AF2504 Introduction to

Business Law
Lecture 12 : Agency Law
Triangular Relationship

Principal

Authorize Contract Formed

(by agency (through the act
agreement) of the agent)

Agent Third Party

Represent the principal

to form a contract
 Example in company law
 Company X is to enter into a contract with Y.
 Director B (or Employee C) signs the contract on behalf of
the company.

Company X
(Principal)

Y Director B
(3rd Party) (Agent)
 Generally speaking, the agency relationship
itself, i.e. the relationship between the
principal and agent, is a contractual
relationship, i.e. based on a agency contract
between the parties
 Creation of Agency
 By contract (written or oral)
 By ratification
 By estoppel
 By necessity
 E.g. to meet emergent needs of the principal
 By Contract
 Here, the agent is appointed expressly
either in writing or orally.
 In today's commercial world, many agents
are appointed by written agreements, so as
to avoid uncertainty.
 However, no particular format of agreement
is required.
 By Ratification
 Where some transactions are made by one
person on behalf of another, without his
knowledge or precedent authority, but the
latter elects to adopt those as his own, he is
bound as principal.
By Estoppel/ Apparent Authority
 Where one person (the principal) by his
words or conduct make another (the third
party) believe that someone is his agent and
that person on the faith of such
representation enters into a transaction
with the agent, the principal is estopped
from denying the existence of an agency
relationship and is bound by such
transaction.
 By Necessity
 Where a person is faced with an emergency
in which the property of another person is
in danger or being lost or harmed, and it
becomes necessary, in order to preserve the
property, to act for that person without his
authority, he acts as agent of necessary.
 Authority of the Agent
 Express authority
 Implied authority
 An agent has the authority to do what is
reasonable to do in order to carry out his duties
effectively.
 Apparent authority
 The principal’s words or acts give the
impression to the Third Party that an agent is
authorized (but in fact that the agent is not
authorized).
 Apparent Authority
 Summers v Salomon (1857)
 The principal employed his nephew as manager to run
his jewelry shop.
 The nephew regularly made order on behalf of the shop.
 A left the shop but obtained further jewelry in the name
of the shop and then disappear.
 Held: The principal had to pay for the jewelry as the
supplier did not know that the agency was ended. The
principal has represented that the nephew had
authority from the previous dealings.
 Duties of an Agent
 To follow Principal’s instruction
 Personal performance
 To exercise his duties with due care and skill
 To avoid conflict of interests
 To account to the Principal
 Not to make secret profits
 Not to take bribes and secret commission
 Duties of an agent
Duty of care and skill
 An example where an agent acted negligently:
 Vincent is employed as an insurance broker by P
Shipping Company. He buys insurance for a ship owned
by P. The ship is destroyed by fire. However, the
insurance policy does not cover damage by fire.
 Vincent has failed to exercise due care and skill, for such
clauses are usually inserted in insurance obtained for
ships.
 Vincent has to pay damages to P.
 Duties of an agent
conflict of interest
 Armstrong v. Jackson(1927)
 A employed a stockbroker, J, to buy some shares in a
company.
 J sold his own shares in this company to A.
 When A discovered, he applied to the court to set aside
the transaction.
 Held: A could rescind the contract. ‘It matters not that
the agent sells the shares at the market price or that he
acts without intent to defraud.’
 Duties of an agent
conflict of interest
 Richard Ellis Ltd v. Van Hong-toun (1987)
 RE, an estate agent, acted for the seller of a flat for a
commission of 0.5%.
 VH wanted to buy the flat and RE gave him a document
stating that VH had to pay 1% commission.
 After VH bought the flat, RE claimed the 1%
commission.
 Held: RE could not act for two principals with
conflicting interests without explicit consent of both
principals. VH had not agreed RE to be the agent of the
seller.
 Duties of an agent
Not to make a secret profit
 Boston Deep Sea Fishing v Ansell (1888)
 A director of BDSF held shares in other two
companies.
 He accepted bonuses and commissions from
these two companies in consideration for BDSF
placing orders with them.
 Held: The director should account to BDSF for
the bonuses and commission he had received,
together with interest.
 Rights of an Agent
 Indemnity
 Indemnity from his principal for the liability
incurred or money spent in the performance of
his duties.
 Remuneration
 Lien
 An unpaid agent has the right to hold on to the
Principal’s property which has lawfully come
into his possession.
 Principal’s Relation with Third Party

 Agent’s contract for a disclosed principal

 The contract is binding on the Principal and
Third Party
 Agent cannot sue or be sued under this contract
 Agent’s contract for an undisclosed
principal, generally
 Agent can be sued by the Third Party
 Principal/Agent can sue the Third Party
 Termination of Agency
 Ways to terminate
 By the acts/agreement of the parties
 By operation of law
 Effects of termination
 Agent no longer has authority to act on behalf of
the Principal.
 If the Third Party is not informed, apparent
authority may apply.