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AGENCY 1

General overview:

The rule that a contract cannot confer rights or burdens on someone who is not a party. The
difficulty for companies is that they can only act through people – it is not actually the company
that negotiates and agrees to buy and sell goods, it is someone purporting to act on its behalf (i.e.
its agent). The law of agency thus enables a company to enter into contracts. The agents, who
actually negotiated these contracts, stand in for the companies they represent and, since they act in
that capacity, the agents acquire no personal liability (unless they separately choose to do so).

The negotiations carried out by the agent on behalf of the company will affect the company’s legal
rights and obligations, the company must be able to place complete confidence in the agent. This
has led the law of agency to make the agent – in most cases – a fiduciary.

Issues

There are also issues

Ø Relating to the protection of the third party with whom the agent has dealt
Ø The protection of the agent against any liability incurred on behalf of the principal
Ø The rights an agent may have against the principal.

WHAT IS AN AGENCY?

1. Lord Alverstone CJ once defined an agent as ‘any person who happens to act on behalf
of another’ (The Queen v Kane [1901] 1 QB 472).

Case: Montgomerie v United Kingdom Mutual Steamship Association [1891] 1 QB 370,

Wright J.

“Where a person contracts as agent for a principal the contract is the contract of
the principal, and not that of the agent; and, prima facie, at common law the only
person who may sue is the principal, and the only person who can be sued is the
principal”.

Example:

If P (the principal) instructs A (the agent) to act in the purchase or sale of goods
from or to T (the third party seller), the contract of sale that arises is enforceable
between P and T. In general, A has no liability to either P or T on that contract
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ISSUES RELATED TO AGENCY:

2): Agent must have authority to enter into contract on behalf of Principle as an agent
who acts outside the authority granted by the principal will be in breach of the
contract (if there was one) by which the agent was appointed.

3): The principal may be liable to the third party if the principal represented that the
agent was acting within their authority (apparent authority). This is based on
estoppel: having represented to the third party that the agent has the necessary
authority, the principal cannot deny this representation. So the question of whether
or not the principal is bound to a third party does not depend on the actual authority
granted by the principal to the agent; it depends on the apparent authority of the
agent (also known as the ostensible authority of the agent).

4): If the third party knows the limits of the agent’s actual authority, there is no
difficulty and the apparent authority will be the same as the actual authority of the
agent. However, usually the third party will not know the terms of appointment of
the agent and must rely on the apparent authority.

5): Where, however, someone represents to the third party that they have the authority
to act as an agent for another person, there is neither actual authority (the ‘agent’
has not been appointed by the ‘principal’) nor apparent authority (the ‘principal’
has not represented to the third party that the ‘agent’ has authority). In this situation
the ‘principal’ is not bound and the third party is left only with an action against the
‘agent’ for breach of warranty (that is, breach of the promise by the ‘agent’ of
authority to act for the ‘principal’).

JUSTIFICATION FOR AGENCY DOCTRINE

There are three main theories that seek to define and explain agency:
Ø Power-liability theory
Ø Consent theory
Ø Qualified consent theory.

Power-liability theory

1) An agency exists when a person (the agent) acquires the power to alter the
principal’s legal relations with a third party so that only the principal (and not the
agent) can sue or be sued by that third party.

2) This theory focus on the authority of the agent.

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3) It ignores the internal relationship between the principal and the agent: the issue
of the appointment of the agent, the terms of that appointment, its breach and the
consequences of breach.

4) Example: Estate agents act as intermediaries in the sale or lease of land; their role
is to introduce buyers and tenants to sellers and landlords. However, usually, they
do not have the power to bind either party – typically, they merely communicate
to the seller the offer made by the buyer and communicate to the buyer the seller’s
acceptance or rejection of that offer.

5) Principles of agency law apply to them.

Consent theory

A different approach to the definition of agency is taken by US Restatement

(Third) of Agency (Tentative Draft No 2) (2003),:

“Agency is the fiduciary relationship that arises when one person (a ‘principal’)
manifests assent to another person (an ‘agent’) that the agent shall act on the
principal’s behalf and subject to the principal’s control, and the agent manifests
assent or otherwise consents to act”. Commented [b1]: The agent must have been invested with a
degree of discretion that shows the principal has placed trust
and confidence in the agent. It is this which gives rise to a
fiduciary duty. Yet this definition has problems too.
Qualified consent theory

This approach is discussed by McMeel. It combines the consent theory with the protection of
‘misplaced reliance’ to account for actual and apparent authority

Types of Agents

Sr. No. Type of Agent Explanation

2. General agent A general agent acts for a principal in the ordinary
course of that agent’s business;
3. Special agent A special agent is appointed to act only for a
particular transaction that is not part of that person’s
ordinary course of business.
4. Factor A factor is an agent who is entrusted with the
possession of goods or documents of title to goods
and who is allowed to sell them in the factor’s own
name as a principal (Baring v Corrie) or in the
principal’s name (Stevens v Biller [1883].
5. Mercantile agent A mercantile agent is an agent who, in the
customary course of business, has authority to sell
or to consign goods for sale, or to buy goods, or to
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raise money on the security of goods (Factors Act

1889, s.1(1)).
6. Difference Between Factor Factor Mercantile
versus Mercantile Agent: 1): A factor takes the A broker does not take the
possession of goods. 2): A possession of goods. Broker
factor deals in his own name deals on behalf of Principal.
and needs not disclose the A broker has no right to
name of the principal. 3): A receive payment. A broker is
factor has the right to receive not personally liable
payments. 4): A factor is
always liable for his actions.

7. Commission agent A commission agent (or commission merchant)

buys or sells goods on behalf of the owner without
establishing a contractual relationship between the
owner and the third party. The commission agent
acts as principal in the contract with the third party.
In a sale, the agent is liable to the third party (the
buyer) for breach of the implied terms as to quality.

8. Confirming houses Confirming houses act for overseas buyers wishing

to buy goods in English markets. The confirming
house can operate in a number of different ways: it
may simply buy goods as principal and sell them to
the overseas buyer without any suggestion of
agency, or it may act as an agent for the buyer, or it
may act as agent for the buyer and separately
undertake to the seller that the buyer will perform

9. Del credere agent An exporter, who is uncertain about the financial

status of a foreign buyer, might find such a
guarantee attractive, although the common practice
is to obtain a confirmation from a confirming house
or to rely either on a documentary credit, under
which a bank pays the seller on the presentation of
certain documents (see Chapter 8), or on a credit
guarantee, where the guarantor pays in the event of
a default by the buyer.

CREATION OF AGENCY

An agency may be created by following Methods:

• By express or implied agreement between the principal and agent

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• Where there is a representation by the principal to the third party that the agent has
authority (agency by estoppel)
• Where the principal ratifies an act by someone who, without authorization, purported to
undertake that act as an agent of the principal
• By necessity (agency of necessity)
• Where the agency arises under statute, such as when an unpaid seller exercises the right
to resell under the Sale of Goods Act 1979, s.48(3) (RV Ward Ltd v Bignall [1967] 1 QB
534; Chapter 5)

Ø AGENCY BY EXPRESS OR IMPLIED AGREEMENT BETWEEN THE

PRINCIPAL AND AGENT

The concept is based on the idea of “Authority of Agent”. The word ‘authority’ is used in
the sense of the agent’s ability to bind the principal. The principal is bound only by those
acts of the agent that are within the scope of that agent’s authority. In Jacobs v Morris
[1902] 1 Ch 816, an agent had authority to make, draw, sign, accept or indorse bills of
exchange and sign cheques. He represented to a third party, who took him at his word, that
he also had authority to borrow. It was held that the principal was not liable: there was no
actual authority. The scope of an agent’s actual authority is important since, generally, it is
only if an agent acts within actual authority that the principal is bound (unless bound by
apparent authority) and the agent can claim an indemnity from the principal for any
expenses incurred or remuneration. In addition, an agent who acts outside their actual
authority may be liable to the third party for breach of the implied warranty of authority.

The actual authority of an agent is determined by the agreement between the principal and
the agent and is, therefore, a matter of contract construction. It consists of:

1) express actual authority, which is the authority expressly given to the agent by the
principal
2) implied actual authority, which is the authority that can be implied into the
agreement between the principal and the agent.

Difference Between Express Actual Authority and Implied Actual Authority

Express Actual Authority Implied Actual Authority

A. Express actual authority is the A. Implied actual authority is a way of filling in the gaps in order to
authority which the principal make sense of the agency agreement. It is not a means of altering
expressly gives to the agent: that agreement or of making it in some sense fairer.
for example, where the agent B. The agent will have implied actual authority to do those things
is instructed to sell a particular that are necessarily incidental to the execution of the express
property for the principal. This actual authority. The question is, do the powers expressly
authority may be contained in given by the principal to the agent enable the agent to carry
documents and/or out the specified task, or can that task only be undertaken by
conversations between the implying the authority to do things in addition to those that
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parties @ Aviva Life & are expressly authorised? Authorising an agent to enter into a
Pensions UK Ltd v Strand contract to buy land carries implied actual authority to sign the
Street Properties Ltd [2010] documents required under statute because the requirement for
B. In determining the express writing in such transactions means that without such authority
authority of an agent, the the agent would not be able to perform the task agreed
normal rules for construing (Rosenbaum v Belson [1900] 2 Ch 267).
contracts apply. C. The agent may have authority to undertake that which is implied
C. What if the instructions from the particular circumstances of the relationship between this
from the principal to the principal and this agent, such as where there has been a consistent
agent are ambiguous? previous course of dealings between the parties in which the
Answer: an agent who adopts particular term has always been present.
a reasonable interpretation will D. The agent may have the authority of someone in this agent’s
not be in breach of its mandate. position, trade, business or profession. Here the question is,
@ Midland Bank Ltd v what authority would the reasonable person in the position
Seymour [1955]. The critical of the third party believe that someone in the agent’s
question is not limited to situation possessed the authotity? The answer will, of course,
whether the agent’s depend on the knowledge of the third party: if they know of limits
interpretation was reasonable; on the agent’s authority, there can be no implication that would
it is whether he behaved contradict such knowledge. In Hely-Hutchinson v Brayhead
reasonably in acting upon that Ltd [1968] 1 QB 549, it was implied from the appointment of
interpretation.@ Patel v the agent as managing director of a company that they had the
Standard Chartered Bank normal authority that managing directors possess to undertake
[2001] the business of the company. However, an estate agent will not
have authority to sell property since this is not what such agents
usually have authority to do; but they will have authority to make
representations about the property.
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Apparent Authority

A third party dealing with an agent will not have knowledge of the terms of the contract between
the agent and principal and so will not know the scope of the agent’s actual authority: ‘In ordinary
business dealings the contractor at the time of entering into the contract can in the nature of things
hardly ever rely on the “actual” authority of the agent’. The third party, therefore, relies on a
perception of the authority of the agent as represented by the principal. The representation creates
an agency by estoppel – in other words, the principal is prevented or estopped from denying the
existence of the agency

An agency by estoppel arises where:

• The principal (or someone acting with the actual authority of the principal) represents to
the third party that the agent is authorised to undertake the transaction which the agent
and the third party subsequently conclude.
• The agent does not purport to make the agreement as principal
• The third party is induced to enter into the transaction in reliance upon the principal’s
representation
• The third party alters their position to their detriment. (It is unclear whether this last is an
additional requirement (Rama Corpn Ltd v Proved Tin and General Investment Ltd)

As a result, the principal may be bound to a third party even though:

1): The agent does not have actual authority, or 2): the agency agreement has ceased, or 3): the
agent acts beyond the actual authority granted by the principal. This is because the agency is based
on estoppel and not the consent of the principal, who may not have intended to create an agency.

Freeman & Lockyer K and H formed a company to buy and then sell some land. K, H and
a nominee of each were appointed directors. The articles of
association contained a power to appoint a managing director but
none was appointed. K instructed F, a firm of architects, to do work
in connection with the land, which they did. On an action by F for
their fees, it was held that since K was not the managing director he
had no actual authority to employ F, but he did have apparent
authority because, with the knowledge of the board of directors, he
had acted throughout the transaction as if he were managing director
and his action in engaging F was within the usual authority of a
managing director.

Representation by the principal

In order to be bound by the apparent authority of the agent, the principal must have represented to
the third party that the agent had the necessary authority to conclude the transaction on behalf of
the principal and the third party must have a reasonable belief that the agent had such authority. In
general, if the representation as to authority comes from the person purporting to be an agent
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(Nayyar v Sapte [2009] above at [134]), the principal will not be bound to the third party, although
the bogus agent may be liable to the third party for breach of an implied warranty of authority.

The representation may be by words or by actions. Usually, silence or inaction will not amount to
a representation unless there is a duty to say something, which will be rare. However, it arose in
Spiro v Lintern: L said nothing when his wife (who had no authority to do so) entered into a
contract for the sale of L’s house, and, as a result, the buyers incurred various expenses in
contemplation of completion of the sale; L’s silence amounted to a representation that his wife had
authority to sell the house.

USUAL AUTHORITY: WATTEAU V FENWICK

Facts:

F, who owned a hotel, appointed H as manager. H was expressly forbidden from buying any goods
other than mineral water and bottles of beer. H had previously owned the hotel and his name
remained above the door as the licensee. H ordered cigars from W, who believed he was the owner
of the hotel. F was held liable for the price of the cigars. It might be argued that W did not think H
was an agent; he believed H to be the principal, so if W had not been allowed to enforce the contract
against F, W would have lost nothing because he was unaware of F’s existence. Against this it
might be said that F’s action in allowing his agent, H, to represent himself as the principal placed
W in a weakened position. W had every reason to suppose that H was the principal and this
misconception was facilitated by F.

Decision

Wills J based his conclusion on usual authority, that is, on the implied authority of an agent who
is appointed to a particular role by the principal or represented by the principal as occupying that
role. But this leaps over the main question as to whether an agency exists – consideration of the
scope of implied authority is relevant only if it is established that an agency exists. Leaving that
aside, W did not know that H was an agent and so could not make assumptions about his authority.
W believed that H was the principal, not an agent, and so made assumptions as to the implied
authority of H.

Might it be a decision on apparent authority? Again, the answer must be no because F made no
representation to W that H was acting as F’s agent (nor did H): W believed H was acting as
principal in the transaction.

The stumbling block to all of these explanations is, of course, that Wills J clearly believed he was
merely applying the doctrine of usual authority; this might prompt us to conclude that since this
was incorrect, he got the decision wrong (hard though this is when he was supported by Lord
Coleridge CJ). Other jurisdictions have rejected the case: for instance, it has been expressly
overruled by one Canadian court (Sign-O-Lite Plastics Ltd v Metropolitan Life Insurance Co
[1990] 73 DLR (4th) 541). In the English courts, Bingham J (later Lord Bingham) called the
decision ‘puzzling’ (Rhodian River Shipping Co SA v Halla Maritime Corp [1984] 1 Lloyd’s Rep
373), but it has not been overruled. It is certainly difficult to find cases in which it has been applied:
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the citation in Mellor v Lydiate [1914] 3 KB 1141 was on a separate point (the decision was cited,
without discussion, in the Scottish case, Graham v Stirling [1922] SC 90). In similar circumstances
the courts have tended to hold the contract to be between the ‘agent’ personally and the third party
– that is, A and T are found to be the principals (Kinahan & Co v Parry [1911] 1 KB 459. See also
Jerome v Bentley & Co [1952] 2 All ER 114).

RATIFICATION

The principal will be bound where it validly ratifies a transaction entered into by someone
purporting either to act as its agent when that person has not previously been appointed as such,
or by someone purporting to possess authority beyond that granted by the principal. This is not
apparent authority because the agent represents their own authority, and it does not seem to fall
within Watteau v Fenwick because there the agency was not made apparent. If the third party goes
ahead with the transaction on the basis of the agent’s representation, there is a risk that the agent
is lying about the existence of actual authority and that the principal will not later ratify the
transaction. There are various reasons why a principal might ratify: the principal may be happy
with the deal, or may be unhappy with the transaction but decide to ratify it to maintain commercial
reputation or to preserve the reputation of the agent. However, in determining if there has been
ratification, the motive of the principal is irrelevant.

There are a number of requirements for valid ratification.

1. At the time of the relevant act, the agent must have intended to act on behalf of the
principal. This intention is gathered from the terms of any contract and surrounding
circumstances
2. The purported agency must be revealed to the third party before the transaction is
concluded.
3. The third party must believe that the person with whom they are dealing has authority to
act for another.
4. The principal must be competent to enter the contract at the time of the original act by the
agent
5. The principal must also be competent at the time of ratification. For example, an enemy
alien cannot ratify, even if at the time of the contract P was not an enemy alien (contracts
with an enemy alien – someone who is resident in a country with which this country is at
war – are void for illegality).
6. Ratification must occur within a reasonable time after the action of the purported agent
(The Managers of the Metropolitan Asylums Board v Kingham [1890] 6 TLR 217)
7. There are no formalities for a valid ratification, but it is essential that the principal must
have intended to ratify and does so with a positive act
8. An attempt to ratify only part of a contract and repudiate the rest will, generally, operate as
ratification of the whole.

Ratification puts the parties into the position they would have been in had the act been authorised
from the outset: ‘Ratification when it exists is equivalent to a previous authority’ (Lord Lindley in
Keighley, Maxsted & Co v Durant [1901] AC 240). This means the principal can sue or be sued
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by the third party. The agent will not be liable to the principal for excess of authority, nor to the
third party for breach of the implied warranty of authority.

Exceptions

Ratification is not likely to be effective in the following situations:

1. If the interests of someone other than a party to the original contract are unfairly affected,
or if the unauthorised act was void as a nullity @ Brown v Bird.
2. If the agent and the third party rescind the agreement before ratification (Walter v James.

AGENCY OF NECESSITY

In a restricted range of emergencies, an agency may arise as a matter of law. This may result in
one of the following consequences: A may be empowered to enter into a contract with T that binds
P; A may be empowered to sell P’s goods to T without giving rise to a contract between T and P;
and A may be entitled to reimbursement from P for actions taken on P’s behalf, which may also
not involve a contract. Although these three situations are often spoken of as aspects of the agency
of necessity, in truth only the first amounts to an agency. Moreover, if A does make a contract that
binds P and T is unaware that A is acting for P, this would seem to be an undisclosed agency which
should mean that T can bring an action on the contract against either A or P

The agency of necessity may arise where certain conditions are fulfilled:

1. P’s property is in A’s possession as the result of an existing legal relationship, such as a
contract of bailment. This excludes claims by strangers, such as someone who finds the
goods
2. A is unable to obtain instructions from the owner
3. an emergency threatens the property; it is not sufficient for A to show that P’s property is
causing A hardship or inconvenience (Sachs v Miklos
4. A takes action in good faith and that action is commercially reasonable, proportionate and
in the interests of P (Prager v Blatspiel, Stamp and Heacock Ltd [1924]