Agents Play a Vital Role

The Use Of Agents Is Probably Indispensable To Commercial Transactions, But The Established Principles Of Agency Are Littered With Pitfalls For The Unwary Principal. Critically Evaluate This Assertion.

Agents play a vital role in commercial activity. Many commercial transactions in the field of commerce are conducted through agents who act as intermediaries and represent the interests of their principals in the conduct of the principals business. Auctioneers, estate agents, commercial agents,commission agents, mercantile agents, brokers, factors, solicitors and barristers are just a few of the many people described as agents who may act on people behalf in the ordinary course of life. The essential point to be borne in mind is that the relationship between agent and principal is essentially a binding contractual one which imposes upon both parties’ rights, duties and obligations. Agents “are to be found in all advanced societies and… [Their] activities are an inevitable feature of a developed economy”.

In addition, it may be useful at the beginning of any discussion of agency to attempt a definition of the common factor which brings them all into the category “agent” or, indeed, it may be useful to ask whether they all properly called agents. The courts have only very rarely attempted to define the agency relationship though they have an occasion pronounced on what agency was not. In the recent case of Comet Group plc v British Sky Broadcasting the court held that promotional contracts to be quite distinct from agency. Fridman (1996) stresses that the effect of someone being an agent is that he affects the legal rights of his principal, and he works backwards from his conclusion to suggest the following definition “ Agency is the relationship that exists between two persons when one, called the agent, is considered in law to represent the other called the principal, in such a way as to be able to affect the principal’s legal position in respect of strangers to the relationship by the making of contracts or the disposition of property”. However, in common law principle in operation is usually represented in the Latin phrase, qui facit per alium, facit per se which means the one who acts through another, acts in his/her own interests and it is a parallel concept to vicarious liability and strict liability in which one person is held liable in Criminal law or Tort for the acts or omissions of another.

Fridman’s definition of agency is based on a power-liability analysis of the relationship between the principal and agent. The power-liability analysis focuses on the agent’s power to alter the principal’s legal relations with third parties and the principal’s consequent liability to have his relations so altered. It is clear, therefore that the principal cannot actually confer power on his agent. As Professor Montrose (1938) has explained “the term power…is a legal relation, one which exists by virtue of a legal rule. The power of agent is not strictly conferred by the principal but by the law: the principal and agent do the acts which bring the rule into operation, as a result of which the agent acquires a power”.

Explaining agency in terms of a power-liability relationship appears to avoid the critics based on the consent of the parties. However, the danger with an explanation which focuses on the agent’s power to affect the principal’s relations with third parties is that is shifts attention away from the internal relationship between the principal and agent to the external relationship between the principal and third party. It must always be remembered that agency is a triangular relationship between principal, agent, and third party. The law of agency is as much concerned with the relationship between the principal and agent as it is concerned with the relationship between the principal and third party. The reformulated power-liability analysis is seen has having several strengths. It is emphasizes that the recognition of the relationship of agency is a matter of law, and not simply a determination of the facts. The answer to the legal question posed depends upon considerations of public policy generally, and is not simply focused upon consent. In contradistinction to the consensual model which concentrates upon the linear relationship between the principal and agent, the power liability model focuses upon the triangular configuration which is a hallmark of true agency. The strengths of the ‘power-liability’ analysis are clear, but weaknesses soon being to surface. A favourite case with power-liability theorists, Boardman v Phipps, where there was no consent to the actions of the ‘self-appointed’ agents, was concerned not with the liability of the principal, but the liability of the agent for breach of fiduciary duty. This was inevitable when the aim of ‘power-liability’ theorists was to reduce agency relationship to the lowest common denominator.

Most developed legal systems recognize the concept of agency and in most areas, there is a marked similarity between the rules of different legal systems. In recent years there have been attempts to harmonize national laws on agency as part of the general trend towards harmonization of laws applying to international commercial activity. A Convention Agency in the International Sale of Goods, drafted under the auspices of UNIDROIT, was adopted at Geneva in 1983. The Convention applies where the agent has his place of business in a contracting state, or where the rules of private international law lead to the application of the law of a member state.Moreover, the Convention is concerned only with the external aspects of agency, that is with the relations of principal and agent with third parties with whom the agent deals; it does not regulate the relationship between principal and agent.

The relationship of principal and agent may be created in any one of the following ways:

• By express or implied agreement between the principal and agent;
• Under the doctrine of apparent authority ;
• By operation of law; and
• By ratification of the agent’s acts by the principal;

Used consensual but it need not be contractual. An agency may be gratuitous. Even in the commercial context the agency may not be contractual. According to Coleman J in Yasuda Fire & Marine Insurance Co of Europe Ltd v Orion Marine Insurance Underwriting Agency Ltd “although in modern commercial transaction agencies are almost invariably founded upon a contract between the principal and agent, there is no necessary for such a contract to exist. It is sufficient if there is consent by the principal to the exercise by the agent of authority and consent by the agent to his exercising such authority on behalf of the principal”.

The relationship between the ‘authority’ and the ‘power’ of an agent was considered above. However, the term ‘authority’ is not always in strict sense. Actual authority will be considered on the agent by the principal under the terms of the agreement or contract between them. The scope of the agent’s actual authority is important. According to Diplock LJ in Freeman and Lockyer v Buckhurst Park Properties Ltd “an actual authority is a legal relationship between the principal and agent created by a consensual agreement to which they alone are parties. Its scope is to be ascertained by applying ordinary principles of construction of contracts, including any proper implications from the express words used, the usages of the trade, or the business between the parties”.

Lord Denning MR stated in Freeman & Lockyer v Buckhurst Park Properties Ltdthat implied actual authority occurs when it is inferred from the conduct of the parties and the circumstances of the case, such as when the board of directors appoint one of their number to be managing director. Actual authority, express or implied, is binding as between the company and the agent, and also as between the company and other, whether they are within the company or outside it.

Apparent authority according to Slade J in Rama Corpn Ltd v Proved Tin and General Investments Ltd “…is merely a form of estoppel, indeed, it has been termed agency by estoppel, and you cannot call in aid an estoppel unless you have three ingredients such as representation, reliance on the representation and an alteration of your position resulting from such reliance”. However, Diplock LJ identified four elements to be taken into account before a company could be bound by the conduct of an agent with no actual authority:

• A representation that the agent had authority to enter into make the contract in question;
• Where such a representation was made by a person with actual authority to manage the business of the company;
• Where the plaintiff was induced by the representation; and
• The contract in question was not authorized under the company’s memorandum or articles.

Continuing in, the agency of operation of law can arise in several ways such as by agency of necessity, statutory agency and agency arising from cohabitation. However, Ratification validates the agent’s actions with effect from the time those actions took place. Lord Sterndale MR stated in Koenigsblatt v Sweet “Ratification …is equivalent to an antecedent authority”. It can be express or implied from the principal’s unequivocal conduct. In Keighley Maxted & Co v Durantit was held that ratification was not effective because A had not made it clear that he was acting as an agent during the purchase. However, in Kelner v Baxter it was held that ratification was ineffective because Co did not have capacity to make the contract at the time it was made. The effect of the rule in Bolton Partners v Lambertis limited in a number of ways. The case hase been criticized for putting the third party in a worse position than he would have withdrawn the offer before the principal accepted it. It was held that as soon as Board ratified the contract, it became effective from 13 of December.

As I have stated above the agent has power to affect the legal relations of his principal with regard to third parties. Typically, the agent will do this by contracting on behalf of the principal or by disposing of the principal’s property. In this paragraph I will concentrate on the effect of contracts made by agents; when considering the rights and liabilities arising under a contract made by an agent, it is important to ascertain whether the agent was acting for a disclosed or undisclosed principal. The general rule is that where an agent makes a contract on behalf of his principal, ‘ the contract is that of the principal, not that of the agent, and prima facie at common law the only person who can sue is the principal and the only person who can be sued is the principal.This general rule applies where the agents contract was authorized, either in advance, or after the fact by ratification; the position may be different where the agent has apparent but not actual authority. In, particular, the rights and liabilities of principal and agents against third parties may differ according to whether the agency is disclosed or undisclosed. A disclosed agency is where the agent reveals that heis acting as an agent; it is sufficient that the fact of agency is revealed, and there is no need for the principal to be named. In contrast, the agency is undisclosed where the agent does not reveal the fact of agency at all and purports to be acting on his own behalf.

The decision of Wills J in the case of Watteau v Fenwick1 has met with a vast amount of criticism throughout the course of the last century. Academics have condemned the decision because the case decided that an undisclosed principal could be held liable for an act of the agent, which had been expressly forbidden. Furthermore the judiciary, both within the United Kingdom and the Commonwealth, have on the whole decided to either to distinguish the case or ignore the decision. However despite this, the case has yet to have been overruled and so currently stands as good law. Goodhart and Hamson (1931) believe it was decided upon apparent authority,yet as stated it is doubted whether this contention is valid because the principal was not known. An agency by ratification, which allows a known principal to ratify a contract and be bound by it could not be inferred because Humble did not contract as an agent. Therefore, Wills J decided that “Once it has been established that the defendant was the real principal, the ordinary doctrine as to principal and agent applies – that the principal is liable for all the acts of the agent which are within the authority usually confided to an agent of that character, notwithstanding limitations, as between the principal and the agent, put upon that authority. It is said that it is only so where there has been a holding out of authority…But I do not think so. Otherwise in every case of undisclosed principal, or at least in every case where the fact of there being a principal was undisclosed, the secret limitation of authority would prevail and defeat the action of the person dealing with the agent and then discovering that he was an agent and had a principal”.

A further reason pointing to the Watteau decision being correct is outlined by Cohen (1998) “If agency law did not step in, the undisclosed principal could collude with the agent to misrepresent not only the creditworthiness of the principal, but also the creditworthiness of the agent…If the case [Watteau] had come out the other way, undisclosed principals would be able to hire insolvent agents to make contracts for them, then claim that the contracts were unauthorized while secretly splitting the goods or money with the agent”.

As the third party contracts in the first instance with the agent and not the undisclosed principal, it is not surprising to discover that the agent may sue and be sued on that contract . In Muldoon v WoodSir John Knox, described in the CA that the effect of the agent may be sued on the contract as ‘elementary law’. For instance, if the agent sues the third party on the contract, the third party can set up against him any defence which would have been available against the undisclosed principal.

Finally, in most cases the rights and duties of an agent derive either from a contract made between the principal and agent or from the fiduciary nature of their relationship. However, they may also derive from other sources, such as tort, statute or the law of restitution. Most of the agencies are consensual. But some arise because of the apparent or usual authority of the agent. Such agencies are non-consensual and it remains uncertain as to whether they give rise to the normal incidents of a principal-agent relationship. Be implied

Apart from any particular rights conferred on the agent by the contract of agency, the common law recognizes the common law recognizes three general right to remuneration (usually based on A’s standard terms and where there is no agreement, terms may b implied, e.g. under s.15 SGSA 1982). A leading case is Luxor Ltd v Cooperwhere estate agents were instructed to sell two cinemas. Commission of £10, 000 was payable on a sale and the agents introduced a buyer, but the owners decided not to proceed. The agents claimed damages for breach of an implied term that the owners should not refuse to sell to a buyer introduced by the agents. The HL refused to imply such as terms. A term can only be implied in order to give business efficacy to the contract; the agents were therefore held to have assumed the risk that the sale would not be completed.

All agents, whether acting under a contract of agency or not, are entitled to be reimbursed expenses and indemnified against expensed incurred in the course of performing their duties. The right to indemnity covers all expenses and liabilities necessary incurred by the agent whilst acting within his actual authority, including contractual and tortuous liabilities, but does not cover any liabilities incurred due to the agent’s own fault, nor any liabilities in respect of acts which the agent knew to be unlawful or illegal. On the other hand, In order to protect his rights to remuneration or indemnity, an agent may be entitled to a lien over property belonging to the principal which is in his possession. A lien is a right to retain property by way of security until some debt is paid.

An agent is subject to a number or duties imposed by the general law as legal incidents of the agency relationship. Where the agency is contractual, some of the duties ma take effect as implied terms in the contract, or be modified by its express terms. Although the fiduciary duties imposed on agents arise in equity it seems that their scope may be determine by reference to the terms of any underlying contract between principal and agent and the surrounding circumstances. Some example of the duties of the agent is to obey instructions, to exercise case and skill, fiduciary duties, not to make secret profit and not to take a bride.

An agent’s authority can be terminated at any time. If the trust between the agent and principal has broken down, it is not reasonable to allow the principal to remain at risk in any transactions that the agent might conclude during a period of notice.

Bibliography

1. Adams, A. (2006). Law for Business Students. (4th Edition). Essex: Pearson Education Limited.
2. Bradgate, R. (2000). Commercial Law. (3rd Edition). London: LexisNexis Butterworths.
3. Cracknell, D.G. (1998). Commercial Law. (2nd Edition). London: Old Bailey Press.
4. Handley, P. et al (1996). An active learning approach: Business Law. Oxford: Blackwell Publishers Ltd.
5. Keenan, D. and Riches, S. (2005). Business Law. (7th Edition). Essex: Pearson Education Limited.
6. McKendrick, E. (2003). Contract Law. (5th Edition). London: Palgrave Macmillan.
7. Salzedo, S. et al (2004). Brief case on Contract Law. (4th Edition). London: Palgrave Macmillan.
8. Sealy, LS. And Holley, RJA. (2003). Text, Cases and Materials: Commercial Law. (3rd Edition). London: LexisNexis Butterworths.

Articles/ Journals

1. Onetto, A.E. (2007). Agency Problems and the Board of Directors. Journal of International Banking and Financial Law. JIBFL 414.
2. Newark, S. (2007). The different roles of agents. De Voil Indirect Tax Intelligence. 132, (23).