Chapter Two: Agency
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Agency
Principal
Agent
Third Party
Relationships between:
•Agents and Principals.
•Agents and the Third Parties
•Principals and the Third Parties
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Agency
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Agency  Commercial Law
contractual or quasi-contractual
tripartite set of relationships
A principal explicitly or implicitly,
authorises the agent to work under his
control and on his behalf.
Agent acts on behalf of Principal  to
create a legal relationship  a Third
Party.
 negotiate contractual relationship.
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The Concept:
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Rights + liabilities of a Principal + an Agent
 reflect commercial needs & legal
realities.
In any business:
 one person to maintain a growing business.
 A corporation is a fictitious legal person
Hence, independent people are contracted by
businesses to act on behalf of them.
Principals are liable under the contracts made
by the Agent So long as the Agent
followed the instructions
Result  the same deal as if the Principal had
done it directly.
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Innocent Third Parties  approached by an
ostensible agent. Third party deals in good
faith relying on the representation of
authority.
In commercial world  it is not cost-effective
to check that everyone has the authority to act
for another actually has that authority.
If it appears later that the alleged agent was
acting without the consent of the Principal
the Agent will usually be held liable.
This commercial necessity has led the creation
of a body of law (Agency)
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Principal
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Principal is a “person, fictitious or otherwise,
who authorises an agent to act to create one
or more legal relationships with a third
party”.
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Merchants  professionals  trade  profit.
 A wholesale merchants between producer
and retail merchants.
 A retail merchant or retailor
A merchant classified in pre-modern
societies.
 High (achieving titles like merchant prince)
 Low, such as in Chinese culture, profiting
from "mere" trade
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In the US, "merchant" is defined as “any person
while engaged in a business or profession” or “a
seller who deals regularly in the type of goods
sold.”
A merchant account is a special account to allow
a business to accept credit cards + other forms of
payment cards.
Businessperson  businessman or businesswoman 
generic term for “someone who is employed at,
usually, a profit-oriented enterprise, or involved
in the manegement of a company.”
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Agent
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Agent is a “person who is authorised to act on behalf
of the principal to create a legal relationship with a
third party”.
Classes of Agents:
Universal agent holds  broad authority
 e.g.  power of attorney  (is a legal document
whereby a person gives another the power to take
decisions with regard to their financial affairs and/or
their health and personal welfare)
or professional relationship as lawyer with client
General agent holds  limited authority
 conduct a series of transactions over a continuous
period of time
Special agent is authorised to conduct either a
 single transaction or
 a specified series of transactions over a limited
period of time.
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The Authority of the Agent
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The Principal's words or conduct 
reasonably cause the Agent to
believe that he is authorised to act.
 Expressed in a contract
 Implied by words or acts 
reasonable for the person to
assume the power of an agent.
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First: Actual Authority:
1.
2.
3.
If it is clear the Principal gave actual
authority  all agent's actions will bind
the Principal.
 If the Agent acts fraudulently for his own
benefit  will bind the Principal unless
the third party was aware.
If there is no contract but the Principal's
words or conduct reasonably led the third
party to believe that the Agent was
authorised to act then the Principal will be
bound. (take care of the customer)
If what the Agent proposes to do is
reasonably necessary to accomplish an
actually authorised transaction, then the
Principal will be bound.
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Second: Apparent or
Ostensible Authority
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1.
2.
If the Principal's words or conduct leads a reasonable
person in the Third Party’s position to believe that
the Agent was authorised to act
Appointing the Agent to a position which carries
with it agency-like powers
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Those who know of the appointment  entitled to
assume apparent authority  of occupying such a
position.
If a Principal creates the impression that an Agent is
authorised but there is no actual authority, (complement
of the agent for his previous deals)
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Third parties are protected so long as they have
acted reasonably  "Agency by Estoppel"  the
Principal cannot deny the grant of authority if
third parties have changed their positions in
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reliance on the representations made.
Agency by Estoppelِِِِِ
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“Legally binding agency relationship that may
arise where, in fact, no formal agency
agreement is in effect. A principal may give an
appearance of agency relationship. In such
cases, the existence of an agency may be
presumed, and the principal may be bound by
the acts of the agent performed on the
principal's behalf.”
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Third: Authority by Virtue of
a Position Held
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1.
2.
3.
The purpose is to deter fraud and other harms to
individuals dealing with agents
Partners have apparent authority to bind the other
partners in the firm
 Joint and several liabilities
Corporations  executives and senior employees
with decision-making authority by virtue of their
declared position  have apparent authority to bind
the corporation. (even if there is no authority)
The Principal may implicitly or explicitly ratify a
transaction and accept liability
 e.g. the principal failure to notify third parties of
the Agent's lack of authority  is an implied
ratification to those transactions +++ an implied
grant of authority for future transactions of a
similar nature.
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Liabilities:
 First:
Liability of Principal to
Agent:
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The Agent acts within  the actual
authority  the Principal must
indemnify the Agent for payments
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made during the course of the relationship
expressly authorised or
merely necessary in promoting the
Principal’s business
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Second: Liability of Agent to
Principal:
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Agent acts without (actual)
authority  +++ the Principal is
bound towards  third party.
In this case, the Agent (has
apparent authority)  is liable
to indemnify the Principal for any
resulting loss or damage.
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Third: Liability of Agent and
Principal to Third Party:
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Principal Liability:
The Agent has (actual or apparent) authority
 will not have liability  so long as
1. The transactions agreed within the
authority
2. The agency was revealed
3. The identity of the Principal was revealed
Agent Liability:
The Principal is not bound if the Agent has no
authority
The ostensible Agent is liable to the Third
Party for breach of the implied warranty of
authority.
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Duties:
First: Principal Duties:
Must make a full disclosure of all
information relevant to the
transactions  the Agent is
authorised to negotiate
 Pay the Agent either a prearranged
commission, or a reasonable fee
established after the fact.
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Second: Agent Duties:
Loyalty to the Principal  involves:
1. Not to accept new obligations that are
inconsistent with the duties owed to the
Principal.
 Agents can represent more than one Principal
(conflicting or potentially conflicting) only with
 full and timely disclosure
 where the different agencies are based on a
limited form of authority to prevent a
situation where the Agent's loyalty to any one
of the Principals is compromised.
 Agreement  Principal + Agent may  identify
specific types of activities that will not breach
the loyalty  (activities) will bind the
Principals.
2.Not to make a private profit or unjustly enrich
himself from the agency relationship.
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Termination:
An Agent's authority can be terminated at any time
 The Indian Contract Act  a variety of ways:
1. The business of agency being completed
2. By the agent  renouncing the business of agency
3. By the principal being adjudicated insolvent
4. By the principal revoking the agency –
 However, principal cannot revoke an agency
coupled with interest of the agent in the
subject-matter of the agency
 e.g., where the goods are consigned to an agent
for sale, to recoup himself from the sale
proceeds,  in such a case, the principal
cannot revoke the agent’s authority till the
goods are actually sold.
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Principal cannot revoke the agent’s authority after it has been
partly exercised
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Fixed Period Agency: the principal and the agent
cannot terminate the agency before the time
expired, except for sufficient cause.
 disobedience of lawful orders, and rude or
insulting behaviour has been held to be sufficient
cause.
 Reasonable notice has to be given by one party to
the other.
 If any of them terminated before time  will be
liable to compensate the other for the loss caused
to him.
The termination takes effect to the agent from the
time it becomes known to him === the same to third
party, until the termination is known to them.
The revocation or renunciation of an agency may be
made expressly or impliedly by conduct.
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Agency and Partnership:
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States are not consistent on the nature of a
partnership.
Some states opt for the partnership natural
persons  joined the firm.
 In English law, a partner is the agent of the
other partners
Others treat the partnership as a business entity
 vest the partnership with a separate legal
personality.
 In Scots law a partner is the agent of the
partnership.
In English law a partner who acts within the
scope of his authority will bind the partners 
even if that implied authority has been revoked
or limited  unless the Third Party knows that
the authority has been compromised 
(notice of the limitation)
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The other partners or the firm (Principal) and Third Parties are
entitled to assume that the Principal has been informed of all
relevant information.
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Problems  when one partner acts fraudulently
or negligently and causes loss to clients of the
firm.
If the partner is acting against the interests of
the firm  There is more likely to be liability
in tort (to third party)
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In most states, a distinction is drawn between (knowledge of
the firm's general business activities) and the (confidential
affairs) as they affect one client.
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in most jurisdictions, the Third Party can sue
the partnership or the individual partners 
their liability is joint and several.
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Brokerage
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Brokerage is considered as a division in
commercial law.
Brokers proceed to bring parties together in
order to reach an agreement.
 He is not a party in the transaction
Broker mediates between individuals or
corporations for a commission to be paid from
the proceeds of the contract.
 If the transaction is not reached, the
broker would not receive a commission.
Broker does not conclude the deal on behalf
of his client
He is not responsible for the implementation
of the contract (no liability)
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