Professional Documents
Culture Documents
Agency
Contents
Introduction
Examination context
Topic List
1
Creation of agency
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Introduction
Learning objectives
Tick off
Practical significance
As you will see, the law of agency is highly relevant to partners and their liability (and therefore of interest
to ambitious trainees in accountancy firms).
It is also an area of law that governs many contractual situations in business generally and so is one with
which you should be familiar.
Working context
You will be working for a group of agents if you work for a firm of accountants and you may come across
situations where your client has acted as agent or appointed an agent to act on its behalf.
Syllabus links
As outlined above, agency is the basis of partnership which we will go on to look at later in this syllabus.
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Examination context
Exam requirements
This is an important area for your exam. The sample paper contained five questions on agency law. It is
likely to be examined in the context of partnerships.
In the assessment, candidates may be required to:
Identify the methods by which agency can be created
Identify the rights and duties of agents including commercial agents
Recognise the authority an agent has to enter into contracts on behalf of a principal, including actual
and ostensible authority
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2 Creation of agency
Section overview
The agency relationship is created either by mutual consent or by operation of law or by ratification.
Express agency is created when the principal expressly appoints someone as his agent, but an agency
relationship can also be implied by the conduct of the parties.
The law may deem that an 'agency of necessity' is created in particular circumstances.
The law may provide that an ostensible or apparent agency relationship is created if the principal
holds out to a third party that the agent's authority is greater than it actually is.
Agency can be created retrospectively, through ratification of the contract.
The agent does not form contracts with third parties on his own behalf and so it is not necessary that he
has full contractual capacity. The principal, however, must have full contractual capacity.
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2.1
Agency by consent
Consent may be express or implied. An agency can be expressly created either orally or in writing. There is
only one exception to this, which is that if the agent is to execute a deed on the principal's behalf (for
example a conveyance of land or a lease exceeding three years) then the agency must be created by deed.
Essentially this means that the agent is given a power of attorney.
In commercial transactions it is usual (but not essential) to appoint an agent in writing, so that the
terms and extent of the relationship are set down to avoid misunderstanding.
2.2
2.3
Agency of necessity
An agency of necessity is another way in which an agency can arise by operation of law. Its origins can be
found in mercantile law, and in shipping law in particular. It may arise where a person is faced with an
emergency in which the property or interests of another person are in imminent jeopardy and, in order to
preserve that property or those interests, it becomes necessary to act for that person without his
authority. An agency of necessity probably only applies where there is already some existing contractual
relationship between the parties, as the law is highly unlikely to allow a person to be bound by the act of a
complete stranger.
An agent who seeks to bind a principal on the grounds of an agency of necessity will need to show that
The agent had no practical way of contacting the principal in order to obtain the principal's
instructions
His actions arose from some pressing need for action (usually an emergency of some kind,
involving perishable goods or starving animals, for example)
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He acted in good faith in the interests of the principal rather than in his own interests, and
His action was reasonable and prudent in the circumstances.
An illustrative case is Sachs v Miklos 1948
The facts: D agreed to store C's furniture. After a considerable time had elapsed D needed the storage
space for his own use. Unable to trace C, he sold the furniture and C sued him for conversion. D
pleaded agency of necessity in making the sale.
Decision: There was no agency of necessity since no emergency had arisen and D had sold the furniture
for his own convenience. If D's house had been destroyed by fire and the furniture left in the open,
then he would then be justified in selling it.
It is fair to say that modern day telecommunications may prevent an agent of necessity from arising very often.
2.4
Ratification
In certain circumstances the relationship of principal and agent can be created or extended with
retrospective effect, that is, once the contract has been entered into by the agent and third party.
Ratification only validates past acts of the purported agent. It gives no authority for the future.
Thus, where A makes a contract on behalf of P at a time when A has no authority from P, P may later ratify
the contract. This will have the retrospective effect of establishing an agency as at the time the contract was
made. All parties are then in the same position as if the principal had been the original contracting party, ie
the principal may sue or be sued by the third party and the agent no longer has any liability.
The principal may only ratify if the following conditions are satisfied.
The principal must have been in existence at the time of the agent's act.
The principal must have the legal capacity to make the contract himself, both at the time the act
was carried out and at the time of the purported ratification.
The agent must, at the time of making the contract, either name or sufficiently identify the
principal on whose behalf he is making the contract.
The principal must ratify the contract within a reasonable time and a ratification of part of the contract
will operate as a ratification of the entire contract (ie the principal cannot just select such parts of the
contract as he considers to be to his advantage). In order to ratify the contract, the principal must
communicate a sufficiently clear intention of ratifying, either by express words or by conduct, such as
refusing to return goods purchased for him by an agent who lacked authority. Mere passive inactivity will
not amount to ratification.
Therefore, David can go ahead and make the contract with Farouk for Esther to ratify later, if Farouk is
happy to contract with Esther. If Esther does not want the goods, she will not ratify the contract.
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Law, if it is a necessity
Ratification
No
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Indicate whether the following statements represent a duty of a commercial agent or his principal.
P
CA
Even where these regulations do not apply, the law implies the following duties into any contract of agency:
Duties
Explanation
Accountability
An agent must provide full information to his principal of his agency transactions and
account to him for all monies arising from them.
If he accepts from the other party any commission or reward as an inducement to
make the contract with him, it is considered to be a bribe and the contract is
fraudulent. The principal who discovers that his agent has accepted a bribe may
dismiss the agent and recover the amount of the bribe from him.
Boston Deep Sea Fishing & Ice Co v Ansell 1888
The facts: A, who was managing director of the claimant company, accepted
commissions from suppliers on orders which he placed with them for goods
supplied to the company. He was dismissed and the company sued to recover
from him the commissions.
Decision: The company was justified in dismissing A and he must account to it for
the commissions.
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No conflict of
interest
The agent owes to his principal a duty not to put himself in a situation where his own
interests conflict with those of the principal.
Performance
The agent who agrees to act as agent for reward has a contractual obligation to
perform his agreed task. (An unpaid agent is not bound to carry out his agreed duties
unless there is other consideration.) Any agent may refuse to perform an illegal act.
Obedience
The agent must act strictly in accordance with his principal's instructions insofar as
these are lawful and reasonable. Even if he believes disobedience to be in his
principal's best interests, he may not disobey instructions (unless he is asked to
commit an illegal or unreasonable act).
Skill
Personal
performance
The agent is usually selected because of his personal qualities and owes a duty to
perform his task himself and not to delegate it to another. (However he may delegate
in certain circumstances, for example a solicitor acting for a client would be obliged
to instruct a stockbroker to buy or sell listed securities on the Stock Exchange.)
Confidence
The agent must keep in confidence what he knows of his principal's affairs even after
the agency relationship has ceased.
AGENCY
Conversely, an agent has the following rights (or duties owed by the principal):
Rights of the agent
Explanation
Indemnity
Remuneration
The agent is also entitled to be paid any agreed remuneration for his services
by his principal. The entitlement to remuneration may have been expressly
agreed or may be inferred from the circumstances, for example by reference
to trade or professional practice. If it is agreed that the agent is to be
remunerated but the amount has not been fixed, the agent is entitled to a
reasonable amount.
Lien
The agent has the right to exercise a lien over property owned by the
principal, i.e. a right to retain and hold goods pending payment of sums owed
to him.
There is a degree of overlap between the rights of an agent and the duties of a principal. Are the following
duties of a principal or of an agent?
Agent
Principal
Expressly given
Impliedly given
The contract made by the agent is binding on the principal and the other party only if the agent was
acting within the limits of his authority from his principal. In analysing the limits of an agent's
authority, three distinct sources of authority can be identified:
Actual express authority
Actual implied authority
Ostensible or apparent authority
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4.1
The extent of the agent's express authority will depend on the construction of the words used on his
appointment. If the appointment is in writing, then the document will need to be examined. If it is oral, then
the scope of the agent's authority will be a matter of evidence.
4.2
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4.3
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Michelle works in Nathans building firm. She is employed in the purchases department. Nathan does not
have approved suppliers, but Michelle is required by internal policy to get Nathans approval for all orders.
Nathan has been invited to Olivers timber yard as Oliver is keen to get Nathan as a customer. However,
Nathan is busy and doesnt want to go, so he sends Michelle in his place, telling Nathan that she deals with
buying anyway.
While Michelle was at Olivers timber yard, she noticed a very good price on some timber. Knowing that
Nathan needed some timber soon for an existing project, she decided to buy it for Nathan. Oliver was
delighted, and set up a credit account for the timber in Nathans name.
Indicate whether the following statements are true or false in respect of Michelles authority to make this
contract on behalf of Nathan.
True
A
False
5.1
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5.2
5.3
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P
Privity
(Contract
enforceable by
P + TP)
Authority
TP
Contracts
Agency by
consent
(usually express,
oral or written)
or implied
Unless P
ratifies
No
authority
Contracts
Privity
Ratification by P
P existed
P had capability (time of
contract and ratification)
P named or identifiable
Agency by necessity
P uncontactable
emergency
A acts for P in good faith
reasonable and prudent
action
Agency by
estoppel
(or holding
out by P)
TP
Agency created,
giving agent authority
Ostensible/apparent
(TP acts on
representation by P)
Actual
Express
(Implied) incidental
(Implied) usual
General Law
Notice of termination
Indemnity
Indemnity/compensation on termination
Duties
Avoid conflict
Communicate information
Execute contract
Obedience
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Self-test
Answer the following questions.
1
(4) principal
(6) principal
(5) legal
(7) agency
(3) contract
2
A principal may, in certain circumstances, ratify the acts of the agent, which has retrospective effect.
True
False
An agent may disobey the instructions of the principal if he believes disobedience to be in the best
interests of the principal.
True
False
Provided an agent has authority and is known to be an agent, he can never have any personal liability
under the contract and only the principal can be liable.
True
False
Now, go back to the Learning Objectives in the Introduction. If you are satisfied you have achieved these
objectives, please tick them off.
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Answers to Self-test
1
7, 1, 5, 4 (6), 3, 6 (4), 2
Agency by consent
Agency by estoppel
Agency of necessity
Ratification
(c)
True
(a)
False
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Yes
Yes
Yes
No
CA
CA
Agent
Principal
Agent
False
False
True. As Michelle is employed in the purchasing department, she has implied authority to enter into
contracts on Nathans behalf.
True. Nathan has told Oliver that Michelle deals with buying so he is entitled to assume that she has
the authority to enter into this contract on Nathans behalf.
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