Agency relationship Essay
Agency is a fiduciary relationship created by express or implied contract or by law, in which one party (the agent) may act on behalf of another party (the principal) and bind that other party by words and/or actions. The etymology of the word agent or agency says much. The words are derived from the Latin verb ago, agere (the respective noun agens, agentis). The word denotes one who acts, a doer, force or power that accomplishes things.1 Agency is the exception to the doctrine of privity under the law of contract.
2. LIABILITY OF A PRINCIPAL AGAINST THIRD PARTIES
Lord Alverstone CJ in THE QUEEN V KANE2 defined an agent simply as ‘any person who happens to act on behalf of another’. A principal is one who authorizes another to act on his or her behalf as an agent.
The general rule is that where an agent makes a contract on behalf of his principal, the contract is between the principal and the third party and prima facie at common law, the only person who can sue and be sued on the contract is the principal. The agent acquires no rights under the contract, nor does he incur any obligation. Having performed his task by bringing about a contract between his principal and a third party, the agent drops out of the picture subject to any outstanding matters between him and principal.3 The onus is on the person alleging that he entered into a contract with another person through an agent to prove that in fact the agent was acting as such. Agents of the state can never be personally liable for the state’s failure to perform a contractual obligation as stated in STICKROSE (PTY) LIMITED V THE PERMANENT SECRETARY MINISTRY OF FINANCE
4. In law, agents are recognized as having the power to affect the legal rights, liabilities and relationships of the principal. In CAVMONT MERCHANT BANK v AMAKA AGRICULTURAL HOLDINGS5, the Supreme Court held that where an agent in making the contract discloses both the interest and the names of the principal on whose behalf he purports to make a contract, the agent as a general rule is not liable to the other contracting party. Apart from having the power to affect the legal rights, liabilities and relationships of the principal, the agent may also affect the legal position of his principal in other ways. For instance, he may dispose of the principal’s property in order to transfer ownership to a third party or he may acquire property on his principal’s behalf. Sometimes the actions of the agent may make the principal criminally liable as illustrated in the case of GARDENER v ACKEROYD
6. The rights and liabilities of principal and agent against third parties may differ according to whether the agency is disclosed or undisclosed. The distinction between disclosed and disclosed agency is important as it affects the principal’s ability to ratify the agent’s actions. Furthermore, the agent’s liability to third parties may depend on whether the agency was disclosed or not. Agency is disclosed where the agent reveals that he is acting as an agent; if the agency is disclosed it is of no legal significance that the principal is not named. If an agent contracts with a third party without disclosing that he is acting as an agent the agency is undisclosed.
7 An undisclosed principal can intervene on the contracts of an agent within his actual authority.
Where an agent makes a contract disclosing the agency, the normal rule is that a direct contractual relationship is created between the principal and the third party and either party can sue the other on the contract. It is important to note that only a disclosed principal can ratify an unauthorised contract. In KEIGHLEY MAXTED v DURANT8 a principal authorized an agent to buy wheat at a given price in the joint names of the principal and the agent. Having failed to purchase wheat at that higher price, the agent bought wheat in his own name at a higher price. The principal being satisfied with this act purportedly ratified the wheat purchase agreement at a higher price but failed to take delivery of the wheat.
The seller then sued the principal arguing that the sale contract had been ratified. It was held that the action could not succeed because the agent’s act was unauthorized and since the principal’s identity had not been disclosed to the sellor, the principal could not ratify and consequently was not liable on the contract. Where the principal is disclosed, he and not the agent is liable on the contract and may sue and be sued. In GADD v HOUGHTON & CO.9 Houghton & Co. sold to the buyers Gadd, a quantity of oranges under a ‘sold note’ which stated, inter alia, that ‘we have this day sold to you on account of James Morand & Co ….’ and signed ‘Houghton & Co.’ The seller having failed to deliver the oranges, the buyer sued Houghton & Co for damages for non-delivery. The action failed, since by the words of the sold note Houghton & Co had clearly indicated that they were not to be personally liable.
They were merely brokers. Lord Mellish stated that “where you find a person in the body of the instrument treating himself as the seller or character, you can say that he intended to bind himself.” In SUI YIN KWAN & ANOTHER v EASTERN INSURANCE CO. LTD10 it was held that the doctrine of undisclosed principal applied. Where an agent acts within his actual authority the undisclosed principal may intervene and acquire the rights/liabilities of the agent. In this case, the agents acted within their actual authority and therefore, the relatives could recover from the insurance company.
Lord Lloyd summarized the law as follows: (1) an undisclosed principal may sue and be sued on a contract made by an agent on his behalf, acting within the scope of his actual authority. (2) In entering into the contract, the agent must intend to act on the principal’s behalf. (3) The agent of an undisclosed principal may also sue and be sued on the contract. (4) Any defence which the third party may have against the agent is available against his principal. (5) The terms of the contract may, expressly or by implication, exclude the principal’s right to sue, and his liability to be sued. The contract itself, or the circumstances surrounding the contract, may show that the agent is the true and only principal.
Sometimes the agent contracts with third parties after disclosing the fact, that he is an agent but without disclosing the name of his principal. In such cases, the principal is bound by the contracts made on his behalf. And thus, the principal is liable to third parties for his agent’s acts done on behalf of the principal. However, such acts must be within the scope of the agent’s authority, and the unnamed principal must be in existence at the time of contract. As a matter of fact, when the agent contracts after disclosing his representative character, the contract will be the contract of the principal. For all such acts, the agent is not personally liable. However, the agent is personally liable if he declines to disclose the identity of the principal when asked by the third parties.
11 When there is undisclosed agency, the contract is initially between agent and the third party and each may enforce the contract against the other. However, if the third party later discovers the principal’s existence, he may enforce the contract against either the agent or the principal. Provided that the agent acted within the scope of his actual authority, the principal can intervene and enforce the contract against the third party.
3. CIRCUMSTANCES WHEN AN AGENT MAY BE HELD PERSONALLY LIABLE If an agent continues to act after his authority has been terminated, he may incur personal liability for breach of implied warranty of authority. Sometimes an agent may suffer a potential risk when his authority is terminated automatically without his knowledge. In the case of YONGE v TOYNBEE13 where solicitors were acting in litigation for a client who, unknown to them, became mentally incapacitated so that the agency was considered to be terminated. However, they continued to litigate for the client and were held liable for their breach of warrant of authority and were ordered to pay the costs of the other litigant.
There are three exceptional cases where the undisclosed principal cannot sue or be sued, by the third party. The first is where the contract between the agent and the third party expressly provides that the agent is the sole principal U.K MUTUAL STEAMSHIP ASSURANCE ASSOCIATION v NEVILL14. The second is where the terms of the contract are inconsistent with agency. In HUMBLE v HUNTER15, an agent signed a charter-party in his own name and described himself as “owner” of the ship. It was held that his undisclosed principal could not sue.
The third case where an undisclosed principal cannot sue is where the identity of the principal is material to the third party. One such case is where the contract made between the agent and the third party is too personal to permit an undisclosed principal to intervene, for example, contracts for personal service. In the case of SAID v BUTT16, a theatre critic knew the management of a particular theatre would not sell him a ticket because of articles he had written. He obtained a ticket through an agent. It was held that the theatre could prevent the principal from entering the theatre. McCardie J said that “the critic could not assert a right as an undisclosed principal since, as he knew, the theatre was not willing to contract with him”.
Even where the undisclosed principal’s existence is discovered, the agent remains liable on the contract and the third party may choose to enforce the contract against either principal or the agent but not both. This is known as the right of election. A third party has an elective right to sue either the agent or the principal where the agent does not disclose the principal. In BOYTER V THOMSON17 the seller instructed agents to sell on his behalf a cabin cruiser under a brokerage and agency agreement. The buyer purchased the boat thinking it was owned by the agents and he was not told that the agents were acting as such nor the name of the owner nor that the owner was not selling in the course of a business although he was aware that the boat was being sold under a brokerage arrangement.
The boat proved to be unseaworthy and was unfit for the purpose for which she was purchased. The buyer sued the seller for damages which were granted. The seller appealed to the House of Lords where goods were sold by an agent acting in the course of business for an undisclosed principal the buyer was entitled to sue not only the agent but also the principal. Once the third party elects to sue one party, his option to sue the other is extinguished. However, not any action by the third party suggesting action against one party in preference for another will be construed as the exercise of the right of election. In CURTIS v WILLIAMSON18, one Boulton appearing to act on his own behalf purchased some gunpowder from the plaintiff. Later, the plaintiff discovered that Boutlton was acting on behalf of an undisclosed principal, the defendant mine owners.
Boulton then filed a petition of liquidation and the plaintiff filed an affidavit in those proceedings in an attempt to recover the debt owed for the gunpowder. However, the plaintiff changed their mind and sued the defendant principal. It was held that once an undisclosed principal is discovered the third party may elect to sue that principal; and secondly, that the filing of the affidavit against the agent did not prevent the action against the principal. The third party will not be bound by an election unless he has unequivocally indicated his intention to hold one party liable and release the other. The doctrine of the undisclosed principal exists for purposes of commercial convenience, it is important to maintain protections for the third party. In the situation where the agent has failed to pass the payment to the third party, either the principal or the third party will lose and it seems fairest to place the loss on the principal.19
4. HOW AGENCY MAY BE DETERMINED
As the relationship between the agent and his principal is based on consent, actual authority is of paramount importance. An agent is only entitled to be paid if he acts within his actual authority. If he acts outside his authority he may be liable to his principal. The relationship between the principal and a third party depends on the agent’s power to bind his principal. However, what is of concern to the third party is the agent’s apparent authority as this is what he relies on in the ordinary course of events. There are several types of authority. These are: a) Express Authority – the agreement between a principal and agent may be express or implied. Express agreement may be made orally, in writing or by deed. In general, if an agent is appointed to execute a deed his appointment is by deed called a power of attorney. b) Implied Authority arises where, although a particular action is not sanctioned by express agreement between the principal and the agent, the principal is nevertheless taken to have impliedly consented to the action or transaction in question.
In GARNAC GRAIN CO. v H.M.F. FAURE AND FAIRCLOUGH20 the House of Lords stated that “the relationship of principal and agent can only be established by the consent of the principal and agent. They will be taken to have consented if they have agreed to what amounts at law as a relationship even if they do not recognize it themselves and even if they have professed to disclaim it. An agent who has express authority to carry out a particular task may also have additional authority to do certain acts incidental to his authorized task For instance, an agent authorized to sell the principal’s property has implied incidental authority to sign a contract of sale.” c) Apparent Authority – a person may be bound by the acts of another done on his behalf without his consent or even in breach of an express prohibition if his words or conduct create the impression that he has authorized the other person to act on his behalf.
This is described at law as “apparent agency or authority” or “ostensible agency or authority”. The distinction between actual and apparent authority was explained by Diplock L.J. in FREEMAN & LOCKYER V. BUCKHURST PARK PROPERTIES21. “Apparent” or “ostensible” authority, 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 on 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 on him by such contract.
To the relationship so created the agent is a stranger. He need not be (although he generally is) aware of the existence of the representation. The representation, when acted on by the contractor by entering into a contract with the agent, 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.
d) Agents of Necessity – A person who acts in an emergency, for instance, to preserve the property or interest of another may be treated as an agent of necessity. His actions will be deemed to have been authorized even if no actual authority is given. Like apparent authority, an agency of necessity can arise even in the absence of consent from the principal. Agency of necessity only arises in extreme circumstances where there is actual and definite commercial necessity for the agent’s actions. The following must be satisfied for an agency of necessity to exist:
(i) There must be an emergency – something unforeseen.
(ii) It must be practically impossible to get instructions for the principal. (iii) The agent must act bona fide in the interest of the principal rather than to advance his own interests. He must not take advantage of the principal. (iv) The agent must act reasonably in the circumstances.
e) Agency arising out of Co-habitation – It is argued that a wife has authority to pledge the credit of her husband for necessities (or vice versa). However, others argue that social conditions now make it old fashioned to suggest that actual or apparent authority should not arise between husband and wife.
The law recognizes the following as agents even though they do not bear the title of agent22: (a) Company Directors and other company officials – being an artificial person, a company has to act through human agents. Then authority to act as company agents is vested in the board of directors. This authority may be delegated to one or more executive directors by the articles of the company to allow him to manage the day-to-day operations of the company. (b) Partnerships – as a partnership has no separate legal identity from its members, every partner in a firm is an agent of the firm as well as all other partners for the purpose of the business of the firm.
Thus, a partner who performs an act for the purpose of carrying out the business of the firm, binds the firm as well as the other partners. (c) Employees – may be servants working under a contract of service or an independent contractor working under a contract for services. An employee e.g. a shop assistant is the agent of the shop owner for the purposes of making a contract of sale for the owner. He has the authority to make statements about goods that are binding on the shop owner, his employer. (d) Professionals – acting on behalf of clients may be the agents of those clients. E.g. a lawyer conducting litigation is his client’s agent and may have authority to settle the case and that settlement will bind the client. Thus the lawyer, not the client, normally signs a consent judgment. Similarly, an accountant’s agreement or statement to ZRA will bind his client in accordance with agency principles.
The relationship between principal and agent depends on consent. If withdrawn, the agency will automatically end, as well as the agent’s actual authority to bind the principal. An agency relationship may be terminated in the following ways: (a) By mutual consent between the agent and the principal.
(b) By either party unilaterally withdrawing consent.
(c) An agent may have been appointed for a fixed period of time or for a specific task or set of tasks. Once the time elapses or the task(s) is/are completed the agency will terminate. (d) By operation of law e.g. if the performance of the agency relationship becomes illegal (e.g. one party becomes the citizen of an alien enemy) or impossible (where it will be ended by the agency contract being frustrated). Death of either party will also terminate the agency and any contract made between them. If an agent becomes insane, the relationship is automatically terminated. The bankruptcy of either the agent or the principal will also end the agency.23
The Effect of Termination vis a vis Third Parties
The agent may continue to have apparent authority even if actual authority has been terminated. If the principal’s conduct is such as to suggest to a third party that the agent continues to have authority. Until the principal brings the termination of the agent’s authority to the notice of a third party, the agent may continue to have apparent authority on the strength of the principal’s representation. DREW v NUNN24 the principal became insane but his wife, who was his agent, continued to act in his name. When he recovered from his insanity he tried to disclaim liability for acts done by his wife during his insanity/incapacity. Held: The agent i.e. his wife, had apparent authority and therefore he was bound. However, where an agent’s actual authority is terminated by the principal’s death or bankruptcy the agent will automatically cease to have apparent authority.