Lecture Fundamentals of business law (7/e): Chapter 18 - M.L Barron

Chapter 18 - Principal and agent. At the end of this chapter you should understand: the definition of an agency relationship; why contract law is relevant to the law of agency; the methods by which agency can be created including estoppel, necessity or ratification;…

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Principal and agent

Chapter 18

Learning objectives

At the end of this chapter you should understand:

• the definition of an agency relationship

• why contract law is relevant to the law of agency

• the methods by which agency can be created including

estoppel, necessity or ratification

• the different types of agent, their roles and function

• the difference between ‘actual authority’ and ‘apparent

authority’

• liability of an agent to the principal and third parties

• the rights of action that a third party has against an agent for

breach of warranty of authority

• the rights and powers of agents

• how an agency can be terminated.

Agency

• A relationship that exists between one

person (the principal) and another

person (the agent)

• The agent undertakes to do certain acts

on the principal’s behalf

• The purpose is to bring a third party into

a contractual relationship with the

principal

Creation of an agency

• Expressly created agency (written or

verbal)

• Impliedly created agency:

– Agency of necessity

– Cohabitation

– Agency by estoppel

– Agency by status

– Agency by ratification

Agency of necessity

• A person must be entrusted with

the property of another person

• An immediate expense is required

to preserve the property

• The owner of the property is

virtually impossible to contact

• The person entrusted with the

property (agent) must act in the

best interests of the owner

(principal).

Agency by ratification

May occur when:

(1)A person acts on behalf of a principal and

enters a contract with a third party, despite lacking authority to do so, then the

principal may ratify or affirm the

unauthorised action

(2)An agent exceeds the authority given to

them by the principal, the principal may

ratify or affirm the excessive authority

Conditions required for valid

ratification

• Agent when contracting must clearly be acting as an agent, not for themselves, and the third party must

be aware of this.

• Principal must exist at the time the agent contracts.

• Principal must have the required capacity to contract both at the time of the agent’s unauthorised conduct and at the time of ratification.

• Principal must ratify the whole contract.

• Principal must have full knowledge of the details of the transaction.

Conditions required for

ratification (cont.)

• Can only be made by the principal for whom the agent was acting or purporting to act

when the contract was made

• Ratification must take place within a

reasonable time

Agency distinguished from other relationships

• Agency is a fiduciary relationship—

exercising rights and powers, in good

faith, for the benefit of another

• Employee is under control and

supervision of employer

• Independent contractors decide how

their work is carried out

• Trustee holds property on behalf of

another person

Categories of agents

• Special—appointed for a particular

task

• General—appointed for all normal

matters

• Universal—appointed for all acts

principal can do, e.g Power of

Attorney

Authority of an agent

• Actual authority:

– Express (written/spoken)

– Implied (by action)

• Apparent authority (ostensible

authority):

– Authority agent has from the point of view

of the third party, with whom the agent is

dealing

Duties of an agent

• To follow the principal’s instructions

• To act personally

• To exercise reasonable skill and diligence

• To act in principal’s best interest

• Not to make a secret profit

• Not to divulge confidential information

• To keep proper accounts

Rights of an agent

• To receive remuneration as specifically

agreed for work performed

• To be indemnified against all losses

and expenses incurred while carrying

out principal’s lawful instructions

• To a lien (i.e a right to retain

possession of principal’s property) until

liabilities satisfied

• To stoppage of subject goods in transit

(before received by principal)

Liability of agent to principal

• If agent:

– fails to follow instructions

– acts in a negligent matter.

• If a loss is incurred.

Liability of agent to third party

• Name and/or existence of principal

disclosed:

– Acts outside authority (i.e breach of warranty)

 Acts on behalf of someone who has not given authority (unless ratified)

 Exceeds authority (unless ratified)

– Non-existent/unascertainable principal

– Agent agrees to be liable

– Usage/custom make agent liable

Liability of agent to third party

(cont.)

• Existence of principal not disclosed:

– Agent bound

• Torts committed while acting within

actual or apparent authority

• Tort committed by an agent acting

outside the actual or apparent authority

Doctrine of undisclosed principal

• If the agent acts as if he/she is the

owner (by not disclosing agency), then

the principal can later reveal the

agency agreement and sue to enforce

the contract

• If third party discovers there was an

agency agreement, he/she can then

sue the principal (as well as the agent)

for breaches of the contract

Termination of agency

• By the acts of the parties:

– By performance of the agency

– With frustration of the agency agreement

– By mutual agreement

• By revoking the authority of the agent

(ineffective to third parties until advised)

• By the operation of law:

– By death of either party

– By bankruptcy of principal

– By bankruptcy of agent

– By insanity of either party

Types of agents (statute law)

• Factors/mercantile agents—goods in agent’s

possession to sell or use for borrowing

• Del Credere agent—guarantees payment for goods

sold (therefore higher commission)

• Partners—principals/agents for each other

• Broker—buys/sells goods without possession

• Real estate agent—sells/leases vendor’s land; finds

property for sale/lease

• Travel agent—sells principal’s products; receives

commission based on sales; organises principal’s

travel arrangements

• Company director—agent of company