LAW OF AGENCY: PRINCIPLES AND OPERATION

1. Relationship of principal and agent

An agent is a person who acts on behalf on another, known as the principal.
The agent enters into binding contracts with other persons (third parties) on behalf of the principal. The
agent is simply a mechanism through which the principal acts. The legal principle is expressed as ‘qui facit
per alium facit per se’ (he who does something through another does it himself)
The agent is not personally bound and drops out once the agreement between the principal and the third
party has been reached.
1.1 Formation of the relationship
An agency agreement can be written or oral or implied from conduct or relationship. The agency
agreement must be in the form of a deed if the agent is given express authority to execute deeds for his
principal.
Existence of express terms of the agreement which directly or by implication refers to the agent as
receiving remuneration makes the relationship contractual. Many agents act without any remuneration i.e
out of gratitude or friendship (gratuitous agents). In these circumstances the agent will owe the principal
all the duties normally owed to a principal.
Every employee is an agent of his employer in the course of his work. A dishonest employee prejudices his
own position in terms of the employer/employee relationship but the principal can be bound by the
misconduct of his employees. Agents are not employees but independent contractors, with a contract for
services rather than of service.
2. Types of agent
2.1 Universal agent
This agent is appointed to handle all the affairs of his principal and has unlimited authority to act for the
principal in any capacity.
2.2 General agent
This agent has authority to represent his principal in the business of a particular kind, e.g. to manage a
shop. The principal will be liable of acts done by the agent within the scope of usual authority unless he
has expressly forbidden such acts and given notice to third parties likely to be affected.
In Watteau v. Fenwick (1893) owners of a public house had appointed a manager to manage the pub for
them. The manager’s name appeared on the door as licensee of the premises. The owners and the
manager had an express agreement which restricted the manager to the purchase of bottled ale and
mineral waters only. Despite the limitation, the manager bought cigars for resale from a supplier who was
unaware of restriction. The supplier sued the owner for payment and the court held that he could succeed
and recover the price as the action of the manager was within his usual authority.
Third parties are entitled to assume that the general agent’s actual authority and his usual (customary)
authority are one and the same.

2.3 Special agent

This agent has authority to act only on a particular occasion e.g. buy a particular article for the principal.
2.4 Del credere agent
This agent undertakes responsibility for the performance of contracts by people whom he introduces to
the principal e.g. a commission agent who agrees to guard his principal against loss from sales on credit.
2.5 Mercantile agent
This agent has authority in the course of business as agents to sell, consign goods for sale, buy goods or
raise money on the security of the goods.
2.6 Commercial agents
These are self employed intermediaries who have a continuing authority to negotiate the sale or purchase
of goods on behalf on the principal.
The agent must be paid commission on repeat order even where the agent was not responsible for the
order. The agent must receive commission on business introduced even after termination of the agency
contract. The agent must be paid his commission even when the contract does not follow from the lead
e.g. when the principal is to blame for the failure of fulfillment of the contract.
3. Appointment of agents
The agency relationship arises as follows:
3.1 Express agent
The appointment is effective and positive and the agent has authority to act in accordance with the
express terms of the agency agreement. If the ambit of authority is ambiguous the agent is under duty to
seek clarification from the principal.
3.2 Implied agent
Agency by implication is derived from the express grant of authority, e.g
(a) Reference to past course of dealings – agency arising from an implied term that such dealings are
to be authorized by the principal. In Murfitt v.Royal Insurance Co (1922) an agent was requested
to arrange insurance cover on fruit trees and crops in an orchard. The agent advised that the
property would be covered while he submitted the proposal to the company. The company,
however, rejected the proposal and in the meantime a fire had taken place. The agent had no
express authority to give verbal cover, but there was overwhelming evidence that he had been
doing that in the district for over two years.
Past course of dealing with an agency was therefore implied and the insurance company had to meet the
claim.
(b) Reference to specific law and practice
Agency relationships are implied by reference to Acts of Parliament, past precedents, the established
methods of conducting business in a trade or profession or a combination of the three e.g. under law of
partnership each partner is the implied general agent of the firm and in banking where each bank has an
implied authority to be the customer’s agent for the purpose of collecting cheques for the credit of his
account.
(c) Wife as implied agent
An agency is implied in favour of the wife living with her husband, she is entitled to pledge her husband’s
credit for the purchase of necessaries suitable to their style of leaving. This implied agency would extend
to a woman living with a man in a stable relationship other than marriage.

However, the implied agency in favour of the wife can be rebutted by proving:
- express warning to supplier to discontinue the supply of goods on credit to the wife; or
- the wife was already adequately supplied with goods; or
- the wife had an adequate cash allowance to cover necessaries without the need for credit; or
- the wife had been expressly prohibited the husband’s credit and the supplier had been notified
accordingly.
3.3 Agency by estoppel
Estoppel is a rule of evidence whereby a party is precluded or prevented from denying the existence of
some of facts which he has previously asserted. The third party must demonstrate that he altered his
position in reliance to the representation that a person is the principal’s agent e.g. a man who has
prohibited his wife from pledging his credit but not notified the supplier accordingly may be estopped
from denying the wife’s implied agency.
Estoppel operates when the principal has acted in such a way as to create the impression of an agency
agreement and where it would create injustice to third parties for the principal to be able to escape
responsibility.
3.4 Agency by ratification
If an agent acts without authority, a principal who would not otherwise be bound by the agent’s action
may adopt the contract by ratification. Ratification gives the contract status of an act done with actual
authority with effect from the date of dealing with the agent. Ratification thus has retrospective effect.
For ratification to be effective the following must exist:
3.1 Contract must not be void
It is essential that the principal must be shown to have been in existence and capable of contracting at the
time of contracting at the time the agent purported to contract for him.
In Ashbury Railway Carriages v.Riche (1875) a company was formed to build railway carriages. The
directors entered into a contract to construct a railway in Belgium, a contract which was ultra vires. The
company could not ratify the contract as at the time the contract was made it lacked the necessary legal
capacity.
3.2 Ratification must be within reasonable time
Undue delay in ratifying a contract will render the purported ratification ineffective.
3.3 Act must still be possible
A principal can only ratify an agent’s action if such action is still possible at the time of ratification e.g. a
contract of insurance cannot be ratified after a loss.
In Grover and Grover Ltd v. Mathews (1910) an intermediary without any instructions from the insured
renewed the policy of piano manufacturers which had expired a few days before a fire at the premises.
Ratification was ineffective.
However, the decision in that case was criticized. Canadian and American courts have subsequently
permitted ratification after a loss. The Marine Insurance Act 1906 section 86 allows for the ratification of
marine insurance contracts after a loss.
3.4 Awareness of material facts
At the time of ratification, the principal must be aware of all the material facts unless he has shown
himself willing to ratify whatever may be the surrounding facts.
3.5 Undisclosed principal
An undisclosed principal cannot ratify. Ratification will only be permitted where it has been declared
openly that the relevant contract has been made on behalf of the person seeking to ratify. The agent need
not name his principal but he must supply sufficient information to allow him to be identified.
3.6 Methods of ratifying
Ratification can be oral or written. A principal may not both ratify the beneficial aspects of a transaction
and at the same time repudiate those parts which are not beneficial.
4. Agency of necessity
This type of agency really arose out of maritime law and practice in the days when limited systems of
communication made it impossible to contact the principal in England when the shipmaster was at sea or
in distant foreign port.
An agency of necessity may arise if an agent is compelled by some emergency to exceed his authority.
Agency of necessity is an extension of any existing agency relationship.
4.1 Features necessary for agency of necessity:
(a) There must be a pre-existing agency relationship.
(b) It must have been impossible for the agent to communicate with the principal.
(c) The agent must show that he acted in what he believed to be the principal’s best interests.
(d) The situation called for immediate action to protect the principal’s goods or property. It must be
really be an emergency situation.
In Great Northern Railway Co. v. Swaffield (1874). The defendant arranged for a horse to be sent by
rail to a station 15 miles from where lived. He was to collect it from the station. It arrived at 10:00pm
and there was nobody to collect it. The station master who did not know the defendant’s address
arranged for the horse to be kept at nearby stable overnight
The defendant refused to pay the expense incurred. It was held that there was an agency of necessity
and he had to pay the charges. There was an emergency situation as the horse was ‘perishable’ and
the stationmaster had acted in Swaffield’s best interest to preserve his property.
5. Authority of an agent
The powers of the agent arise from the following:
(a) Express authority – where the principal gives express instructions to his agent
(b) Implied or usual authority – where it is implied from the conduct of the parties and the
circumstances of the case
(c) Apparent or ostensible authority -which is the authority the agent appears to others to have
as a result of some representation or conduct by the principal intended to be acted by the
 third party.
6. Duties owed by agent to principal
The agent owes his principal the following duties:
6.1 Obedience
The agent must obey his principal’s instructions and if he fails to execute the agency contract he will be
liable in damages and will be unable to claim any remuneration.
In Turpin v.Bilton (1843), an insurance broker agreed, for a consideration, to arrange for the insurance of
the plaintiff’s ship. He failed to do so, the ship was lost and he was held liable in damages to the plaintiff.
An agent is also required to exercise discretion in accordance with the duty of obedience.
6.2 Personal performance
An agent must perform the duties imposed on him by the agency and is not entitled to delegate the duties
to someone else. He is required to delegate a task which is purely mechanical which does not require
judgment or discretion.
Improper delegation makes the agent liable to the principal for breach of duty.
Exceptions
The agent can delegate his duties in the following circumstances:
(a) where a principal expressly authorizes the agent to delegate
(b) where custom or trade usage sanctions delegation
(c) where delegation is necessary to ensure proper performance
(d) where the work delegated is purely clerical (e.g., signing letters)
(e) where unforeseen emergencies arise which impose upon the agent the necessity of
employing a substitute (e.g. serious illness)
6.3 To exercise due care and skill
An agent must show skill and diligence in doing his work. If the agent breaches this duty the principal can
sue for damages.
6.4 To act in good faith
An agent stands in a fiduciary relationship with his principal and must not use his position for his own
benefit.
This duty can be considered as follows:
(a) Conflict of interest
An agent must not let his personal interest to conflict with his business interest. In Swale v Ipswich
Tannery Co (1906), the plaintiff was employed as a fulltime manager. His duties, among other things,
was to advise the defendant on its insurance arrangements.
He accepted an agency from an insurance company without the knowledge of the defendant and
received commission for that. The court held that the misconduct amounted to conflict of interest and
justified instant dismissal.
The agent acts as the tool of the principal and must always act in the principal’s best interests. He
must not act for his own benefit unless he makes a full disclosure to the principal and receives
permission to do so.
An agent appointed to sell property cannot sell to himself or if appointed to buy property cannot buy
from himself without the consent of the principal.
(b) Secret profits
An agent acting on behalf of the principal is not entitled to profit by carrying out those transactions
unless he has made full disclosure of the true position to the principal and has received permission to
do so.
Any secret profit made is recoverable by the principal. For example, if an agent receives money due to
a principal a fortnight early and invests it during that time and earns interest, such interest will
amount to a secret profit and will have to be handed over to the principal.
Bribes and double commission amount to secret profits.
A bribe is an amount of money paid to an agent so that he may exercise his agency powers in a
particular way.
The principal who discovers that his agent has accepted a bribe can:
 - recover the bribe from the agent
- dismiss the agent without notice and without commission
- sue the agent and the third party for conspiracy to defraud

- exercise the right to set aside the contract made with third party
An agent is not permitted to receive commission from both his principal and the third party unless he
has made full disclosure and consent has been granted.
Confidential information
An agent may not use confidential information which he has acquired in his capacity as agent for his
personal benefit or the benefit of a third party. This duty may continue after the termination of the
agency.
6.5 Accountability
An agent must account to his principal for all money he receives on his behalf and must keep a proper
record of all transactions. He must keep the agency money separate from his own.
7. Duties owed by principal to agent
7.1 Remuneration
The agent has a right to the remuneration agreed by his principal or to a reasonable remuneration as is
customary in the particular business or is appropriate to the particular circumstances. Remuneration
usually consists of commission and to earn it he must prove that he was the effective cause of the
transaction.
7.2 Indemnity
The agent must be compensated for all expenses or loss incurred in acting on behalf of the principal. An
agent cannot claim indemnity in respect of unauthorized actions unless they are subsequently ratified. He
has no rights for losses caused by his default or negligence.
7.3 Liability for breach of duty
(a) Breach by principal
The agent can take legal action to recover any money he is owed by the principal. He also has the right
to refuse to continue to act.
The agent can in respect of the money he is owed hold on to any goods he holds on behalf of the
principal i.e. exercise a lien over the goods.
(b) Breach by agent
The principal has a right to terminate the agency if an agent is in breach of his obligations. The
principal may also sue the agent for breach of contract. If agency agreement is terminated on the
grounds of fraud, the agent will lose the right to remuneration and there will be the possibility of
prosecution under Prevention of Corruption Act.
8. Relationship of principal and agent to third parties
8.1 Agent contracting for disclosed principal
If the agent acts outside his actual, implied, ostensible or presumed authority, no contract will be created
between the principal and the third party unless the disclosed principal ratifies the agent’s unauthorized
acts.
8.2 Agent acting for undisclosed principal
In this case a contract is made with a person who, although really an agent, is not known to be such at the
time of the contract. The principal is treated as undisclosed unless the third party has actual notice of his
existence.
The undisclosed principal and the agent are bound by the contract and can enforce it. The undisclosed
principal will not be able to enforce a contract:
- where the agent has expressly described himself as principal
- where the agent made the contract without authority
- where the third party contracted with the agent because of reasons personal to the agent
 - where to admit evidence of the existence of a principal would be in conflict with the terms of the
contract
8.2.1 Personal liability of agent

If an agent fails to disclose that he is acting for an undisclosed principal he can be held personally liable by
the third party.
In Sika Contracts Ltd v. Gill and Others (1978) a chartered civil engineer acting for a principal made a
contract with a building contract and did not disclose this fact until sometime after the contract had been
concluded. He had signed his letters ‘BL Gill BE, MICE, Chartered Civil Engineer’ although the court agreed
that he was acting in a professional capacity, he was also personally liable to the plaintiffs.
8.2.2 Third party’s right to elect
Where the agent contracts for an undisclosed principal both agent principal are bound. However, when
the name of the principal is disclosed the third party may elect within reasonable time the party whom
(agent or principal) he is looking to for the discharge of obligations under the contract.
The contract cannot be enforced against another defendant at a later date. If he elects to proceed against
the agent then the principal is discharged.
8.3 Misrepresentation by agent
If the unauthorized acts of an agent are not ratified by the principal the agent becomes liable to an action
by the third party for breach of warranty of implied authority. The agent can be sued for fraud if he has
been fraudulently misrepresenting his authority.
8.4 Principal’s liability for the torts of his agent
A principal is liable for the torts committed by his agent when acting within the scope of his express,
implied or ostensible authority and liabilities extends to torts which he later ratifies. This is akin to the
vicarious liability of an employer for the torts of his employees acting within the course of their
employment.
8.5 Payment via agent
The principal remains liable to the third party for payment made through his agent which the agent fails to
pass on by reason of fraud or bankruptcy.
8.6 Breach of warranty of authority
Anyone claiming to be an agent is deemed to warrant that he has authority to do so. If it is later
discovered that he had no such authority, he can be sued for breach of warranty of authority.
9. Termination of agency
9.1 Termination by act of the parties
(a) Mutual consent
The agent and principal may mutually agree to terminate the agency agreement.
(b) Revocation by principal
The principal can revoke the agency before performance is complete but may be sued for damages if
the revocation is in breach of the agency contract.
(c) Renunciation by agent
The agent can resign from the agreement before the agency has been completely performed and may
be sued by the principal for damages if the renunciation is in breach of the contract.
(d) Breach
If either principal or agent breaches the agency contract in a way that would amount to a breach of
conditions the other party may treat the contract as discharged.
(e) Commercial agents
If the contract for a commercial agent is terminated, the agent is entitled to commission for business
he has introduced, repeat orders and renewal commission.
9.2 Termination by operation of the law
(a) Personal incapacity
Death or insanity of either principal or agent will terminate the agency agreement.
Bankruptcy of the principal terminates the agency contract.
(b) Destruction of subject matter
Destruction of the subject matter of the agency will terminate the agency contract e.g. if an agent is
instructed to sell a ship but the ship is destroyed before the sale is effected.
(c) Supervening illegality
The agency will be terminated where performance of the acts required to give effect to the agency
becomes illegal e.g. a principal becoming an enemy alien on the outbreak of war.
(d) Effluxion of time
If agency is for a fixed period, the contract terminates at the end of that period.
9.3 Exceptions to rules of termination
Agency coupled with an interest cannot be terminated i.e. the agent has been authorised to act as
such in order that he should obtain some benefit for himself)
9.4 Effects of termination
If a principal in breach of contract terminates the agency he may be liable to pay agent damages for
breach. If an agent who declines to perform his obligations under the contract may be liable in
damages to his principal.
(a) Rights of action
Benefits already earned or obtained under the terms of the agreement are not destroyed by
termination. The agent may lose these benefits where he is found to have committed acts of fraud
against the principal. Commercial agents are entitled to commission after the termination of the
agency contract if the transaction is mainly attributable to the agent’s efforts during the contract.