Law and Ethics

7. Agency Law

By the end of this section you will be able to ...

● Define the agency relationship and know the different

types of agents

● Describe how agency relationships are created

● Identify the duties and rights of an agent

● Identify the liability of an agent

● Discuss the various methods of terminating an agency

relationship

What is agency

law?

Agency law governs the relationship between

agents and principals. Some principals are

the owners of businesses who employ agents

to help them to find a relevant third party to

negotiate and enter into a contract with.

https://www.youtube.com/watch?v=DEX-w31q6U0

Law of Agency

Governs relationship between three

parties

PRINCIPAL == AGENT == THIRD PARTY

The Agent is not a party to the

contract nor will they have any rights

and obligations under contract.

Why might

someone get an

agent to do work?

Why?

Expertise

Skill

Better negotiating

Consent and Authority

The principal and agent enter into

relationship on consent.

This relationship then gives the agent

“authority to act” on the principals

behalf in creating a legal relationship

between the principal and a third party.

This authority is the most important

aspect.

Classifications of an Agent (Two Types)

General Agent and Special Agent

General Agent is person who acts for

the principal in ordinary course of

trade

Special Agent only has the authority to

act for a specific purpose

Creation of an Agency

1. Agreement

2. Ratification

3. By Estoppel

4. By Necessity

Creation of an Agency - 1. Agreement

Most common - both parties enter agreement

Verbal or written

Authority must be expressed or implied

a) Express authority = limited to actual

terms

b) Implied authority = where parties act in

a way reasonable for other persons to

infer from conduct that the agent has the

authority

https://www.youtube.com/watch?v=ccMahobJTQg

Wattau v Fenwick

Hotel manager entered contract with

cigar manufacturer to supply cigars

against wishes of hotel owners.

Owners refused to pay and said manager

had no authority to enter contract.

Court upheld contract and said that it

was reasonable to presume owner had

authority to enter contracts

Hely Hutchinson v Brayhead

Company chairman was allowed to act

as a managing director agreed to

guarantee debt of another company.

Court held that although he wouldn’t

normally have authority to guarantee

the loan, as he was acting MD, the

third party was entitled to believe

he was entitled to a loan.

Robinson v Mollet

Court held that if you are going

to rely on implied authority

arising from a custom, then the

custom must be:

1) Universally known

2) Binding

3) Reasonable

Creation of an Agency: 2 - Ratification

When agreement is entered into between

the principal and the agent after the

agent has made the contract with the

third party.

Even though principal may not have given

the agent authority to contract, they may

be happy to ratify after the fact.

Rules exist so that no one is unfairly

prejudiced

Kelner v Baxter

Directors of hotel were personally

liable for contract entered into with

a third party on behalf of a company.

Ratification by the principal must

take place within a reasonable time of

the contract entered into by the agent

and the third party.

Bolton Partners v Lambert

Company ratified the MD’s contract with a third party to buy

the company’s factory, two weeks after the contract was made.

Court held that two weeks was a reasonable period in which to

ratify contract.

Agency must tell the third party they’re acting on behalf of

a principal

Keighley Maxsted & Co. v

Durant

Principal authorised the agent to buy

wheat at a certain price on his behalf.

Agent purchased wheat at higher price from

third party in his own name and didn’t

disclose the existence of principal with

third party.

Principal failed to pay and third party

sued for breach.

Remember these rules

Principal must have existed at time contract was made between agent and third

party

Ratification must take place in reasonable time

Agent must tell third party they’re acting for principal

Principal must have legal capacity to enter contract

Principal must ratify entire contract not just parts, and must communicate

this to third party

Once ratified, contract is binding from date of ratification

Creation of an Agency - 3. Estoppel

Estoppel means that an individual or

corporation is prevented (or estopped)from

making assertions that are contradictory

to his or her prior position on certain

matters.

In this case, they are estopped from

denying the existence of a contract on

basis of behaviour where the behaviour

points to the individual acting as if

contract was in existence.

No actual agreement between agent

and third party but principal allows third

party to believe that the person is acting

as an agent on their behalf.

(see page 84)

Freeman and Lockyer v Buckhurst Park

Properties

Company (principal) held out one of their directors to be MD.

Director made contract with firm of architects. Company

refused to pay and argued that the contract between the

company and architects was not effected properly as the

director who entered contract did not have proper authority.

Court held that the company had held the director our to be a

managing director and represented to architects that he had

authority: CONTRACT UPHELD.

Ostensible / apparent authority

Authority that arises where there’s no agreement.

Authority not given to the agent by the principal but the

principal makes representation to the third party that agent

has authority to act….

….so the agent is considered to have apparent authority to

act.

Court will uphold contract made on the basis of

apparent authority to act provided

- Representation made to third party by principal or

agent acting on behalf of principal

- Third party relied on the representation to enter

contract

- Principal had legal capacity to enter the contract

- Third party did not know that the agent did not have

the authority the principal represented the agency to

have.

Creation of an Agency - 4. Necessity

Agency can be created without consent of the

parties where an emergency situation arise and

forces agent to act in this capacity to protect

the property or interest of the principal if

- Agent is entrusted with principal’s goods

- A genuine emergency situation exists

Sachs v Miklos

Storage owner who was storing furniture on behalf of

principal, acted as principal’s agent and sold furniture

because it was not convenient for him to continue storing.

Principal sued for losses and owner argued that he acted as

agent by necessity.

Court held there was not an emergency situation and storage

owner was liable to principal for losses incurred.

(entrusted with goods / genuine emergency)

Springer v Great Western Railway

Railway company sold tomatoes that had just arrived off

delayed cargo and were going bad. Principal sued company

for losses incurred as result of selling locally and

preventing principal from selling in London.

Court held railway co. should have been able to communicate

with principal before selling tomatoes, therefore they were

liable for losses incurred. Agent must be unable to

communicate with or obtain instructions from the principal

Great Northern Railyway v Swaffield

Agent must be acting principal’s best interests and not his

own benefit

Defendant delivered a horse to railway company for transport

but failed to collect it on arrival as agreed. Railway co.

sued the Def for the cost of feeding the horse, arguing an

agency of necessity.

Railway co. said they were acting in the best interest

defendant. Court upheld the claim.

Duties an agent owes to principal:

- Duty to act with due care and skill

- Duty to obey instructions and not exceed authority

- Duty to avoid conflicts of interest and make full

disclosure

- Duty not to make secret profit

- Duty not to delegate

- Duty to account

- Duty to communicate and keep confidentiality

Rights of agent:

- Entitled to be paid once performance is completed

Liability of Agent

to a third party

https://www.youtube.com/watch?v=3mtyHL43FYU

Contracting within authority

Agent who creates a contract on behalf of principal is not

personally liable for contract provided the agent has acted

within his actual or apparent authority and complied with

relevant rules in creating agency relationship.

Principal is liable to third party and must perform to avoid

a breach of contract.

Agent sets contract but principal enforces it.

Contracting outside authority

Agent who creates contract but exceeds authority will be

personally liable to third party for breach of authority.

This means, the agent who has breached the warranty or

guarantee to the third party that he has the authority to

enter into such a contract on behalf of the principal.

The agent will not have liability towards the principal for

exceeding his authority because the principal is not party to

the contract.

Terminating an Agency Agreement

Methods - Actions of the parties:

Consent

Revocation

Renunciation

Completion

Notice

Termination by operation of the law

Agency relationship automatically terminated where one of

following events arise

- Death, mental incapacity or bankruptcy

- Expiry of the agency agreement

- Occurrence of a frustrating event

- Change in the law affecting the contract of agency

Attempt Qs 1,2

and 3 on page 89

msstephanielord@yaho

o.com