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1
Introduction to Agency Law
The law of agency is concerned with the activities of three characters:1 an agent who acts on behalf of a principal or client in dealing with a third party. If these three characters are visualised as standing at the points of a triangle, then the sides of that triangle represent the legal relationships between the parties. This in turn serves to emphasise an important truth, namely, that the law of agency deals, not just with one legal relationship (that of principal and agent), but with all three.
There is indeed something to be said for the view that the most important aspect of agency law is the relationship between the principal and the third party. After all, the primary purpose of appointing an agent is to permit the principal to enter into transactions with third parties, without necessarily having to act in person. The fundamental question which has to be addressed, therefore, is how far the agent’s acts are to be regarded as equivalent to acts carried out personally by the principal. Other questions (such as the agent’s legal position vis-à-vis the principal and the third party) are also important, but they may perhaps be regarded as ancillary to the central issue.
Some idea of the kind of legal problems with which the law of agency deals may be obtained by considering the following hypothetical situations, each of which concerns an agent representing a principal in dealing with a third party:
• The agent fulfils the principal’s instructions to the letter, making the existence of the agency clear to the third party. Here a legal relationship comes into existence between the principal and the third party; the agent drops out of the picture, reappearing only to claim from the principal whatever is due under the agency agreement.
• The agent again makes a contract with the third party, but this time exceeds whatever authority has been given by the principal. Here the principal, who is not bound by the agent’s acts, can effectively disclaim all liability on this contract. If the third party is to obtain any form of redress, this can only come from the agent.
• There are some circumstances, which will be explained later, where the principal can be legally bound by acts of the agent which have not been expressly authorised; indeed, they may have been specifically prohibited. In such a case, the principal, whose legal position vis-à-vis the third party has been wrongfully altered, may take action against the agent for breach of duty.
Agency and authority
If any one concept may be singled out as central to the law of agency, it is surely that of ‘authority’. The scope of the authority given by the principal to an agent is crucial in determining whether or not the third party can hold the principal responsible for what the agent has done. It is also of great importance in deciding whether or not the agent is in breach of duty towards the principal. Again, where the potential personal liability of the agent towards a third party is in issue, the scope of the agent’s authority is an important factor to be considered.
In recognising the importance of authority, it is vital to appreciate that the word takes on different shades of meaning in different contexts. As far as the third party is concerned, any act of the agent which is binding upon the principal may be said to have been ‘authorised’ in one way or another. In considering the agent’s position, however, ‘authority’ bears a much more restricted meaning; an agent’s primary duty is that of obedience to the principal, whose express instructions (as properly interpreted and with any appropriate implications) are paramount.
The first part of this chapter is concerned to identify the various kinds of authority which an agent may possess. As will be seen, these are not all conferred by the principal in any direct sense; they may arise by implication from the parties’ actions, or even by operation of law. It is thus important that the types of authority, and the differences between them, are fully understood.
Express authority
Agency is a consensual relationship; indeed, it arises most commonly out of a contract entered into between an agent and a principal, under which the agent agrees to perform certain tasks in return for some reward. Even where there is no contract in the full legal sense, as where the agent undertakes to do something for nothing, most (though not all) of the normal incidents of the agency relationship will be present.
Where agency is based on a contract, it is subject to all the general rules of law which govern the validity of a contract, such as fraud, misrepresentation, mistake or illegality. In particular, persons such as minors or the mentally incompetent, whose capacity to make contracts is legally restricted, may only appoint agents to carry out such transactions as they could enter into for themselves,2 and cannot in any event execute a valid power of attorney (that is, a deed conferring powers on an agent).3 Furthermore, an agent’s authority will be automatically terminated if an initially sane principal becomes mentally incompetent, although the third party may continue to rely upon the appearance of authority until notified of the principal’s condition.4
Surprisingly, perhaps, an agent who lacks contractual capacity may still bring about a binding contract between the principal and a third party. In such circumstances, however, the agent will not be bound by the contract of agency and will not incur personal responsibility to the third party, in circumstances where an agent of full capacity would do so.5
As to the form of a contract of agency, the general principle is that, apart from certain statutes which require an agent’s appointment to be by deed6 or in writing,7 no specific formalities are necessary. Thus an agent instructed to execute a contract, which must itself be in writing, may be validly appointed by word of mouth.8 However, an agent who is to execute a deed on behalf of the principal must receive authority to do so in the form of a power of attorney,9 except where the agent executes the deed in the principal’s name and presence and at the principal’s express request.10
The scope of an agent’s express authority naturally depends upon the terms of appointment. Where these are contained in a deed, they will be strictly construed.11 In consequence, general words which appear to confer wide powers upon an agent may well be cut down by special words in another part of the instrument. In Danby v Coutts & Co Ltd,12 for example, the plaintiff appointed by deed two persons to be his attorneys, with authority to borrow money on mortgage. The deed did not limit the duration of these appointments; however, it began with a recital that the plaintiff was going abroad for a time and required an attorney to act for him during his absence. When the two agents fraudulently executed a mortgage of the plaintiff’s property, in order to raise money for their own purposes, it was held that this was not binding upon the plaintiff, since it was executed after the latter had returned to England. The court ruled that the recital governed the operative part of the deed, so as to limit the agents’ powers to the time when the principal was abroad.
Legal interpretation of documents other than deeds is much less strict, far more regard being paid to the surrounding circumstances. As a result, an agent is allowed to exercise a certain amount of discretion for the benefit of the principal, although not to override any express instructions. This principle was applied somewhat generously in Ireland v Livingston,13 where an agent had been instructed to purchase 500 tons of sugar, give or take 50 tons more or less. When the agent found that only 393 tons were available and duly purchased this quantity, the House of Lords held that the transaction lay within the agent’s authority. On the ...
