Diploma of Financial Services (Banking)FNSACCT404B

Make Decisions in a Legal ContextLecture 2

Principal and Agency Law

Principal and Agent

Relationship where one person is appointed to act as the representative of the other.

Agency = the relationship which exists between two parties whereby one party, the principal, authorizes another party, the agent, to do on their behalf acts which will bring the principal into legal relations with a third party.

4

Agency

Principal Agent

3rd Party

Contracts Involved

Two contracts involved - one creating the agency, the internal

relationship, - second where the agent contracts on

behalf of the principal with a third

party, the external relationship.

TYPES OF AGENTS

Special agent General agentUniversal agent

(power of attorney)

CAPACITY OF THE AGENT

An agent has the contractual capacity of the principal due to the delegation of contractual capacity by the principal to the agent.

2 Cases Minor as principal Adult as principal

CREATION OF AGENCY

Expressly created agency Deed (contract under seal) - POA In writing (simple contract) Verbally

Impliedly created agency Agency by necessity By ratification By estoppel By position or status

EXTENT of AGENT’S AUTHORITY

AUTHORITY Implied(eg to negotiate)

Apparent

Actual Express (verbal or writing)

(eg sell land)

THE DUTIES OF AN AGENT TO THEIR PRINCIPAL

Duty to follow the principal’s lawful and reasonable instructions

Duty to act personally Duty to act in the principal’s best

interestsDuty to exercise reasonable care, skill

and diligence Duty to keep proper accounts of all

money and property received on behalf of the principal

Continued…

Duty to keep all money and property of the principal separate from that of the agent

Duty of confidentiality Duty not to make a secret profit

RIGHTS OF AGENTS Right to remuneration – to be

paid as agreed Right to indemnity and

reimbursement Right to a lien over the principal’s

property in the agent’s possession until the agent’s remuneration and expenses are paid

Right to redirect the goods in order to possess and retain them

AGENT’S LIABILITY TO THE PRINCIPAL

The agent will only be responsible to the principal if the agent does not comply with the principal’s instructions, or breaches a duty owed, in which circumstances, they will be responsible for any loss.

AGENT’S LIABILITY TO A THIRD PARTY A third party who wishes to take legal

action over a contract that was arranged by an agent usually only has rights against the principal.

The principal and not the agent will be liable to a third party for any torts committed by the agent whilst acting within the scope of their actual or apparent authority, even if the principal gained no benefit from the agent’s conduct.

However, an agent may be responsible to a third party in the following situations:

Liability of Agent

The principal is disclosed and named but special factors make the agent liable ◦ the named principal does not exist◦ the agent agreed to be liable◦ it is standard practice in a trade or industry

that an agent becomes liable◦ the agent executed a deed or bill of

exchange in their own name instead of that of the principal

◦ the agent acts outside actual or apparent authority (breach of warranty of authority)

Existence but not name of the principal is disclosed◦ No liability except when:

agent acts outside actual authority agent specifically agrees to be liable

Existence of principal not disclosed ◦ third party can choose whether they sue

the agent or the principal, usually based on who will be more able to pay any judgment sum.

◦ A third party who obtains a judgment against one party, loses all rights against the other.

Disclosure & Liability of Agent

Breach of warranty of authority

◦This action may exist where the agent has falsely claimed to have authority they do not in truth possess

◦Thus, warranty of authority will be breached if the agent; falsely claims to be acting with the principal’s

authority – the claim may be made directly or indirectly, fraudulently or innocently;

the claim of authority induced the third party to enter into the subject contract with the principal;

the third party was not aware of the lack of authority; and

the third party suffered loss.

TERMINATION OF AGENCY

Performance of the agency contract as agreed

Mutual agreement Revocation of the agent’s

authority Renouncement of authority by

the agent Acceptance of secret

commission

TERMINATION OF AGENCY Continued.

By operation of law ◦lapse of a set time period for the life

of the agency◦death, bankruptcy or insanity of the

agent or principal◦frustration of the contract◦object of the contract becomes

illegal

REMEDIES OF A PRINCIPAL If breach by agent:-

rescission of the agency agreement;

refusal to pay commission;damages;recovery of secret commission;

and/ orcriminal charges laid for

accepting a secret commission

TYPES of COMMERCIAL AGENTS

‘Factors’ or mercantile agents ◦ eg: sells on consignment

Del Credere agents◦ Higher commission but guarantees

payment upon sale of goods (eg: livestock selling agents)

Real estate agents Partners Brokers