Good
Faith relationship of trust, known as a
fiduciary relationship, exists between a principal and an agent for the benefit
of the principal. This relationship requires the agent to exercise a duty of
loyalty to the principal and to use reasonable care to serve and protect the
interests of the principal. An agent who acts in his or her own interest
violates the fiduciary duty and will be financially liable to the principal for
any losses the principal incurs because of that breach of the fiduciary duty.
For example, an agent who accepts a bribe to purchase only the goods from a
particular seller breaches his fiduciary duty by taking the money, since it is
the agent's duty to work only for the best interests of the principal.
An agency relationship is created by the consent of
both the agent and the principal; no one can unwittingly become an agent for
another. Although a principal-agent relationship can be created by a contract
between the parties, a contract is not necessary if it is clear that the
parties intend to act as principal and agent. The intent of the parties can be
expressed by their words or implied by their conduct.
In commercial law, the law of agency
is a very important concept to understand as it deals with contractual,
quasi-contractual and non-contractual relationships. This usually involves a
person, called the agent, who can act on behalf of another person, called the
principal, to form a legal relationship with third parties.
In this free online law of agency
course, you will learn about the relationship between the agent and principal
and how the principal gives authority to the agent to act on their behalf. You
will gain a better understanding of the three types of authority a principal
can give to an agent - actual authority, apparent authority and ratified
authority.
You will also learn about agent
obligations to a principal and the limits of agent authority. The course also
reviews who is agent for a business or corporation and what the duties of the
Board of Directors and Officers in a business or corporation are.
This course will benefit
entrepreneurs and business professionals who would like to learn more about the
legalities behind the law of agency and what the duties of particular
individuals in a business or corporation are regarding this law.
Agency: the relationship of a person
(called the agent) who acts on behalf of another person, company, or
government, known as the principal. "Agency" may arise when an
employer (principal) and employee (agent), asks someone to make a delivery or
names someone as an agent in a contract. The basic rule is that the principal
becomes responsible for the acts of the agent, and the agent's acts are like
those of the principal (Latin: respondeat superior). Factual questions arise
such as: was the agent in the scope of employment when he/she ran down the
little child, got drunk and punched someone, or sold impure wheat? There is
also the problem of whether the principal acted in such a way as to make others
believe someone was his agent--this is known as "apparent" or
"ostensible" authority. When someone who is or is not an employee
uses company business cards, finance documents, or a truck with the company
logo, such use gives apparent authority as an agent
The law of agency is an area of commercial law dealing with a set of contractual,
quasi-contractual and non-contractual relationships that involve a person,
called the agent, that is authorized to act on behalf of another (called
the principal) to create a legal relationship with a third party.[1]
Succinctly, it may be referred to as the relationship between a principal and
an agent whereby the principal, expressly or implicitly, authorizes the agent
to work under his control and on his behalf. The agent is, thus, required to
negotiate on behalf of the principal or bring him and third parties into
contractual relationship. This branch of law separates and regulates the
relationships between:
- Agents and principals;
- Agents and the third parties with whom they deal on their principals' behalf; and
- Principals and the third parties when the agents purport to deal on their behalf.
·
The common law principle in
operation is usually represented in the Latin phrase, qui facit per alium,
facit per se, i.e. the one who acts through another, acts in his or her
own interests and it is a parallel concept to vicarious liability and strict
liability in which one person is held liable in criminal law or tort for the
acts or omissions of another.
In India, section 182 of the Contract
Act 1872 defines Agent as “a person employed to do any act for another or to
represent another in dealings with third persons”.[2]
Concepts
The reciprocal rights and liabilities between a
principal and an agent reflect commercial and legal realities. A business owner
often relies on an employee or another person to conduct a business. In the
case of a corporation, since a corporation is a fictitious legal person, it can
only act through human agents. The principal is bound by the contract entered
into by the agent, so long as the agent performs within the scope of the
agency.
A third party may rely in good faith on the representation
by a person who identifies himself as an agent for another. It is not always
cost effective to check whether someone who is represented as having the
authority to act for another actually has such authority. If it is subsequently
found that the alleged agent was acting without necessary authority, the agent
will generally be held liable.
Brief statement of legal principles
There are three broad classes of agent
1.
Universal
agents hold broad authority to act on behalf of the principal, e.g. they may hold
a power of attorney (also known as a mandate in civil law jurisdictions) or
have a professional relationship, say, as lawyer and client.
2.
General
agents hold a more limited authority to conduct a series of transactions over a
continuous period of time; and
3.
Special
agents are authorized to conduct either only a single transaction or a
specified series of transactions over a limited period of time.
Authority
An agent who acts within the scope of authority
conferred by his or her principal binds the principal in the obligations he or
she creates against third parties. There are essentially three kinds of
authority recognized in the law: actual authority (whether express or implied),
apparent authority, and ratified authority (explained here).
Actual authority
Main
article: Actual authority
Actual authority can be of two kinds. Either the principal
may have expressly conferred authority on the agent, or authority may be
implied. Authority arises by consensual agreement, and whether it exists is a
question of fact. An agent, as a general rule, is only entitled to indemnity
from the principal if he or she has acted within the scope of her actual
authority, and may be in breach of contract, and liable to a third party for
breach of the implied warranty of authority. In tort, a claimant may not
recover from the principal unless the agent is acting within the scope of
employment.
Express
actual authority
Express actual authority means an agent has been
expressly told he or she may act on behalf of a principal.
- Ireland v Livingstone [1872] LR 5 HL 395
Implied
actual authority
Implied actual authority, also called "usual
authority", is authority an agent has by virtue of being reasonably
necessary to carry out his express authority. As such, it can be inferred by
virtue of a position held by an agent. For example, partners have authority to
bind the other partners in the firm, their liability being joint and several,
and in a corporation, all executives and senior employees with decision-making
authority by virtue of their position have authority to bind the corporation.
- Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549
Apparent authority
Main
articles: Apparent authority and Estoppel
Apparent authority (also called "ostensible
authority") exists where the principal's words or conduct would lead a
reasonable person in the third party's position to believe that the agent was
authorized to act, even if the principal and the purported agent had never
discussed such a relationship. For example, where one person appoints a person
to a position which carries with it agency-like powers, those who know of the
appointment are entitled to assume that there is apparent authority to do the
things ordinarily entrusted to one occupying such a position. If a principal
creates the impression that an agent is authorized but there is no actual
authority, third parties are protected so long as they have acted reasonably.
This is sometimes termed "agency by estoppel" or the "doctrine of holding out",
where the principal will be estopped from denying the grant of authority if third
parties have changed their positions to their detriment in reliance on the
representations made.[3]
- Rama Corporation Ltd v Proved Tin and General Investments Ltd [1952] 2 QB 147, Slade J, "Ostensible or apparent authority... is merely a form of estoppel, indeed, it has been termed agency by estoppel and you cannot call in aid an estoppel unless you have three ingredients: (i) a representation, (ii) reliance on the representation, and (iii) an alteration of your position resulting from such reliance."
- Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
- The Raffaella or Egyptian International Foreign Trade Co v Soplex Wholesale Supplies Ltd and PS Refson & Co Ltd [1985] 2 Lloyd's Rep 36.
Watteau v Fenwick
In the case of Watteau
v Fenwick,[4] Lord Coleridge
CJ on the Queen's Bench concurred with an opinion by Wills J that a third party
could hold personally liable a principal who he did not know about when he sold
cigars to an agent that was acting outside of its authority. Wills J held that
"the principal is liable for all the acts of the agent which are within
the authority usually confided to an agent of that character, notwithstanding
limitations, as between the principal and the agent, put upon that
authority." This decision is heavily criticised and doubted,[5] though not
entirely overruled in the UK. It is sometimes referred to as "usual
authority" (though not in the sense used by Lord Denning MR in Hely-Hutchinson,
where it is synonymous with "implied actual authority"). It has been
explained as a form of apparent authority, or "inherent agency power.
·
Authority
by virtue of a position held to deter:
fraud
and other harms that may befall individuals dealing with agents, there is a
concept of Inherent Agency power, which is power derived solely by virtue of
the agency relation.[6]
For
example, partners have apparent authority to bind the other partners in the
firm, their liability being joint and several (see below), and in a corporation,
all executives and senior employees with decision-making authority by virtue of
their declared position have apparent authority to bind the corporation.
Even if the agent does act without authority, the
principal may ratify the transaction and accept liability on the transactions
as negotiated. This may be express or implied from the principal's behavior,
e.g. if the agent has purported to act in a number of situations and the
principal has knowingly acquiesced, the failure to notify all concerned of the
agent's lack of authority is an implied ratification to those transactions and
an implied grant of authority for future transactions of a similar nature.
Liability of agent to third party
If the agent has actual or apparent authority, the
agent will not be liable for acts performed within the scope of such authority,
so long as the relationship of the agency and the identity of the principal
have been disclosed. When the agency is undisclosed or partially disclosed,
however, both the agent and the principal are liable. Where the principal is
not bound because the agent has no actual or apparent authority, the purported
agent is liable to the third party for breach of the implied warranty of
authority.
Liability of agent to principal
If the agent has acted without actual authority, but
the principal is nevertheless bound because the agent had apparent authority,
the agent is liable to indemnify the principal for any resulting loss or
damage.
Liability of principal to agent
If the agent has acted within the scope of the actual
authority given, the principal must indemnify the agent for payments made
during the course of the relationship whether the expenditure was expressly
authorized or merely necessary in promoting the principal's business.
Duties
An agent owes the principal a number of duties. These include:
- a duty to undertake the task or tasks specified by the terms of the agency (that is, the agent must not do things that he has not been authorized by the principal to do);
- a duty to discharge his duties with care and due diligence; and
- a duty to avoid conflict of interest between the interests of the principal and his own (that is, the agent cannot engage in conduct where stands to gain a benefit for himself to the detriment of the principal).
An agent must not accept any new obligations that are
inconsistent with the duties owed to the principal. An agent can represent the
interests of more than one principal, conflicting or potentially conflicting,
only after full disclosure and consent of the principal.
An agent also must not engage in self-dealing, or otherwise
unduly enrich himself from the agency. An agent must not usurp an opportunity
from the principal by taking it for himself or passing it on to a third party.
In return, the principal must make a full disclosure
of all information relevant to the transactions that the agent is authorized to
negotiate and pay the agent either a prearranged commission, or a reasonable fee established after the fact.
Termination
An agent's authority can be terminated at any time. If
the trust between the agent and principal has broken down, it is not reasonable
to allow the principal to remain at risk in any transactions that the agent
might conclude during a period of notice.
As per sections 201 to 210 of the Indian Contract Act 1872,
an agency may come to an end in a variety of ways:
1.
Withdrawal
by the agent – however, the principal cannot revoke an agency coupled with
interest to the prejudice of such interest. An agency is coupled with interest
when the agent himself has an interest in the subject-matter of the agency,
e.g., where the goods are consigned by an upcountry constituent to a commission
agent for sale, with poor to recoup himself from the sale proceeds, the
advances made by him to the principal against the security of the goods; in such
a case, the principal cannot revoke the agent’s authority till the goods are
actually sold, nor is the agency terminated by death or insanity (illustrations
to section 201);
2.
By
the agent renouncing the business of agency;
3.
By
the business of agency being completed;
4.
By
the principal being adjudicated insolvent (section 201).
5.
The principal also cannot revoke the agent’s authority
after it has been partly exercised, so as to bind the principal (section 204),
though he can always do so, before such authority has been so exercised
(section 203).
Further, as per section 205, if the agency is for a
fixed period, the principal cannot terminate the agency before the time
expired, except for sufficient cause. If he does, he is liable to compensate
the agent for the loss caused to him thereby. The same rules apply where the
agent, renounces an agency for a fixed period. Notice in this connection that
want of skill, continuous disobedience of lawful orders, and rude or insulting
behavior has been held to be sufficient cause for dismissal of an agent.
Further, reasonable notice has to be given by one party to the other;
otherwise, damage resulting from want of such notice, will have to be paid
(section 206). As per section 207, the revocation or renunciation of an agency
may be made expressly or impliedly by conduct. The termination does not take
effect as regards the agent, till it becomes known to him and as regards third
party, till the termination is known to them (section 208).
When an agent’s authority is terminated, it operates
as a termination of subagent also (section 210).[7]
This has become a more difficult area as states are
not consistent on the nature of a partnership. Some states opt for the
partnership as no more than an aggregate of the natural
persons who have joined the firm. Others
treat the partnership as a business entity and, like a corporation, vest the partnership with a separate legal
personality. Hence, for example, in English
law, a partner is the agent of the other
partners whereas, in Scots law where there is a separate personality, a partner is
the agent of the partnership. This form of agency is inherent in the status of
a partner and does not arise out of a contract of agency with a principal. The
English Partnership Act 1890 provides that a partner who acts within the scope of
his actual authority (express or implied) will bind the partnership when he
does anything in the ordinary course of carrying on partnership business. Even
if that implied authority has been revoked or limited, the partner will have
apparent authority unless the third party knows that the authority has been
compromised. Hence, if the partnership wishes to limit any partner's authority,
it must give express notice of the limitation to the world. However, there
would be little substantive difference if English law was amended:[8] partners will
bind the partnership rather than their fellow partners individually. For these
purposes, the knowledge of the partner acting will be imputed to the other
partners or the firm if a separate personality. The other partners or the firm
are the principal and third parties are entitled to assume that the principal
has been informed of all relevant information. This causes problems when one
partner acts fraudulently or negligently and causes loss to clients of the firm. In most
states, a distinction is drawn between knowledge of the firm's general business
activities and the confidential affairs as they affect one client. Thus, there
is no imputation if the partner is acting against the interests of the firm as
a fraud. There is more likely to be liability in tort if the partnership benefited by receiving fee income
for the work negligently performed, even if only as an aspect of the standard
provisions of vicarious liability. Whether the injured party wishes to sue the
partnership or the individual partners is usually a matter for the plaintiff
since, in most jurisdictions, their liability is joint
and several.
Agency relationships
Agency relationships are common in many professional areas.
- Employment.
- Financial Advice (insurance agency, stock brokerage, accountancy)
- contract negotiation and promotion (business management) such as for publishing, fashion model, music, movies, theatre, show business, and sport.
An agent in commercial
law (also referred to as a manager)
is a person who is authorised to act on behalf of another (called the principal or client)
to create a legal relationship with a third party.
Agency relationship in a Real Estate transaction
Real estate transactions
refer to real estate brokerage, and mortgage brokerage. In real estate brokerage, the buyers or sellers are
the principals themselves and the broker or his salesperson that represents
each principal is his agent.