Corporate and Business Law

AGENCY LAW

Agency is a relationship which exists between two legal persons in which the function of the agent is to form a contract between the principal and a third party

1.     WHO IS AN AGENT

An agent is a person who is empowered to represent another legal party, called the principal, and to bring the principal into a legal relationship with a third party. Any contract entered into is between the principal and the third party each of whom may enforce it. In the normal course of events the agent has no personal rights or liabilities in relation to the contract.

1.1.          Examples of agency relationship

There are many examples of agency relationships. Some of the types of agents include; company directors, partners, factors, brokers, auctioneers, commercial agents among others.

-          Company directors are agents of their company

-          Partners are agents of each other in the partnership

-          Factors – a factor is  person whose job is to sell or buy gods on behalf of another person

-          An auctioneer is an agent authorized to sell property at an auction on behalf of the seller.

-          A broker is an intermediary who arranges contracts in return for commission

2.     FORMATION OF AGENCY

The agency relationship can be created by the following ways;

• Express agreement;
• implied  agreement
• by ratification
• by necessity
• by estoppel

2.1.          Express agreement

This is where the principal expressly appoints the agent. This may be done orally or in writing.

2.2.          Implied agreement

An agency relationship between two people may be implied from their relationship or from their conduct.  For example an employee whose duty is to make contracts for the sale or purchase of goods for his employer may be deemed to be an agent for his employer.

2.3.          Agency by ratification

Ratification is the subsequent adoption of an activity. Ratification occurs whereby a “principal” confirms the prior acts of an agent who at the time of acting did not have the authority to act. The agency relationship is created  retrospectively by the ‘principal’ affirming/approving/ratifying the acts of the ‘agent’.

For ratification to be valid, the following conditions must be present:

1.  the person, who is going to give ratification, must be in existence at the time of the activity. For example, a company cannot validly give ratification to pre-incorporation contracts. Pre-incorporation contracts are made by promoters before a company is incorporated.[1] Kelner v Baxter – the promoters of a company entered into a contract on behalf of the company before it was incorporated to purchase some property.  The seller was not paid. Decision; The promoters were personally liable to the seller since the company did not exist at the time the contract was made. The company could  not therefore ratify the contract.at the time the act was done, the agent must have had a competent principal i.e. the person who ratifies the acts must have had capacity to contract at the time of the activity as well as at the time of ratification.
2. at the time the act was done, the agent must have had a competent principal i.e. the person who ratifies the acts must have had capacity to contract at the time of the activity as well as at the time of ratification.
3. ratification should be given within a reasonable period after the activity. What is reasonable depends upon the nature of the situation.
4. ratification must be absolute i.e the principal must ratify the contract in its entirety. Partial ratification carries no validity;
5.  the fact of ratification must be communicated to all parties in connection with the activity.

The effect of ratification is to back date agent’s authority to act for the principal.

2.4.          Agency by estoppel

Where P makes a representation to a third party, whether by words or by conduct, that A is his agent, and subsequently that third party (T) deals with A as P’s agent in reliance on such representation, P will not be permitted ( is estopped) to deny the existence of the agency if to do such will cause damage to third party.

However, an agency relationship is not formed if it is the ‘agent’ who creates the impression that he has an agency relationship with the ‘principal’

2.5.          Agency by necessity

An agent’s (A) power normally derives from some authority conferred by the principal (P), but this is not necessarily so. In extreme cases, as where P’s property is at imminent risk and A has to take urgent action to save it and is unable to communicate with P or to obtain an adequate response to his request for instructions, the law treats A as an agent of necessity to take the necessary remedial action. A good example is where a master of a ship enters into a salvage agreement with T on behalf of P to save P’s cargo, or where A is in possession of perishables belonging to P and sells them for P’s benefit before they become rotten.

Tus, this form of  agency only arises when;

•       P’s property is entrusted to A
•    an emergency arises making it necessary for A to Act
•  it ispractically impossible for the agent to communicate with the principal before the agent acts of behalf of the principal;
• A acts in the interest of P.

However, authority to act in emergencies cannot usually prevail over express instructions to the contrary given by the principal.

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[1] A company comes into existence after the date of incorporation. Therefore, a copany is npt in existence at the time of pre-incorporation contracts.

AGENCY LAW:     AUTHORITY OF THE AGENT

In establishing an agency relationship, the principal does not give the agent unlimited power to enter into any contract whatsoever but is likely to place strict limits on the nature of the contracts that the agent can enter into on his behalf. In other words, the authority of the agent is limited and in order to bind a principal, any contract entered into must be within the limits of the authority extended to the agent. The authority conferred on an agent can be;

•  express authority

•   implied authority

• ostensible authority

1.1.          Express authority

Express authority is a matter between principal and agent. This is authority explicitly given by the principal to the agent to perform particular tasks, along with the powers necessary to perform those tasks. The extent of the agent's express authority will depend on the construction of the words used on his appointment. If the appointment is in writing, then the document will need to be examined. If it is oral, then the scope of the agent's authority will be a matter of evidence. If the agent contracts outside the scope of his express (actual) authority, he shall be liable to the principal. The agent will also be liable to the third party for breach of warranty of authority. The consequences for the relationship between the principal and third party depends on whether the third party knew that the agent was acting outside the scope of their authority.

For example, an individual director of a company may be given the express power by the board of directors to enter into a specific contract on behalf of the company. In such circumstances the company would be bound by the subsequent contract but the director would have no power to bind the company in other contracts.

1.2.          Implied authority

Implied authority is authority inferred or conferred by;

• custom;

• the nature of the agent's activities; or

•  what is reasonably necessary to carry express authority.

Between principal and agent the latter's express authority is paramount. Accordingly, the agent cannot contravene the principal's express instructions by claiming that he had implied authority for acting in the way he did. However, third parties are entitled to assume that an agent holding a particular position has all the powers that are usually provided to such an agent. Without actual knowledge to the contrary the third parties may safely assume that the agent has the usual authority that goes with their position. In Watteau v Fenwick (1893) the new owners of a hotel continued to employ the previous owner as its manager. They expressly forbade him to buy certain articles including cigars. The manager, however, bought cigars from a third party who later sued the owners for payment as the manager’s principal. It was held that the purchase of cigars was within the usual authority of a manager of such an establishment and that for a limitation on such usual authority to be effective it must be communicated to any third party.

Directors of companies can also bind their companies on the basis of implied authority. In Hely-Hutchinson v  Brayhead Ltd (1968), although the chairman and chief executive of a company acted as its  de facto  managing director, he had never been formally appointed to that position. Nevertheless, he purported to bind the company to a particular transaction. When the other party to the agreement sought to enforce it, the company claimed that the chairman had no authority to bind it. It was held that, although the director derived no authority from his position as chairman of the board, he did acquire such authority from his position as chief executive and thus the company was bound by the contract he had entered into on its behalf as it was within the implied authority of a person holding such a position.

1.3.          Ostensible/apparent authority

The Phrase apparent authority refers to the appearance of authority to which the principal has lent himself by some act by which he represents or holds the agent out as having an authority beyond that which he in fact possesses. Where A acts within his scope of apparent authority, P is bound to the same extent as if he had actually authorized the transaction. 

In  Freeman & Lockyer v  Buckhurst Park Properties (Mangal) Ltd (1964), although a particular director had never been appointed as managing director, he acted as such with the clear knowledge of the other directors and entered into a contract with the plaintiffs on behalf of the company. When the plaintiffs sought to recover fees due to them under that contract it was held that the company was liable: a properly appointed managing director would have been able to enter into such a contract and the third party was entitled to rely on the representation of the other directors that the person in question had been properly appointed to that position.

Apparent authority will also arise where a P has revoked A’s authority and the third party has no notice of this.  The principal may still be liable for the actions of the former agent until he informs third parties who had previously dealt with the agent about the new situation.

The extent of ostensible authority

Ostensible authority is not restricted to what is usual and incidental. The principal may expressly or by inference confer on the agent any amount of ostensible authority.

Conditions needed to be able to invoke apparent authority

For a representation to create ostensible authority;

• the representations must be made by the principle or an agent acting on his behalf and not by an agent who is claiming ostensible authority;

• it must be a representation of fact not law; and

• the representation must be made to the third party.

Furthermore, it must be shown that the 3^rd party relied on the representation. If there is no causal link between the 3^rd party’s loss and the representation, the third party will not be able to hold the principal liable. Nevertheless, it is enough that third party alters his position as a result of reliance on the representation. He does not have to suffer any detriment as a result.