AGENCY LAW

ROLE OF AGENCY AND AGENCY RELATIONSHIPS

TYPES OF AGENTS
FORMATION OF AGENCY
The relationship of principal and agent is created by mutual consent in the vast majority of cases. This
agreement does not have to be formal or written.
The mutual consent comes about usually by express agreement, even if it is informal. However, it may also
be implied agreement, due to the relationship or conduct of the parties.
Express agreement
This is where the agent is expressly appointed by the principal. This may be orally, or in writing. In most
commercial situations, the appointment would be made in writing to ensure that everything was clear. An
agent expressly appointed by the principal has actual authority of the principal to act on their behalf.
Implied agreement
An agency relationship between two people may be implied by their relationship or by their conduct.
For example, if an employee's duties include making contracts for their employer, say by ordering goods
on their account, then they are, by implied agreement, the agent of the employer for this purpose. An
agent authorized in this way is said to have implied authority.
RATIFICATION OF AN AGENT’S ACT:
RETROSPECTIVE AGREEMENT
An agency relationship may be created retrospectively, by the 'principal' ratifying the act of the 'agent'.
Therefore it is created after the 'agent' has formed a contract on behalf of the 'principal'. If the principal
agrees to the acts of the agent after the event, they may approve the acts of the agent and make it as if
they had been principal and agent at the time of the contract.
The conditions for ratification are:
• The principal must have existed at the time of the contract made by the agent
• The principal must have had legal capacity at the time the contract was made
• The ratification must take place within reasonable time
• They ratify the contract in its entirety
• They communicate their ratification to the third party sufficiently clearly
Once a contract has been ratified by the principal, the effect is that it is as if the agency relationship had
been expressly formed before the contract made by the agent took place.
FORMATION OF AN AGENCY WITHOUT CONSENT
An agency may be created, or an agent's authority may be extended, without express consent. This
happens by estoppel, when the principal 'holds out' a person to be their agent, and when there is an
agent of necessity.
Implied agreement
In some cases, an agency created by implied agreement might result in the agent having more implied
authority than the principal might have consented to.
Agent by estoppel
An agency relationship may be formed by implication when the principal holds out to third parties that a
person is their agent, even if the principal and the 'agent' do not agree to form such a relationship. In such
a case, the principal is estopped from denying the agent's apparent/ostensible authority, hence the name
'agent by estoppel'. An agency relationship is not so formed if it is the 'agent' who creates the impression
that they are in an agency relationship with a 'principal'.
AGENCY BY NECESSITY
In some rare situations, it may be necessary for a person to take action in respect of someone else's
goods in an emergency situation. That person can become an agent of necessity of the owner of the
goods, as they take steps in respect of the goods.

Illustration:
A seller is shipping frozen goods to a buyer in another country. While the ship is docked, the freezers in
the ship break down and the relevant part required to fix them cannot be obtained. If the ship's
captain (acting as the agent of necessity) cannot make contact with the owner of the goods, they
might, of necessity, sell the goods while they are still frozen, rather than allow them to spoil by
defrosting. This is particularly rare, because it would only occur when the 'agent' could not make
contact with the 'principal', which in the modern world is extremely unlikely. This principle is a historic
part of English shipping and merchant law and you should be aware that it might be possible, but do
not worry about the other details of the doctrine.
AUTHORITY OF THE AGENT
A principal does not give the agent unlimited authority to act on their behalf. A contract made by the
agent is binding on the principal and the other party only if the agent was acting within the limits of
their authority from their principal.
In analysing the limits of an agent's authority, three distinct sources of authority can be identified:
• Express authority
• Implied authority
• Ostensible authority
EXPRESS AUTHORITY
Express authority is a matter between principal and agent. This is authority explicitly given by the principal
to the agent to perform particular tasks, along with the powers necessary to perform those tasks.
The extent of the agent's express authority will depend on the construction of the words used on their
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. If the agent contracts outside the
scope of their express (actual) authority, they may be liable to the principal and the third party for breach
of warrant of authority.
Illustration
A board of directors may give an individual direct express authority to enter the company into a specific
contract. The company would be bound to this contract, but not to one made by the individual director
outside the express authority.
IMPLIED AUTHORITY
Where there is no express authority, authority may be implied from the nature of the agent's activities or
from what is usual or customary in the circumstances. Between principal and agent, the latter's express
authority is paramount. The agent cannot contravene the principal's express instructions by claiming that
they had implied authority for acting in the way they did. As far as third parties are concerned, they are
entitled to assume that the agent has implied usual authority unless they know to the contrary.
Watteau v Fenwick 1893
The facts: The owner of a hotel (F) employed the previous owner (H) to manage it. F forbade H to buy
cigars on credit but H did buy cigars from W. W sued F for payment but F argued that he was not bound
by the contract, since H had no actual authority to make it, and that W believed that H still owned the
hotel.
Decision: It was within the usual authority of a manager of a hotel to buy cigars on credit and F was bound
by the contract (although W did not even know that H was the agent of F) since his restriction of usual
authority had not been communicated.
Hely-Hutchinson v Brayhead Ltd 1968
The facts: The chairman and chief executive of a company acted as its de facto managing director, but he
had never been formally appointed to that position. Nevertheless, he purported to bind the company to a
particular transaction. When the other party to the agreement sought to enforce it, the company claimed
that the chairman had no authority to bind it.
Decision: Although the director derived no authority from his position as chairman of the board, he did
acquire authority from his position as chief executive. Therefore the company was bound by the contract
as it was within the implied authority of a person holding such a position.

Illustration
A principal employs a stockbroker to sell shares. It is an implied term of the arrangement between them
that the broker shall have actual authority to do what is usual in practice for a broker selling shares for a
client. Any person dealing with the broker is entitled to assume (unless informed to the contrary) that the
broker has the usual authority of a broker acting for a client.
Actual authority
Express and implied authority are sometimes referred to together as actual authority. This distinguishes
them from ostensible or apparent authority.
Actual authority is a legal relationship between principal and agent created by a consensual agreement
between them.

Apparent/ostensible authority
An agent's apparent or ostensible authority may be greater than their express or implied authority. This
occurs where a principal holds it out to be so to a third party, who relied on the representation and altered
their position as a result. It may be more extensive than what is usual or incidental.
The ostensible (or apparent) authority of an agent is what a principal represents to other persons that
they have given to the agent (authority by 'holding out'). As a result, an agent with express or implied
authority which is limited can be held, in practice, to have a more extensive authority.
Apparent/ostensible authority usually arises either:
(a) Where the principal has represented the agent as having authority even though they have not
actually been appointed; or
(b) Where the principal has revoked the agent's authority but the third party has not had notice of
this.
The extent of ostensible authority
Ostensible authority is not restricted to what is usual and incidental. The principal may expressly or by
inference from their conduct confer on the agent any amount of ostensible authority.

Example: partnership
A partner has considerable but limited implied authority by virtue of being a partner. If, however, the
other partners allow them to exercise greater authority than is implied, they have represented that
they have wider authority. They will be bound by the contracts which they make within the limits of
this ostensible authority.
EXAMPLE: COMPANIES
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd 1964
The facts: K and H carried on business as property developers through a company which they owned in
equal shares. Each appointed another director, making four in all. H lived abroad and the business of the
company was left entirely under the control of K. As a director K had no actual or apparent authority to
enter into contracts as agent of the company, but he did make contracts as if he were a managing director
without authority to do so. The other directors were aware of these activities but had not authorised them.
The claimants sued the company for work done on K's instructions.

Decision: There had been a representation by the company through its board of directors that K was the
authorised agent of the company. The board had authority to make such contracts and also had power to
delegate authority to K by appointing him to be Managing Director. Although there had been no actual
delegation to K, the company had by its acquiescence led the claimants to believe that K was an authorised
agent and the claimants had relied on it. The company was bound by the contract made by K under the
principle of 'holding out' (or estoppel). The company was estopped from denying (that is, not permitted to
deny) that K was its agent, although K had no actual authority from the company.
 It can be seen that it is the conduct of the 'principal' which creates ostensible authority. It does not
matter whether there is a pre-existing agency relationship or not.
This is important – ostensible authority arises in two distinct ways. It may arise where a person makes a
representation to third parties that a particular person has the authority to act as their agent, without
actually appointing them as their agent. Alternatively, it may arise where a principal has previously
represented to a third party that an agent has authority to act on their behalf.
Representations creating ostensible authority
The representation must be made by the principal or an agent acting on their behalf. It cannot be made by
the agent who is claiming ostensible authority. It must be a representation of fact, not law, and must be
made to the third party. This distinguishes ostensible authority from actual authority, where the third party
need know nothing of the agent’s authority.

Reliance on representations
It must be shown that the third party relied on the representation. If there is no causal link between the
third party's loss and the representation, the third party will not be able to hold the principal as liable.
Illustration
If the third party did not believe that the agent had authority, or if they positively knew they did not, then
ostensible authority cannot be claimed. This is true even if the agent appeared to have authority.
Alteration of position following a representation
It is enough that the third party alters their position as a result of reliance on the representation.
They do not have to suffer any detriment as a result, but damages would in such an event be minimal.

Revocation of authority
Where a principal has represented to a third party that an agent has authority to act, and has
subsequently revoked the agent's authority, this may be insufficient to escape liability. The principal
should inform third parties who have previously dealt with the agent of the change in circumstances.
This is particularly relevant to partnerships and the position when a partner leaves a partnership.
TERMINATION OF AGENCY
Agency is terminated when the parties agree that the relationship should end.
It may also be terminated by operation of law in the following situations:
• Principal or agent dies
• Principal or agent becomes insane
• Principal becomes bankrupt, or the agent becomes bankrupt and this interferes with their position
as agent
Termination brings the actual authority of the agent to an end. However, third parties are allowed to
enforce contracts made later by the 'agent' until they are actively or constructively informed of the
termination of the agency relationship.
RELATIONS BETWEEN AGENTS AND THIRD PARTIES
An agent contracting for their principal within their actual and/or apparent authority generally has no liability on the
contract and is not entitled to enforce it. However, there are circumstances when the agent will be personally liable and
can enforce it.
(a) When they intended to undertake personal liability – for example, where they sign a contract as
party to it without signifying that they are an agent.
(b) Where it is usual business practice or trade custom for an agent to be liable and entitled.
(c) Where the agent is acting on their own behalf even though they purport to act for a principal.
Where an agent enters into a collateral contract with the third party with whom they have contracted on the principal's
behalf, there is separate liability and entitlement to enforcement on that collateral contract. It can happen that there is
joint liability of agent and principal. This is usually the case where an agent did not disclose that they acted for a principal.
Breach of warranty of authority
An agent who exceeds their authority will generally have no liability to their principal, since the latter will not be bound by
the unauthorized contract made for him. But the agent will be liable in such a case to the third party for breach of
warranty of authority