Chapter 15- Law of agency
The role of an agent and the development of the law of agency
The agency relationship
The agency relationship arises when one person, the principal, expressly or by implication
contracts for the services of another called the agent to carry out a specific task on behalf of the
principal
The agent’s usual role is to negotiate contracts and bind the principal in contract with a third
party. Sometimes however, the agent has no authority to bind the principal in a contract such as a real
estate agent bringing a buyer and seller together, or a lawyer performing a legal service for his client.
Risk of hiring an agent: the principal is responsible for knowing everything his agent knows
The Nature of the Agency Relationship
Types of agency relationships
1.
Agency by express agreement arises where there is an express contract creating the agency
relationship, spelling out the rights and duties of the parties
2.
Agency by conduct or by estoppel arises when the surrounding circumstances indicate to a third
party that he or she is apparently dealing with an agent, whether that person is in fact an agent or not.
In these circumstances the principal may be bound.
3.
Agency by necessity arises when, in an emergency, an agent in some circumstances can act
without authorization by the principal to preserve the principal’s property, and bind the principle for
acts taken to do this.
Express agency agreements
Express agreements may be oral or in writing
If the contract the agent is negotiating with a third party must meet formality requirements,
then the contract that creates the agency agreement must meet the same formality requirements.
A verbal agreement can be that a person is asking another to buy something from a hardware
store.
The ordinary agency relationship extends beyond the agreement between the principal and the
agent. It usually involves a second contract with a third party. The two contracts are separate but in the
case of the contract negotiated between the agent and the third party, if the agent acts within the scope
of his or her authority, the rights and duties under the agreement become those of the principal and the
third party. The agent, in effect, drops from the transaction once the agreement is executed and has
neither rights nor liabilities under it.
Duties of the parties
The principal must pay the fee or commission when due, and pay agreed expenses of the agent
The parties must act with utmost good faith
The agent must obey instructions
The agent must advise the principal of any notice received by the agent, and keep the principal
informed of developments that may affect the principal
The agent must have and exercise the skills he or she holds himself or herself out as having.
The agent must act only for the principal; he or she must not accept secret commissions or put
his or her interests ahead of the principal’s, or act for both sides unless the principal agrees . If the agent
should obtain a commission or benefits from the third party without disclosing the fact to the principal,
the agent wouldn’t be entitled to claim a commission from the principal.
The agent may not delegate authority to a sub-agent unless the principal agrees
The agent must be prepared to account at all times for funds received and acts done on behalf
of the agent.
Creation of an agency relationship by conduct
A person may, in his or her conduct create an impression that might lead a reasonable person to
assume that an agent has been given authority to act in certain ways, when in fact that is not the case.
For example: a wife may be an agent of her spouse, when she goes to buy groceries, etc, and the
principal pays the credit card balance, etc. In this case, the third party, the grocery store owner is under
the impression that an agent (wife) was given the authority to act in certain ways
Agency by conduct may result in liability for the principal if the principal fails to notify the third
parties that the agency relationship has terminated; Third party may hold the principal liable on a
contract negotiated by the agent on the basis of the agents apparent authority
Agent may also possess the implied authority to bind the principal
Apparent authority: ability of an agent to bind a principal where the principal hasn’t notified the
third parties of the restricted or terminated authority of the agent.
Agency by operation of law
The status of a person or a particular set of circumstances may create or give rise to authority
to act as an agent, without an express grant of that authority by a principal; agency that may arise in
certain circumstances out of necessity where it is not possible to obtain the authority of the principal
With modern communications, this type of agency is limited.
Example: right at law would permit ship-master can sell or deal with cargo of a ship in an
emergency, though no express authorization would be given by the owner of the cargo to do so.
A pre-existing legal relationship must exist between the principal and the agent for which the
common law will allow circumstances under which a person may act as an agent of necessity.
Ratification of Contracts by a Principal
Ratification
The principal may in certain circumstances wish to take advantage of a contract that an agent
negotiated on his/her behalf, and that the agent clearly has no authority to make. Acceptance of this
type of contract is called ratification. If done correctly, it has the effect of binding the principal in
contract with the third party as of the fate it was negotiated.
Principal may ratify a contract if they were in existence at time the agent made the contract and
was identified in the agreement as the principal: this rule generally applies to corporations rather than
individuals..
The right of a corporation to ratify (formally approve something) pre-incorporation contracts
and contracts that are outside the company’s objects may be limited by legislation
The principal must act reasonably soon to ratify
Ratification may be express or implied by conduct
The principal must accept the total contract, not just the good parts
On ratification, the contract is deemed to be in effect from the time the agent accepted it.
Third Parties and the Agency Relationship
Disclosed Agency
Performance of a contract is between agent and third party, & the agent must clearly indicate to
he third party that she is acting only as an agent and will usually identify the principal for whom she acts
by saying “Mia per Pre” meaning Mia is the principal and Pre is the agent, (per procurationem means on
behalf of another) or say it another way if she wants.
Consequences where agency relationship disclosed
If the agent acted within his or her authority, the principal alone is liable to the third party.
The agent has no right or duties under the contract.
The agent may not claim any benefits from the contract, other than agency commission
Undisclosed principals
An agent may identify that he or she acts as an agent for an undisclosed principal---in this case
the principal alone is liable on the contract.
The fact that agent describes himself as an agent and that the third party is willing to enter into
a contract with the agent on that basis, protects the agent from personal liability
If the principal makes his existence known after the contract has been made by an agent who
didn’t disclose the principal’s existence, the principal may be in a position somewhat analogous to that
of an assignee of a contract. Principal may take agent’s place, and be obliged to accept the relationship
as it stands between agent and the third party. If third party had contracted in the belief that the agent
was in fact a principal, any defence third party had against agent will be raised against the principal.
Non existent principals and the rights of third parties: Fictitious Agency
Third party may sue agent for breach of warrant of authority if there is no principal
Third party may also sue agent if there is a principal and agent has exceed his authority
If agent acts fraudulently when there is no principal, he is open to an action for deceit.
Undisclosed Agency
Agent may act for a principal without revealing that he is an agent--in this case the agent will be
liable on contract to the third party because they will think that agent is the principal.- the agent, by the
same rule of law would be entitled to enforce the agreement against the third party if they fail to
perform the agreement in accordance with its terms
Agency relationships and tort Liability
A third party may sue both the agent and the principal for a tort committed by the agent
If the tort is committed in the ordinary scope of the agent’s employment both are liable
If the tort is committed outside of the scope of the agent’s employment, then only the agent is
liable.
Termination of the Principal – Agency Relationship
Termination of the agency relationship
Agency relationships terminate if either party dies or becomes insane (incapacity)
Agency relationships created by express agreement also provide for termination if the
agreement specifies that any party may terminate the relationship by giving the other party a particular
notice period, if no date is given right to terminate can be implied and either party may give notice to
end the relationship.
When a task is complete, the relationship will automatically terminate
Bankruptcy by the principal, ends the agency relationship, as bankrupt principals have limited
rights to contract, directly or through an agent.
Contract is voidable at the option of infant or minor, if one party is an infant or a minors
Principal must tell the third party of the termination or else the agent may sill bind the principal
in contract on the basis of the agent’s apparent authority.s