Defining the Agency Relationship

Defining agency is a difficult task one of which an attempt is never all encompassing, however this work will try to define one. Agency is a relationship which exist between two parties where one party known as the Principal delegates power expressly or impliedly to another person or party known as the Agent to so act or assume legal position [1] on his behalf with third parties. It is mandatory for an agency agreement to be consensual however the failure to make contractual agreement does nothing to the agency relationship [ Saeley, L. S.& Hooley R.J.A, 2009 pg 111]. In the definition it will be noticed that apparent authority was left out, that is probably one of the difficulties many authors find in defining the term however, this work will try to discuss the term in-depth because there lays the key to fully understanding the statement of Diplock, LJ in the case of Freeman & Lockyer v Buckhurst Park Properties.

In modern society where specialisation is the order of the today the employment of an agent to act on behalf of an individual or a company is almost inevitable. However the problem that may arise is at what point is an agent acting beyond the scope of his authority and who is liable to the consequential act? In an agency agreement the Principal (also known as the donor) can either expressly give approval or consent to the Agent (also known as the donee )to act on his behalf or so represent, that a third party would assume or believe that the agent has power to act (‘apparent’ authority). The former being ‘actual’ authority and the latter being ‘apparent’ authority was defined in the case of Freeman Lockyer v Buckhurst Park Properties (Mangal) Ltd [2] which shall be the primary case of this work.

It is a well known fact that actual authority and apparent authority are both independent and interdependent. What however remains to be seen is how this adds up in actual practice. This work will try to do just that and where necessary try to give an in depth evaluation of the situation. Before I proceed I will like to give a summary of the case: QB FREEMAN & LOCKYER V BUCKHURST PARK PROPERTIES (MANGAL) LTD [1964] 2 480 CA: Hoon and Kapoor had formed a company known as Buckhurst Park Properties (Mangal) Ltd to buy and resell a property. The Board of Directors consisted of the two original members and two other members who were nominated by them. In the Article of Association there was a provision for the appointment of a Managing Director however none was appointed. With the position vacant Kapoor, one of the Directors acted as a de facto Managing Director with the consent of the other Board members. Although there was no express delegation of authority as he was never appointed Manager, by implication he had actual authority. Kapoor entered into several contract on behalf of the company one of which was the appointment of a firm of architects who were instructed to apply for permission to develop the property. Although there had been no actual authority to act, the Board had shown no objection. When the firm had demanded for their fees from the company the company raised a defence that Mr Kapoor had acted without authority. An issue then arose whether or not Kapoor had apparent authority to bind the company. The Court’s decision held that Kapoor’s had such apparent authority because he had been held out by the company to have authority to act. On appeal the Court of Appeal dismissed the case affirming the decision of the lower court and in his Judgment; Diplkock LJ made a critical statement and that statement I shall be critically discussing in this work.

What then is actual authority? “…a legal relationship between 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 course of business between the parties…” Actual authority can either be express actual authority [3] or implied actual authority [4] . Where two people come together to enter a contract (it is not mandatory though but might be relevant) or agreement one delegating g to the other to act on his behalf then there will be a case of express actual authority. Implied actual authority on the other hand may apply in under 3 circumstances:

Incidental Authority: this arises from an agent’s express authority. In Saeley & Hooley, 2009 pg 116 “…an agent has implied actual authority to do everything necessary for, or ordinarily incidental to, the effective execution of his express authority…” See the case of SMC Electronic Ltd v Ahkter Computers Ltd [5] where the court held that an agent who had been contracted to sell goods on behalf of his principal also had incidental authority to enter into commission agreement with third parties. [6] Contrast this with the case of Earner v Sharp [7] where the court held that an agent whose services were employed to find a buyer for a property lacked the authority to enter into a contract of sale. See the case of Rosenbaum v Belson [8] for further reference.

Usual Authority: the name speaks for itself. It is impliedly expected that an agent will act in the usual manner required to execute the act for which he was employed. See the case of Waugh v HB Clifford & Sons Ltd [9] where the court held that the solicitor had the implied usual legal authority to settle. This case has raised some controversy. Some authors’ belief that the decision arrived at would have been different if it had been decided in the light of current development [Foskett, D. 2005]

Customary Authority: there is an implied authority that an agent may act in accordance with the custom of the place where he is employed so far it does not reasonability and is not illegal [Sealey, LJ. &Hooley, RJA. 2009: pg 116]. See the case of Robinson v Mollet [10] In this case the court held that where a custom is unreasonable it will only bind the principal if he had prior knowledge.

Implied actual authority will arise where by the conduct of the parties and the facts of the case one will assume…“there was an agency relationship created by implied agreement [Sealey LJ & Hooley, RJA. 2009: PG 117]. See the case of Heley- Hutchinson (supra).

Apparent authority on the other hand as defined in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd (supra) “…is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the ‘apparent’ authority, so as to render the principal liable to perform any obligations imposed upon him by such contract…operates as an estoppel, preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract”. One key point of actual authority whether express or implied there must have been some agreement of some sort. See the case of Garnac Gran Co Inc v HMF Faure & Fairclough [11]

Whether an agent has actual authority to act on behalf of a principal is a question of fact [Sealey, 2009 pg 113]. As a general rule an agent can be appointed by word of mouth, writing or by deed. Whatever the mode of appointment an agent owes his principal a fiduciary duty. [12] A principal will not be held liable where an agent acts in contradiction to the principal’s express limitations of the agents duties; however this is dependent on facts. See the case of Midland Bank v Reckitt. [13] If A, an agent had been specifically instructed by B the principal to import sugar from Brazil and subsequently A acting on his own goes to import from Malaysia B would not be liable to pay for the goods unless he ratifies the act or had represented to the third party that A had authority. See the case of Firth v Staines [14] where Justice Wright as he then was pointed out the three requirements for ratification. See also Article 2.2.9 of the Unidroit Principles of International Commercial Contract 2004 and Article 15 of the Geneva Convention on Agency in International Sales of Goods, 1983. See also the case of Rama Corporation Ltd v Proved Tin and General Investment Ltd (supra). Note however that even where a principle restricts the authority of the agent, any act done by the agent as a result of usual practice will still bind the principal because such unauthorised act will invest in the agent apparent authority [ Sealey LJ & Hooley RJA, 2009 pg 117]. See the case of AMB Generali Holding AG v SEB Trygg Liv Holding AB [15] and also see the case of First energy (UK) Ltd v Hungarian International Bank Ltd [16] where the court held that an agent cannot rely on authority which never existed, where no apparent authority existed for an agent to conclude a contract, apparent authority will not be available to make representation of facts on such a contract.

Apparent authority may arise in two circumstances; the first one is where there exist no relationship but the act of X binds Y or where there exit an agency relationship but the agent acts outside his authority his act will bind his principal if the principal acted in a manner that suggest approval. In the words of bradgate 2005 pg 145 4.2 “apparent authority, may exceed or expand on actual authority, or even exist independently of”. As a general rule an agent has the power to bind his principal even where the act was done outside his authority. The law in situations like this will look at the conduct of the principal. If the principal had so acted to construe approval the law will estopp the principal from refusing liability. See the case of Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd (supra) where Diplock L.J defines apparent authority as “…by a representation made by the principal to the [third party], intended to be and in fact acted on by the third party that the agent has authority…” Apparent authority may arise out of an agent’s actual authority. In the case of Povey v Taylor [17] the defendants had been estopped from refusing apparent authority. The defendants had accepted leaflets meant for a tenant of theirs who did similar business like the defendants’ and had said nothing to that effect. The Court of Appeal held that it was not out of place for the Plaintiffs to have assumed that the tenant had been acting on the authority of the defendant’s and had so acted upon. More often than not an agent’s actual authority tends to coincide with his apparent authority [Bradgate, 2005 pg 145: 4.2]. Where a third party deals with an agent who has or had actual authority but is unaware of the agent’s limitation or where the agency agreement had seized to exist, of such non existence the act will still bind the principal if by his conduct (words or action) the third party would believe that the agent had acted on the authority delegated to him by the principle. It does not matter that the agent had acted outside his powers or the agency relationship had seized to exist or terminated. The rule is whether or not the third party was aware that the agent was acting without authority. See the case of Rama Corporation v Proved tin and General Investment Ltd [18] where the court ruled that apparent authority estopps a principal. See also the case of Freeman & Lockyer v Buckhurst Park Properties (supra) where the court affirmed that apparent authority estopps a principal. However as earlier pointed out for a principal to be bound by the unauthorised act of an agent or supposed agent (one who act without prior agency agreement or relationship) the law looks out for three elements. See the case of Freeman & Lockyer v Buckhurst Park Properties and Rama Corporation v Proved Tin and Gen Inv Ltd (supra) [19] The first is has there been a representation (it does not matter when this representation was made, before, during or after) of some sort by the principal or someone with the principals authorisation acting on his behalf that the agent has authority to act on behalf of the principal. It will not suffice if such representation was made by the agent himself or the person acting with no actual authority. See the case of Boulas v Angelopoulos [20] . In this case the appellant had assumed he had won an auction at the price of $ 226,000 falling short of the reserve price of $270,000. There had been a mix up and the auctioneer had knocked down the price at a price below the reserve price of which when the vendor had realised had refused to sign the contract transferring ownership to the purchaser. The purchaser sought enforcement in the court but the court refused to enforce the sale. On appeal against the decision of the lower court, the New South Wales Court of Appeal dismissed the appeal on the grounds that there had been agency by estoppels. Another scenario is where Mr XYZ presents Mr E as his agent for food and supply matters to GK Company a manufacturers of rice to be responsible for all transactions with GK company and the agency agreement subsequently terminates for whatever reason and Mr XYZ fails to communicate this to GK Company the law will estopp Mr XYZ should there be any transaction between Mr E and GK Company because there would have been no way GK Company would have known of such termination especially where there was nothing to raise suspicion. See also the case Armagas Ltd v Mundagas SA [21] . Representation may also arise where one person hold out another as his agent. The second element is that the representation must have been made by the principal or supposed principal where no prior agency relationship existed or such authorised person on behalf of the principal otherwise it will not be binding on the principal. See the case of Crabtree-Vickers Property Ltd v Australian Direct Mill Advertising Co Pty Ltd [22] and where it is a company the board of directors will make such representation however there must have been prior actual authority. See the case of Freeman & lockyer v Buckhurst Park Properties(supra) where the court was particular that the agents of a company, who are the board of directors, must have actual authority. The third element is, the third party who is alleging apparent authority must have acted upon such representation [Bradgate 2005 pg 146 4.2] otherwise such third party will not be allowed to plead estoppels. See the case of Rama Corporation v Proved Tin and General Investment Ltd (supra). It will not suffice that some measures had been taken to dispel any agency relationship, as long as the third party was not in any position to have known, such representation will bind the principal. However if the third party had reason to doubt and believes that the agent who is acting outside his power or the supposed agent who had no prior authority is acting without the principal’s delegated authority then estoppel will fail. See the case of Criterion Properties Plc v Stratford UK Properties LLC [23] The law will however not protect a third party who is very aware (see article 84) that there had been no delegation of authority. See the case of Egyptian International Foreign Trade Co v Soplex Wholesale Supplies Ltd [24] It is also important to note that the act of the third party as a result of such representation is such that must have been detrimental. See the case Boulas v Angelopoulos (supra). Where a principal takes reasonable steps to bring to the notice of a third party that an agent is acting outside his authority or where there was no prior agency relationship, such a person is acting without authority, estoppel will fail. However where he fail to do such the agent’s apparent authority will not be affected [25] See the case of Overbrooke Estates Ltd v Glencombe Properties Ltd. [26] Note however that a third party is not obligated to investigate the extent of authority of an agent who is acting within his capacity as an agent with actual authority [Bradgate 2005] especially where nothing would have informed and investigation. See the case Waugh v H B Clifford & Sons [27] but ideally if there are suspicions it is only proper to investigate. See also the case of British Bank of Middle East v Sun Life Assurance Ltd. [28] The Principal will not be bound if the third party is aware that the unauthorised act of the agent is mainly for his own benefit. See the case of Combulk Property Ltd v TNT Management Property Ltd. Where a principal so represent by word or action after the act of an agent who had acted without prior authority or exceeded the limitation of his authority the court will estopp the principal from refusing liability. This is one of the most objective principles of apparent authority a principal who had the option open as to whether or not to take responsibility for an authorised act of an agent should not then be allowed to renege on such implied act. It will be different situation if it had been a prior representation that was acted upon by the third party of which the principal can raise a defence and where the defence is strong and can be proved, for example the third party had been sent two different letter one disclaimer and the other informing him that the agency agreement with the agent had been terminated through a personal delivery to the third party and the third party had failed to read them might escape liability. See the case of Spiro v Lintern [29] , in this case Mr A had directed his wife to put his house under the care of estate agents but instead she had instructed the agents to dispose of the house. Being aware of his wife’s act he had raised no objection. Subsequently interest was shown in the house and he had gone ahead to make some arrangement for the transfer of ownership to the buyers who had already made plans to alter the style of the house when he suddenly raised objection claiming for the first time that his wife and the agent had acted without his authority. The court rejected his argument and held him liable for making a representation which was acted upon by the buyers that his wife had acted with his authority. He was therefore estopped. The Courts acted in order a person should not be allowed to renege from his or her act especially when third parties had innocently acted upon such representation otherwise many contractual agreements will never be completed and it will only make an ass of the legal system defeating the essence for which it stands. Where a Principal feels aggrieved by the act of the agent or supposed agent he may only seek damages from the party that has wronged him and not the innocent third party who had acted on the representation by the principal that the agent had actual authority of some sort to act on his behalf.

In the word of Diplock LJ in the case of Freeman & Lockyer v Buckhurst Park Properties “…actual authority and apparent authority may coexist and coincide …” one might wonder how this is possible but from the nature of actual and apparent authority this is not difficult to understand or imagine. Apparent authority by its nature can enlarge an already existing actual authority [Sealey & Hooley, 2009 pg 120]. Let me paint a scenario. A gives C an estate agent authority and consent to collect rent on his behalf after every six months. A bring an interested tenant who is interested in the property and aware of the six months payment plan to C and tell the interested tenant: this is my agent he shall be dealing with the property on my behalf. Whatever documentation there is to be done to lease the property to you he shall be doing that. If you have any problem or complain communicate to him and he shall be getting the information back to me. I do not like dealing with tenants directly. By A’s word and action he has expressly and impliedly represented to the intending tenant that C has actual authority to act on his behalf with regards issues that concerns the property and tenancy agreement. If after the first six months, C demands for 1 year rent and the tenant pay that binds the principal. Now let me go further with the Scenario. A has a misunderstanding with C and terminates the contract. A not aware of C’s action desires to re possess his property from the tenant. He would be estopped. Why is this so, after all he had not collected the rent and he was not aware of the act of the agent? The answer is simple his representation to the tenant had informed the decision of the tenant to pay the rent of one year to the agent. There had been no suspicious situation to doubt the agent especially when annual payment is not illegal. His representation had created an agency of estoppel (apparent authority in the agent) See the case of Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd (supra). As I earlier pointed out it will not matter that the C collects the money after the agency had been terminated as long as the tenant was not aware it will still binds.

CONCLUSION

As pointed out in the case of Freeman & Lockyer v Buckhurst Park Properties (supra). Actual authority and apparent authority can exist one independent of the other. However, more often than not the scenario allows for coexistence, in some cases apparent authority exceeding actual authority. This is more often found in company appointments of Directors and Managers where authority is most times express and implied authority with some apparent authority accompanying such appointment because it is expected that the holder of such office is to do all that entails and comes with such appointment which in most times is incidental. See the case of Hely-Hutschinson v Brayhead Ltd (supra) and Freeman & Lockyer v Buckhurst Park Properties. In my opinion the reason may be because it involves three parties thinking and analysing situations independent of the other and how far can a contractual agreement cover all to avoid future misunderstanding? This is to be imagined. In most situations apparent authority arises out of no deliberate act of the principal, agent or third party, to cause coarse. This is not to say there are no deliberate unauthorised acts, some even fraudulent but it seems safe to blame it more on negligence. That said, should a third party then be made to the pay the price for the negligence in most cases of the principal or agent? I do not think so, however I am of the opinion that where an agent has acted without authority especially where his authority has been specifically defined and the representation of the principle had been done out of negligence the agent should liable to the third party for his act. Should an innocent principal who had taken to pain to expressly inform an agent of his responsibilities or gone through the stress of severing his relationship with the agent now be made to suffer for the act of an agent who had gone on a frolic of his own? I do not think so. However when we thinks of the innocent third party who had gone into a relationship with the agent because of the principal’s representation one becomes in between the devil and the deep blue sea.

I conclude by saying although the law has to an extent has adequately taken care of actual and apparent authority but is there no need to create more severe punishment as a deterrent to erring agents who deliberately act outside their authority? I leave that for debate.