Principal-Agency Relationship
An agency is the relationships that exist between two persons when one party, called
the agent is considered by law to represent the other party, called the principal in such a
way as might affect the principal’s legal position in respect of third parties.
The principal: A principal in an agency relationship is one who employs another
(called an agent) to represent him in legal or business dealings with third parties. There
are three kinds of principal, namely disclosed, undisclosed and partially disclosed. A
disclosed principal as the name implies, is one whose identity in an agency relationship
is made known to third persons dealing through the agent. A principal is undisclosed
when an agent, in dealing with third persons, does not reveal the existence of an agency
relationship or the identity of the principal, but appears to act on his own behalf rather
than for another. A principal is considered partially disclosed when the agent in his
dealings with third persons, reveals the existence of an agency relationship but does not
divulge the identity of his principal.
The Agent: An agent in an agency relationship is one who is commissioned by another
(called the principal) to represent him in legal or business dealings. Three types of
agency relationship particularly in a real estate transaction are: dual agency where a
single agent/broker two or more parties in a single transaction; sole agency where an
agent represents a single principal in a transaction, and sub-agency which refers to
situations where several agents represent different levels of positions in terms of power
and direct relationship to the principal(s) in a single transaction. Other categorization of
agency is in terms of level agency viz:
1. Universal agency: Occurs where the principal gives the agent legal powers to
transact matters of all types on the principal’s behalf e.g unlimited power of attorney.
2. General agency: This is when the agent is given the power to bind the principal in a
particular transaction or business, e.g. a property manager’s contractual relationship
with the property owner.
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3. Special agency: Where the principal empowers the agent to perform a particular act
or transaction e.g. power of attorney to sign a deed on behalf of someone who will be
out of the country.
Third Parties: These are persons who are not direct parties to a contract but may be
affected by it. In a real estate transaction for instance, third parties could be the buyer
and could also apply to the seller from the perspective of the buyer, especially if the
latter has commissioned an agent to act on his behalf, i.e., a buyer agent. Subsequently
the buyer becomes the buyer principal.
When an agency relationship is created, specific obligations, rights and liabilities
emerge which relate to the principal, the agent and their third parties as discussed
below.
Obligations of the Principal to the Agent.
To compensate: It is the obligation of the principal to compensate his agent for his
service unless of course, the agent agrees to perform a gratuitous function. The amount
of compensation is usually set forth in the agreement. For instance in the case of a real
estate transaction, in the absence of an express agreement to the contrary; a real estate
agent earns his commission the moment he presents the vendor with a buyer who is
ready, willing and able to close on substantially the vendor’s terms. An agent also earns
his commission, the moment the seller contracts with the buyer, even though such
buyer may later be unable to meet the seller’s terms.
To reimburse: The principal is obligated to reimburse the agent for expenses incurred
while acting on behalf of the principal and within the scope of his authority. However, in
the ordinary real estate agency arrangements, the principal has no such duty to
reimburse the agent. By the terms of the usual listing agreement and also by custom, the
agent’s sole compensation is a percentage of the selling price and the understanding is
that the real estate agent pays his expenses out of his commission.
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To indemnify: The principal is also obligated to secure his agent against any loss or
damage (indemnify) suffered as a consequence of the agent carrying out his principal’s
instructions under the agency relationship.
Obligation of the Principal to the Third Parties
For Acts of his Agent: The principal is obligated to honour all contractual agreement
entered into by his agent on behalf of the principal, while the agent acts within the
scope of his actual or apparent authority. It is irrelevant whether or not the third party
knows he is dealing with an agent. If the agent has actual authority, he is authorized to
make a binding contract in his principal’s name. When an agent, however acts beyond
the scope of his actual authority, a determination must be made whether or not the
principal authorized the agent to so act.
For Tort of His Agent: A principal is liable for his agent’s tort if they are committed
while the agent is doing what he is instructed to do. If for instance an agent makes
fraudulent statement to a third party which were not authorised by the principal, the
principal would be liable for any damages caused by the negligent acts of his agent
which the agent engaged in while promoting the interest of his principal. This is indeed
the essence of the concept of vicarious liability which argues that a principal is held
responsible for acts committed by his agent even though the wrongful acts was no fault
of his as long as it can be established that there is a principal-agent relationship
between the two. This is in line with the maxim “he who acts through another act for
himself”.
Obligations of the Agent to the Principal
Duty to Act: A paid agent is under a duty to act and any loss suffered by the principal
because of failure of the agent to act is recoverable by the principal. If the agent does not
intend to act, he is obligated to inform his principal of this fact. However, the agent
cannot be made liable for failure to perform acts which are illegal or void.
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Duty of obedience: A primary obligation imposed on an agent is to act in accordance
with the instructions of his principal in so far as they are lawful and reasonable. An
agent has no discretionary power to disobey his principal’s instruction, if however an
agent caries out his instructions, he cannot be liable for loss suffered by the principal
because the instructions were faulty. On the other hand, if an agent does not comply
with instructions given to him, he will be responsible to his principal for any loss
suffered. However, if the instructions received by the agent are ambiguous, he is not in
breach of his duty if he makes a reasonable but incorrect interpretation of the
instructions.
Duty to exercise reasonable care and diligence in performance of the agency: This
duty is in essence the assigned task according to the agreement between the principal
and the agent. An agent whether paid or gratuitous, is required to display reasonable
care in carrying out his instructions and also, where appropriate such as may
reasonably be expected from members of his profession. Reasonable in this respect is
that an agent is expected to competently perform his task or to have information that is
within the scope of responsibility conferred by his profession. If he fails in this regard,
an agent will be liable for any loss which the principal suffered thereby. A negligent
agent may also forfeit to remuneration where his negligence renders his services
worthless to the principal.
Duty of loyalty: The agent owes a duty of loyalty to his principal. Loyalty in this respect
can be defined as an unwavering allegiance or faithfulness to a private person to whom
fidelity is due. The interest of the principal must therefore come before and have
absolute priority over that of the agent as far as the agency relationship is concerned.
The lure of a potential commission or fee must never interfere with the agent’s
judgement of what is in the best interest of the client. This is one of the most common
conflicts of interest that real estate sales people face in their everyday business. The
agent has a duty to obey the principal and to fulfil the request of the principal to the best
of his or her ability.
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Fiduciary Duties: Every agent owes fiduciary duties to his principal, i.e. duties of good
faith, loyalty, diligence and disclosure. These duties are based on the confidential nature
of the agency relationship. However, it is worthy of note that an agent may be in breach
of these duties and liable for the consequences, even where he has acted innocently.
There are two main fiduciary duties- a duty to disclose any conflict of interest and a
duty not to take secret profit or bribes as explained below:
1. Conflict of interest: In situations where an agent’s own interests, or the interests of a
third party, come into conflict with those of the principal, the agent is obligated to make
a full disclosure to the principal of all relevant facts. This will enable the latter to decide
whether to continue with the transaction or not. This rule prevents an agent in the
absence of disclosure from purchasing the principal’s property for himself or from
acting as an agent for both the vendor and the purchaser or for two competing would-be
purchasers. In the same vein, an agent instructed to sell a property must not favour a
particular purchaser at the expense of others, in the hope of a reward from the
purchaser. If an agent is in breach of this duty, the principal may set aside the resulting
transaction, claim any profit accruing to the agent and refuse to pay any commission.
2. Secret Profit and Bribes: In situation where an agent in the course of his agency and
without the knowledge and the consent of his principal, makes a profit for himself due
to his position, or due to the information with which he is entrusted, he is obligated to
account for the profit to the principal. Consequently, an agent may not accept
commission from both parties to a transaction, nor keep for himself the benefit of a
trade discount while charging his principal the full price. However an agent who has his
principal’s informed consent may keep whatever profit that accrues to him.
Where the secret profit is in form of payment from a third party who is aware that he is
dealing with an agent, it is called a bribe, even if the payment is made with no evil
motive and even when the principal suffers no loss thereby. The taking of such bribes
entitles the principal to dismiss the agent, recover either the amount of the bribe or his
actual loss (if greater) from the agent or third party, withdraw from any transaction in
respect of which the bribe was given and refuse to pay commission.
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Other duties: An agent has other duties which include accountability and duty not to
delegate his responsibilities to a sub-agent without the consent of the principal. The
duty to account for all funds and property under the agent’s control centres on the trust
and accountability aspect of the fiduciary responsibility. An agent is therefore expected
to keep proper accounts and must remit to the principal any money received on behalf
of the principal in the course of the agency.
Obligation of the Agent to the Third Party
An agent (broker) may owe a fiduciary duty to a prospective purchaser even if the
broker is the agent of the seller. An agent has a duty to disclose facts he has knowledge
of which would materially affect a purchase decision to buy a property. If the broker is
an agent of the seller, he must balance his duty to act in the best interest of his principal
with his duty to disclose facts he has knowledge of to the purchaser.
Creation of Agency
How an agency relationship is created determines the classification of the agency.
Agency relations are often created by some action or conduct on the part of the
principal. A prospective agent cannot by his conduct alone or by any statement he might
make establish an agency relationship. Agency may be created by agreement, which
could be express or implied, by ratification, statute, necessity or estoppel.
Appointment by express agreement: This usually provides a written document to
evidence the existence of the agency relationship. An express agency relation is created
voluntarily through agreement between the principal and the agent. This agreement is
usually but not necessarily a contract. Nonetheless if the agent is to transact contracts
which must be evidenced in writing, all that is required is a desire to appoint ‘A’ as an
agent with ‘A’s’ consent to act as such. However in some cases certain formalities are
necessary to create an agency relationship. For instance, if an agent has to execute a
deed, his appointment must be by deed, and it is known as a power of attorney.
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Appointment by implied agreement: An implied agreement is created voluntarily by
the conduct and act of the principal and the agent which reflect the intent to create an
agency relationship even though such intent is not expressed in writing and may or may
not be expressed orally. If the parties have to conduct themselves in a manner that it
would be reasonable for them to assume that they have consented to act as principal
and agent, then it would be appropriate to assume that an agency relationship exists
between them. One basic factor which has been found relevant in determining whether
an agency relationship has been created by implied agreement is if one party acts on
behalf of the other at the other’s request and whether the commission is payable or not.
Appointment by ratification: In certain circumstances, the relationship of principal
and agent can be created or extended retrospectively under the doctrine of ratification.
Essentially, what this means is that if ‘A’ purports to act as an agent for ‘B’ in a particular
transaction (although he is not authorised to do so), ‘B’ may subsequently ratify or
adopt what ‘A’ has done. In such a case, ‘A’ is deemed to have been acting as an
authorised agent of ‘B’ when he effected the transaction. However, ratification only
validates past actions of the agent and gives no authority for future actions.
Nonetheless, frequent acts of ratification by an alleged principal may create agency
relationships by implied agreement or confer ostensible authority on the agent.
Ostensible authority: Created where a principal through his acts or conducts gives a
third party reasons to believe that another person is his agent even though that person
may not be aware of the appointment. If the third party accepts that as true, the
principal may well be bound by the acts of his agent.
Appointment by Statute: Agency relations by statute are usually created by state’s
statutes in individual or legal entities to facilitate the service or process when such
services would otherwise have been difficult or impossible.
Agency by estoppel: Can result when a principal fails to maintain due diligence over
his agent and the latter goes ahead to exercise powers not granted to him. If this causes
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a third party to believe that the agent actually has these powers, an agency by estoppel
is created.
Termination of Agency: An agency relationship may be terminated by the completion
of the contract, by mutual agreement or by abandonment on the part of either party.
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