Powers and Liabilities Between Agent and Principal

Agency is a tri-parte relationship between an agent, his principal and third party. Whilst the vast majority of agency relationships are governed by a contract, there is a small group of relationships which arise from necessity e.g. Enduring Power of Attorney, salvage of goods at sea [1] etc.

Arguably, the terms agent and agency are the most misused and misunderstood [2] in a commercial setting. It is further complicated by the fact that there are no formal requirements to form an agency relationship, and the existence of agency can be inferred from the facts, even if parties explicitly excluded it [3] . What is however common to all agency arrangements, whether contractual, consensual or of necessity, is that the agent’s power to create, or alter, principal’s legal relationship with third parties [4] . An agent’s wide powers are the main reason why, apart from contractual duties [5] , an agent owes his principal fiduciary duties and ‘…single-minded loyalty…’ [6] . In the absence of additional fiduciary duties, a balance of power would be skewed strongly in favour of an agent whilst offering, if any, only contractual protection for a principal. It is not unlikely that, unfavourable risk/reward ratio would discourage principals from using agents what would stifle economic growth.

PROTECTION OF THIRD PARTIES

In a disclosed agency setting, third parties, from the outset are aware of the existence of principal and intend to contract with him. In those circumstances an agent is merely a facilitator who ‘drops out of the picture’ once the contract has been concluded. It is however not uncommon for an agent to exceed his authority or even to falsely purport that he has one. In those circumstances a policy decision has to be made whether a third party’s or a principal’s interest should be protected. If the choice is made to afford greater weight to a principal’s interests, it may appear that it is an indirect invitation for the principal to appoint negligent agents. Conversely, if a greater weight is given to third parties than to principals interests’, principals are indirectly required to appoint fit and proper agents. A failure to comply will burden the principal with unwanted and costly consequences of his decision. As principals have choice over appointment and vetting of agents, it naturally follows that they should be burdened with consequences of agents’ conduct. From a practical point of view it is unreasonable to expect a third party to enquire into a scope of agent authority. To permit such approach would stifle economic growth and place unbearable burden on innocent third parties. It is highly impractical and costly, both in terms of money and time, to expect e.g. directors of two limited companies to enquire into each other’s authorities to bind their respective companies.

This policy decision can denotes the doctrine of apparent authority. It has been argued that apparent authority is not a real authority; it is rather ‘appearance of authority’ to third parties. Whether apparent authority is branded as a ‘real authority’ or not, its consequences to innocent third parties are enormous as they can rely on appearance, rather than make detailed investigation into a representator’s authority. It is due to representation [7] , [8] made by principal, or a person authorised by him, subsequent reliance (not necessarily detrimental [9] ) and alteration of position [10] , apparent authority is also called agency by estoppel. Should a court find an existence of such agency, a principal is estopped from denying that an agent had authority to alter his relationship with third parties e.g. enter into a contract.

Agency by estoppel may arise in various ways:

i) A principal may represent that agent has authority when he has not. In Barrett v Deere [11] a third party made a payment to a person present on the merchant’s premises. It was held that ‘…the debtor has a right to suppose that the tradesman has the control of his own premises…’ hence the payment made to the individual discharged the debt owed to the merchant.

ii) The principal may represent that authority continue after it has been withdrawn or expired. Actual authority is conferred upon an agent by a principal who, at the time of doing so, must possess capacity to delegate authority to an agent e.g. be of sound mind. Whilst actual authority automatically expires on a principal’s death or insanity, apparent authority can continue until a third party is given a clear notice of expiry [12] or withdrawal. It follows that failure to notify a third party creates representation that agency arrangement continues.

iii) Principal may represent that the authority is greater that it really is. In Todd v Robinson, agent bought goods for his principal on six previous occasions. His authority was however restricted to purchases up to amount of £31. Unbeknown to the seller, an agent made a purchase for £45 and converted the goods. It was held that failure to inform the seller about restriction on agent’s authority amounted to representation that he had unrestricted authority to make purchases. The representation, together with reliance on the seller’s part, invoked doctrine of agency by estoppel and prevented the principal from denying that the agent had right to bind him.

As can be seen from the above the doctrine of apparent authority can arise unexpectedly, without a principal’s knowledge or intention. It offers protection to innocent third parties, at the expense of an unsuspecting principal. Unless restricted, doctrine of apparent authority would be prone to abuse by unscrupulous third party acting for his benefit. It however should be remembered that estoppel is an equitable remedy; hence a third party who wishes to rely on the doctrine of apparent authority must behave in an equitable manner. It must have no notice, or reasonable suspicion [13] that an agent has exceeded his authority [14] , acted fraudulently or clearly contrary [15] to interests of his principal [16] . It is logical that an agent cannot appear to have authority when a third party knows that he has not. It follows that in such circumstances a third party will be prevented from relying on the doctrine and unable to enforce contract.

As apparent authority is an agency by estoppel, and estoppel can be used ‘…as a shield and not as a sword…’ [17] it may be thought that a principal is unable to sue a third party, whilst a third party can sue a principal. This inequality can be addressed by a principal’s subsequent ratification which operates ab initio and is equivalent of antecedent authority [18] .

As can be seen from the above, apparent authority is a very powerful tool in the hands of an innocent third party. Unless creation or operation of such agency is prevented by equity [19] its operation can be invoked and principal compelled to comply with contract entered into by his agent.

PROTECTION OF A PRINCIPAL

In order to counter-balance the principal’s potential exposure and liability caused by his agent actions, an agent owes his principal numerous duties both in equity and in common law. Apart from contractual duties, which may or may not arise for example, as an agency may be gratuitous [20] or one of necessity, further, an agent owes his principal strict equitable duties and ‘…a single-minded loyalty…’ [21] .

If an agency is contractual one, its scope and operation is governed by the contract between an agent and his principal. Nonetheless, common law implies that an agent must carry out his duties promptly [22] , skilfully and with due care [23] , so as to comply with his principal’s lawful instructions [24] , and not exceed his authority [25] , even if he thinks that the action he choose is the best possible in given circumstances [26] . Furthermore, the level of care owed to a principal does not differ, whether an agency is contractual or merely gratuitous [27] .

If an agency is formed under statutory framework e.g. Commercial Agents (Council Directive) Regulations 1993, an agent must ‘…look after the interests of his principal…act dutifully and in good faith…’ [28] . An agent must comply also with the ‘…reasonable instructions given by his principal…’, a duty which is cannot be derogated from [29] .

Apart from statutory and common law duties owed to a principal, an agent also owes his principal equitable duties. It is the existence of fiduciary duties which really protect interests of principals. Fiduciary duties include but are not limited to: i) duty not to allow for conflict of interests to arise, ii) duty to make full and frank disclosure, iii) duty not to take bribes or secret commission iv) duty not to take advantage of its position v)duty not to delegate vi) duty to account. These will be examined in turn.

Duty no to allow for conflict of interests to arise

As agent’s position is one of trust he must avoid any situation which would possibly [30] create a conflict of interest between him and his principal. It has been confirmed in Parker v McKenna that ‘…it is a rule founded on the highest and truest principles of morality…No man can…be allowed to put himself in a position in which his interest and his duty will be in conflict…’ [31] . The duty is strict and is imposed to ensure that agent avoids ‘…temptation not faithfully to perform his duty…’ [32] . If an agent allows conflict of interests to arise e.g. by accepting a payment from a third party, principal is entitled to decline to pay his agent [33] and an agent is unable to obtain damages – ‘…he acts so adversely to his employer that he forfeits all remuneration from his employer…’ [34] . As can be seen from the above, the rule preventing an arise of a possible [35] conflict of interest is strict and is employed as a preventive measure to safeguard interests of principal.

Duty to make full and frank disclosure

An agent is under strict obligation to make a ‘…full and frank disclosure of all material facts…’ [36] which may give rise to conflict of interest. The duty to make full disclosure places burden of proof on agent and demands that the standard of disclosure is higher than in other case – ‘…a statement which would in other cases be constructive notice sufficient to put the party on inquiry will not be sufficient in the case of principal and agent…’ [37]

Duty not to take advantage of his position

Agent is under strict duty not to take advantage his position. Should he fail to comply, any profit he makes from the breach will be treated as belonging to principal [38] . Furthermore, as the profit will be held in trust for principal [39] , it will be safeguarded from other creditors in case of agent’s insolvency. The doctrine extends beyond use of goods, plants and machinery and includes unauthorised use of privileged or confidential information [40] .

Duty not to accept bribes or secret commission

An agent is prohibited from accepting bribe or secret commission [41] from a third party. Should he accept either, it will be presumed that the bribe was given to ensure that an agent betrays his principal, and acts contrary to his interest. Court will disregard motives and irrebuttably presume [42] that the bribe influenced an agent.

The extremity of protection offered to principals can be seen in the Privy Council decision in A-G of Hong Kong v Reid [43] , where the old doctrine that an agent in receipt of bribes was, a mere debtor [44] was rejected. It was held that ‘…the bribe and the property from time to time representing the bribe are held on a constructive trust for the person injured…’ [45] . The fact that a bribe is held in trust for a principal clearly shows that principal’s interest are safeguarded to the highest possible level, and given priority over all other creditors. The judgment in A-G of Hong Kong v Reid was approved by the Court of Appeal in Daraydan Holdings Ltd V Solland International Ltd where Lawrence Collins J confirmed that ‘…There is no injustice to the creditors in their not sharing in an asset…which the fiduciary should not have had…’ [46]

Duty not to delegate

As a result of a fiduciary relationship between agent and principal, and in the absence of contractual arrangements to the contrary, the former cannot delegate his duties to sub-agent, unless principal consents [47] or it is customary [48] to do so.

As can be seen from the above interests of principals are protected in both common law and equity. Even if an agency setting lacks contractual underpinning, equity protects principal’s interests and ensures that his agent acts with the highest possible degree of fitness and propriety. Should an agent fail below the level expected from fiduciary, courts have wide remedies at their disposal and, as shown above, are willing to protect principals from incompetent or dishonest agents and consequences of their misfeasance.

Protection of an agent

The rights enjoyed by an agent against his principal, in comparison with rights of principal against his agent are very limited and qualified. Agent’s rights against his principal include: i) right to earn commission, ii) right to be indemnified and iii) right to exercise lien over his principal’s goods.

An agent has a right to earn contractual commission either conditional upon some event taking place, or on quantum meruit if contract so provides. If payment of commission is conditional, the event must have taken place, or agent is entitled to nothing [49] as ‘…there appears to be no halfway house and it matters not that the plaintiff proves expenditure of time, money and skill…’ [50] Furthermore an agent must show that he is the ‘effective cause’ [51] e.g. that he caused principal’s alteration of position.

An agent also enjoys the implied [52] right to be reimbursed for expenses he incurred as well as right to be indemnified against losses and liabilities. This rule is however restricted by two factors. Principal is not obliged to indemnify agent in respect of expenditure incurred outside of scope of his authority [53] , and can decline to indemnify an agent who incurred expenditure through his fault [54] .

It has been confirmed by Lloyd J in The Ijaola that agent has right to exercise lien over principal’s goods which can be used to discharge payment of commission and/or indemnity [55] .

Conclusion

As can be seen from the above there is a very strong, policy driven, imbalance between rights of agent and those of principal. It appears that this imbalance attempts to address imbalance of consequences which parties may suffer. If for instance an agent acts beyond scope of his actual authority, but within apparent authority, the consequences of his action befall on innocent principal. It follows that in order to discourage an agent endangering interests of his principal, fear of substantial liability must be constantly present in agent’s mind.

Third parties also enjoy wide protection, cost of which is placed at principal’s doors. In the absence of notice of agent’s wrongdoing, third party can invoke doctrine of apparent authority and compel innocent principal to comply with terms of contract he may have not authorised and which is detrimental to his interests.

It appears that the law of agency is burdened with uneasy choice of balancing conflicting interests off all parties. It attempts to ensure that concept of agency is workable in practice and promotes economic growth without placing undue burden on innocent party.