AUTHORITY OF THE AGENT
Implied obligations between principal and agent
If the agency arrangement is intentional, it may already be set out in a written
contract what the agent can or cannot do, where and when it has to perform
obligations, and what level of skill they need to use. If so, these are said to be
express duties.
Duties can however be implied into agency, and arise where there is no
written agreement. Each country has differing approaches on this. English courts
have been historically reluctant to impose terms into commercial contracts if they
are otherwise fairly comprehensive as to express terms, but if the agency is not
commercial, significant implied terms can be implied.
Both a) whether or not an implied duty has arisen, or b) whether the implied
duty has been breached can be open to interpretation and so it is usually safer to
include these in a written agreement. If the dispute revolves around
interpretation, it can be much more difficult to predict what a court would decide
and they court retains a high level of autonomy.
Duties of the agent to principal
Some key duties the agent owes to the principal, implied by common law are:
The agent has to keep the principal’s information confidential. This can be
especially critical in manufacturing arrangements where the entire business’s
value is grounded on a closely guarded process or recipe.
An agent cannot delegate its own duties without the consent of the principal.
An agent is often hired or instructed precisely because of their personal skill and
knowledge. If the agent opts to outsource their duties deceptively, the actions of
the other party will likely lie with the agent. If individual skill is not at all
material, then subcontracting may be possible.
The agent has to properly account for property and monies received, for the
principal. To do not do so could amount to theft and conversion, as well as being
a breach of duty.
The agent has to follow the reasonable instructions of the principal. If they
fail to do so, the liability for any wrongdoing might rest with the agent. If the
agent’s fees are dependent on specific instructions, and they fail to do them, the
agent might not be entitled to any money. The agent has to do so with reasonable
care and skill, if they don’t, they may be partly accountable.
The agent has to stick within the guidelines it has been given, provided these
are reasonable. The guidelines might be very narrow, and if the agent
purposefully ventures outside of these, it could be argued they didn’t have
authority and liability ought to rest with them.
The agent in a common law situation owes a duty of good faith to the
principal, and must not make undue profit from abuse of the agent’s position,
they cannot pursue conflicting interests, and has to disclose if a third-party
benefits. If the agent doesn’t do so, this could be said to be a breach of implied
duties. There is on-going uncertainty whether good faith also applies to
commercial agency and case law on this is mixed, but only likely applies in very
limited circumstances.
The agent has to disclose material facts to the principal. It cannot present halftruths.
If the agent agrees to do something, it has to do so within a reasonable time
frame. What is reasonable may depend on what is being contracted for. If it is to
sell perishable goods, the need to act quickly may be enhanced.
An agent may have a duty not to act in a particular geographic area if it can
be implied this was the nature of their instructions, but may only be enforceable
if implied if it protects a legitimate business interest and goes no further than is
reasonable. These factors will turn on the facts.
Duties of the principal to agent
If a principal has implied it will pay the agent for services provided, there can
be an implied duty that it has to be bound to that agreement.
If payment to the agent is conditional on something happening which doesn’t,
the obligation may fall away.
If payment is conditional on introduction of a customer and the principal
refuses to proceed for no good reason and refuses to pay the agent, the principal
may be held to be in breach.
A principal has to pay the expenses of agents which they incur in discharging
their obligations, unless otherwise agreed.
Unless otherwise agreed, the principal may have to indemnify the agent for
any losses it incurs whilst properly carrying out the principal’s instructions.
If the arrangement is covered by commercial agency regulations, the principal
may be found to act in good faith towards the agent, but there is no general
requirement in common law agency.
If the principal restricts the agent’s authority and the third party knows about
that restriction and the agent causes a dispute, then the principal may not be held
liable.
Vicarious liability of principal
The term vicarious liability is often used in legal circles but more simply
means the principle where one person can be held liable by the actions of another.
It comes into play often in agency situations.
Liability of agent
If an agent is negligent in carrying out their duties, they may be liable to either
the principal or third party directly. If the agent is deceptive or acts fraudulently,
agents may be held liable in civil and criminal law. An agent may become liable
personally for a dispute when acting as an agent if they do not make their agency
status sufficiently clear; in which case the agent may be seen to have contracted
personally.
Remedies will most commonly be damages or compensation for loss
suffered. The court could order that the contract is terminated or that it continues
potentially. The court could order an account of profit, if the agent makes
unauthorized money at the principal’s expense.
There could be added compensation for breach of implied duties and terms.
An agent might obtain a right over the principal’s property until such time as the
principal makes full payment. The contract might be rescinded, which is to say
to put the parties back in the position as if the contract had never gone ahead. If
money is thought to be inadequate, then potentially the court could order the
agent to complete whatever it is they haven’t done. Query then whether they
would do it well!
Termination of agency
A common dispute which habitually arises is whether an agency agreement
can be terminated part way through and what is the outcome.
For commercial agency, governed by Regulations, if it is terminated, the
agent may be entitled to compensation as a matter of course, and the dispute can
extend to what value of compensation is just. There is a minimum amount of
notice required.
An agency agreement may be terminated automatically in law, if the task has
been completed, if the contract has been frustrated, if death, insolvency or
insanity applies.
There is no general outcome of termination in common law, and each case
turns on its facts as to what is agreed or can be implied.
The agency relationship is created either by mutual consent or by operation of law;
or by ratification.
A consensual relationship created by contract or by law where one party,
the principal, grants authority for another party, the agent, to act on behalf of
and under the control of the principal to deal with a third party. An agency
relationship is fiduciary in nature, and the actions and words of an agent
exchanged with a third party bind the principal.
An agreement creating an agency relationship may be express or implied,
and both the agent and principal may be either an individual or an entity, such as
a corporation or partnership.
Under the law of agency, if a person is injured in a traffic accident with a
delivery truck, the truck driver's employer may be liable to the injured person
even if the employer was not directly responsible for the accident. That is
because the employer and the driver are in a relationship known as principalagent, in which the driver, as the agent, is authorized to act on behalf of the
employer, who is the principal.
The law of agency allows one person to employ another to do her or his
work, sell her or his goods, and acquire property on her or his behalf as if the
employer were present and acting in person. The principal may authorize the
agent to perform a variety of tasks or may restrict the agent to specific functions,
but regardless of the amount, or scope, of authority given to the agent, the agent
represents the principal and is subject to the principal's control. More important,
the principal is liable for the consequences of acts that the agent has been directed
to perform.
A voluntary, good faith relationship of trust, known as a fiduciary
relationship, exists between a principal and an agent for the benefit of the
principal. This relationship requires the agent to exercise a duty of loyalty to the
principal and to use reasonable care to serve and protect the interests of the
principal. An agent who acts in his or her own interest violates the fiduciary duty
and will be financially liable to the principal for any losses the principal incurs
because of that breach of the fiduciary duty. For example, an agent who accepts
a bribe to purchase only the goods from a particular seller breaches his fiduciary
duty by taking the money, since it is the agent's duty to work only for the best
interests of the principal.
An agency relationship is created by the consent of both the agent and the
principal; no one can unwittingly become an agent for another. Although a
principal-agent relationship can be created by a contract between the parties, a
contract is not necessary if it is clear that the parties intend to act as principal and
agent. The intent of the parties can be expressed by their words or implied by
their conduct.
Perhaps the most important element of a principal-agent relationship is the
concept of control: the agent agrees to act under the control or direction of the
principal. The extent of the principal's control over the agent distinguishes an
agent from an independent contractor, over whom control and supervision by the
principal may be relatively remote. An independent contractor is subject to the
control of an employer only to the extent that she or he must produce the final
work product that she or he has agreed to provide. Independent contractors have
the freedom to use whatever means they choose to achieve that final product.
When the employer provides more specific directions, or exerts more control, as
to the means and methods of doing the job—by providing specific instructions
as to how goods are to be sold or marketed, for example—then an agency
relationship may exist.
The agent's authority may be actual or apparent. If the principal
intentionally confers express and implied powers to the agent to act for him or
her, the agent possesses actual authority. When the agent exercises actual
authority, it is as if the principal is acting, and the principal is bound by the
agent's acts and is liable for them. For example, if an owner of an apartment
building names a person as agent to lease apartments and collect rents, those
functions are express powers, since they are specifically stated. To perform these
functions, the agent must also be able to issue receipts for rent collected and to
show apartments to prospective tenants. These powers, since they are a necessary
part of the express duties of the agent, are implied powers. When the agent
performs any or all of these duties, whether express or implied, it is as if the
owner has done so.
A more complicated situation arises when the agent possesses apparent
authority. In this case, the principal, either knowingly or even mistakenly,
permits the agent or others to assume that the agent possesses authority to carry
out certain actions when such authority does not, in fact, exist. If other persons
believe in good faith that such authority exists, the principal remains liable for
the agent's actions and cannot rely on the defense that no actual authority was
granted. For instance, suppose the owner of a building offers it for sale and tells
prospective buyers to talk to the rental agent. If a buyer enters into a purchase
agreement with the agent, the owner may be liable for breaching that contract if
she later agrees to sell the building to someone else. The first purchaser relied on
the apparent authority of the agent and will not be penalized even if the owner
maintains that no authority was ever given to the agent to enter into the contract.
The owner remains responsible for acts done by an agent who was exercising
apparent authority.
The scope of an agent's authority, whether apparent or actual, is
considered in determining an agent's liability for her or his actions. An agent is
not personally liable to a third party for a contract the agent has entered into as a
representative of the principal so long as the agent acted within the scope of her
or his authority and signed the contract as agent for the principal. If the agent
exceeded her or his authority by entering into the contract, however, the agent is
financially responsible to the principal for violating her or his fiduciary duty. In
addition, the agent may also be sued by the other party to the contract for fraud.
The principal is generally not bound if the agent was not actually or apparently
authorized to enter into the contract.
With respect to liability in tort (i.e., liability for a civil wrong, such as
driving a car in a negligent manner and causing an accident), the principal is
responsible for an act committed by an agent while acting within his or her
authority during the course of the agent's employment. This legal rule is based
on respondeat superior, which is Latin for "let the master answer." The doctrine
of respondeat superior, first developed in England in the late 1600s and adopted
in the United States during the 1840s, was founded on the theory that a master
must respond to third persons for losses negligently caused by the master's
servants. In more modern terms, the employer is said to be vicariously liable for
injuries caused by the actions of an employee or agent; in other words, liability
for an employee's actions is imputed to the employer. The agent can also be liable
to the injured party, but because the principal may be better able financially to
pay any judgment rendered against him or her (according to the "deep-pocket"
theory), the principal is almost always sued in addition to the agent.
A principal may also be liable for an agent's criminal acts if the principal
either authorized or consented to those acts; if the principal directed the
commission of a crime, she or he can be prosecuted as an accessory to the crime.
Some state laws provide that a corporation may be held criminally liable for the
acts of its agents or officers committed in the transaction of corporate business,
since by law a corporation can only act through its officers.
An agent's authority can be terminated only in accordance with the agency
contract that first created the principal-agent relationship. A principal can revoke
an agent's authority at any time but may be liable for damages if the termination
violates the contract. Other events—such as the death, insanity, or bankruptcy of
the principal—end the principal-agent relationship by operation of law.
(Operation of law refers to rights granted or taken away without the party's action
or cooperation, but instead by the application of law to a specific set of facts.)
The rule that death or insanity terminates an agent's authority is based on the
policy that the principal's estate should be protected from potential fraudulent
activity on the part of the agent. Some states have modified these common-law
rules, allowing some acts of the agent to be binding upon other parties who were
not aware of the termination.
The law of agency is the law of delegation—i.e., the legal principles that
govern the ability of one person (the principal) to have another person (the agent)
act on his behalf. Basic agency relationships underlie virtually all commercial
dealings in the modern world. For example, the relationship between a sole
proprietor and his employees is governed by the law of agency, as is the
relationship between a corporation and its officers. Technically, the agency
relationship is not a form of business organization in and of itself; instead, agency
is the mechanism by which business organizations function. To take an obvious
example, a corporation—an artificial legal construct that has no physical being
of its own—can act only through agents for everything it does. Regardless of
whether the corporation is writing a check, selling a product, or entering into a
multi-billion dollar merger, the law of agency is involved.
An agent’s authority may be expressly given, impliedly given, and
ostensible or apparent on the basic of the principle conducts. Actual authority can either be vested as express authority or implied authority.
Express authority:
This type of authority is created by words, either written or oral. It often
derives from a contract between the principal and agent, although an agent may
act gratuitously. No particular form is required unless the agent is appointed to
execute a deed, in which case he must be given authority in a deed, called a power
of attorney.
Implied authority:
The agent's implied authority permits him to perform all subordinate or
incidental acts necessary to exercise his express authority. Implied authority
cannot contradict express actual authority. Indeed implied authority is a way of
filling in the gaps in the agency agreement.
Implied authority may arise in the following circumstances:
(a) Usual authority: This is a more specific form of implied authority which
relates to agents of certain type acting in the "usual” way of such agents.
The test is what authority would the reasonable appointed person in the
agent’s position believe they possessed? It will be implied that someone
appointed as a managing director of a company has the authority that
managing directors possess.
Watteau V. Fenwick (1893). The defendant had employed
H. as manager of a hotel. H.’s name alone appeared over the bar as
licensee. The defendant limited H.'s actual authority by forbidding
him to buy cigars.’ However, the agent did order cigars from W.
who knew nothing of the 3 existence of the prohibition. The court
held that such purchases were within the usual authority of a hotel
manager and F was bound to pay for the cigars.
(b) Customary authority:
Here, an agent’s implied authority drives from a locality,
market or business usage. To imply a custom, it must be uniform,
certain, notorious (that is, generally known), recognized as binding
and reasonable. Customary authority will not be recognized where
it contradicts either the express agreement between the agent and
the principal or the normal duties owed by the agent to the principal.
(c) Apparent or ostensible authority:
An ‘apparent’ or ‘ostensible’ authority refers to the authority of an agent
which one would accept an agent of that type to possess. If a third party has no
notice that the authority of a particular agent is limited and is thus less than that
normally enjoyed by such an agent, he can assume that the agent has such
authority, and contract made by the agent within the boundaries of the agent’s
ostensible or apparent authority will be binding on the principal. If the agent has
exceeded the actual authority with which he has been invested but has bound his
principal because the contract was within his ostensible authority, he will be
liable to principal for any losses; for want of authority.
See the case of Watteau v Fenwic, 1893. In Freeman and Lockyer v
Buckhurst Park Properties Ltd (1964). In this case, the Articles of the defendant
company created the office of Managing Director. However, at the material time
none had been appointed. One director with knowledge of the others purported
to Act as managing director. He engaged the Plaintiff firm to work for the
company. The firm was not paid for services rendered to the company. In an
action to enforce the contract, the company disclaimed liability on the ground
that the director was not its Managing Director and hence had no authority to
contract on its behalf in the said contract It was held that since the company had
held out this director as its managing director the plaintiff was entitled to assume
that he was its managing director. The company was estopped from denying its
representations.
Apparent authority may arise where there is or was an agency relationship
in existence, but unknown to the third party, the actual authority has been limited
or terminated. Apparent authority clearly operates to protect third parties and
may arise even where there has been an agency relationship created between
principal and agent.
Apparent or ostensible authority is based on estoppel. The requirements
for estoppel to arise are:
1. A representation by words or conduct that the agent” has authority.
2. The representation must be made by the principal to the third party.
3. The third party must have relied on the misrepresentation.
This is shown by the third party entering into the contract. Once these
conditions have been satisfied the principal will be prevented or estopped from
denying the agency. Normally the principal’s representation precedes the
contract’ but he may be bound by his behavior subsequent to the contract.