Authority in Agency Law: Analysis of Actual, Usual, and Ostensible Authority

This article discusses the different types of authority in agency law, including actual, usual, and ostensible authority. It also analyzes a scenario involving the binding authority of an agent in a contract with a third party. The article also covers the doctrine of undue influence and its evolution in courts, including the traditional classification of actual and presumed undue influence, and the refinement of the classification into three classes. The article applies these principles to a scenario involving a transaction between two parties with a power imbalance.

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Introduction
Issue
This scenario raises questions of authority in agency law. In particular, did Linda had the
authority to bind John, the principal with a third party, whose name is Cathy?
Rule
The law of agency covers situations where one party delegates the duties of the formation
of a contract to another party. Any case regarding agency relationship constitutes three parties; (i)
the first one is the principal who gives permission for the contract to be made on his/her behalf;
(ii) the second party is the agent who receives authority to form contracts in the principal’s
interests, and (iii) the last party is the third party who execute transactions with the agent to
create a connection with the principal (Baskind, Osborne and Roach, 2016, p.46). Both the
principal and its agent have a fiduciary relationship which is very much contractual. This
rationale was once confirmed with a statement given by the judge in (South Sydney District
Rugby League Football Club Ltd v. News Ltd, [2000]) that ‘finding whether there is a
relationship between an agent and his principal requires an analysis of their contract, their
conducts in the business or their express statement when dealing with each other.’
Contracts made between a third party and the agent are treated as though they were made
between that third party and the principal(Chen-Wishart, Loke and Vogenauer, 2018, p.146). This
is a principle that has been held by courts that where person ‘A’ leads person ‘B’ to believe that
person ‘C’ is an authorized agent, and the person ‘B’ relies on this representation, the court will
not allow person ‘A’ to deny the authority manifested on person ‘C.’ This concept was widely
discussed in (Rama Corp Ltd v Proved Tin and General Investments Ltd, [1952]) under the
apparent authority which would be covered below.

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Every agency relationship operates with both parties consenting to each other thus
creating a relationship based on trust and confidence mainly based on the agent’s authority. There
are different types of these relationships. One of these authorities is an actual authority. This
actual authority mostly arises from an agreement made by the principal with the agent in express
terms either in words or in writing (Mann and Roberts, 2018, p.538). At other times, the actual
authority may be implied which would not need express words which become implied actually.
In most cases, it is assumed that principals have given implied authority to agents or employees
appointed to a particular position in the principal’s place of business. In general, any type of
actual authority is born from the principal’s consent that the agent holds some authority. For
instance, in (Hely-Hutchinson v. Brayhead Ltd, [1968]) the court stated that where the board of
directors agreed to authorize the chairman to work as though he was a managing director, the
court would assume that the board has given the chairman express actual authority, and thus the
chairman’s would also have the implied actual authority in managing director’s duties.
People working in offices could also have usual authority. This type of authority was
illustrated in the case of (Watteau v. Fenwick, [1893]). Watteau was a third party who sold cigars
to the agent (public-house manager) of Fenwick. The agent, Humble was previously working as
a pub manager. When the defendant principal denied the agency, the court held that the principal
was bound since the house manager was exercising the general duties of a manager.
Lastly, ostensible authority looks at the conduct of the principal and his agent as
described above (Mann and Roberts, 2018, p.521). The authority follows the rationale that if the
principal manifested to the third party that the agent has the authority to form contracts or
execute transactions, and then the third party relies on this manifestation, the court will
disapprove any claim by principal refuting the authority (Miller and Jentz, 2010, p.499). In

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(Rama Corp Ltd v Proved Tin and General Investments Ltd, [1952]) the court explained that
ostensible authority is a type of estoppel which the court regards to as the agency created through
estoppel and it requires three elements which are (i) principal’s representation, (ii) third party’s
dependence on the representation, and (iii) the change of legal position on the side of the third
party following the reliance on the representations.
Application
On application, the first step would be identifying whether there was an agency
relationship between Linda and John. This first step would require an examination of the
relationship between the parties, and the facts regarding this relationship can be found in the
realm of their contract, trade practices, or their interaction as explained in (Freeman & Lockyer
v. Buckhurst Park Properties (Mangal) Ltd, [1964]) that agency relationship results from the
parties express words in the contract or trade practices. On analysis, the fundamental relationship
between Linda and John was that of an employer and an employee. Linda was working as a
supermarket manager at John’s supermarket.
Having found an agency relationship, the next step is conducting an analysis as to
whether Linda had any authority for ordering the orders. An authority for this analysis can be
derived from the rationale held by Lord Denning in (Hely-Hutchinson v. Brayhead Ltd, [1968]).
The judge gave an example that where the board of directors allows two directors to certify
cheques, the two acquire express actual authority to signing the cheques. Where the same board
appoints one director as the managing director, they confer to him implied actual authority in the
duties of managing directors. Applying the case to supermarket managers, it can be argued that if
Linda was given a role of supermarket manager, she had an implied authority of managing even
the orders, and this included getting new orders. Regarding actual authority, there was a rule that

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orders could only be made when John was present. In confirmation, a test for usual authority
applied to the case of (Watteau v. Fenwick, [1893]) would confirm that managers have a usual
authority or ordering purchases.
Apparent authority requires the application of the test developed in (Rama Corp Ltd v
Proved Tin and General Investments Ltd, [1952]). The test requires three ingredients which are
the principal’s manifestation, a reliance on the third party, and a change in the third party’s
position due to the reliance. In this case, the principal would be John. The act of allowing Linda
to interact with Cathy created the reliance. And this particular day, Cathy relied on that
manifested reliance to think Linda had the right to purchase orders.
Conclusion
Question 1: Advice to AFC Grocery Ltd.
As we have found that John was bound to Cathy by Linda, it means that John was liable
for the payment of $45,000. This case is covered under section 53 of (Sale of Goods Act, 1954).
Subsection 1 on this provision provides that:
“ (1) If the buyer wrongfully neglects or refuses to accept and pay for the goods, the
seller may maintain an action against the buyer for damages for
nonacceptance.
(2) The measure of damages is the estimated loss directly and naturally resulting in
the ordinary course of events from the buyer's breach of contract.
(3) If there is an available market for the goods, the measure of damages is prima
facie to be ascertained by the difference between the contract price and the
market or current price at the time or times when the goods ought to have been

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accepted, or, if no time was fixed for acceptance, at the time of the refusal to
accept.”
In this regard, Cathy would calculate the value of the goods in the market, and charge the
difference to John.
Question 2: Linda expressly prohibited from making orders.
Whether Linda was expressly prohibited from making order requires an analysis of the
facts of the case. From the facts, we are told that as a rule, sufficient stock was ordered during
John visits so that Linda had no need to order further stock. These facts demonstrate that Linda
did not have express authority to order further stock, but that does not mean she did not have
other authorities such as usual authority or apparent authority. For instance, in (Ireland v
Livingstone, [1872]), the given the express authority to procure sugar, but he had not stated the
limits of this authority and had not told the third parties that he had given such authority.
Similarly, the express authority only applies where third parties are aware of such authority.
Scenario 2: Sylbo and Bruno
Issue
The main issue, in this case, regards a transaction entered between two persons with the
stronger party pressuring the weaker party thus raising a question of undue influence and
disadvantageous transaction.
Rule
The doctrine of undue influence evolved from courts as a way of ensuring that equity
prevails in the transactions (Mann and Roberts, 2018, p.198). The reason why equity required the
principles of undue influence was that the principles of duress were too narrow and could not
cover some cases where there was pressure in absence of threats(Chitty, 2012, p.675). Today, any

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contract concluded by two people with one party exercising undue influence on the other is
stated to be voidable upon a claim by the disadvantaged party. However, the law does not
prohibit inducement of the other party into forming the contract as this is the rationale of
bargaining. The only instance that this doctrine prohibits is when inducement extends to a degree
which denies the other party a chance to exercise its free will.
One of the earliest cases that defined undue influence includes (Allcard v. Skinner,
[1887]). The case arose after the defendant joined a convent and transferred almost all her
property to the lady superior Miss Skinner. After the convent, she then sought to recover the
property. This case led to the definition of the doctrine of undue influence as one that protects
victims from the unconscious conducts of the stronger parties where they are forced, misled or
tricked into giving up their property.
Traditionally, cases of undue influence were solved by classifying them as either having
actual undue influence or presumed undue influence. The actual undue influence was found in
cases where parties carried no special attachment. In such cases, the onus of proof was with the
party that was alleging that it had been unduly influenced. The attempt to prove the cases
involved the claimant demonstrate that the defendant used his/her dominant position to unduly
influence the claimant. For instance, in (Williams v. Bayley, [1866]), the bank approached the
father over his son’s debt to that bank. The bank told that father that if he was not going to
finance the son’s debt, the then son would be prosecuted. The Court looked at the nature of the
threats subjected to the father and ruled that there was an actual undue influence.
The second category of undue influence in traditional courts was the presumed undue
influence. This one was found to be automatic in people with a special attachment unless the
defendant proved otherwise. Therefore, it was upon the defendant to disapprove the alleged

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claim of presumed undue influence. Examples of special attachment included parent/son,
doctor/patient, solicitor/client e.t.c. An example of cases of presumed undue influence is the case
of (Allcard v. Skinner, [1887]) as discussed above that involved a superior lady and members of
the convent.
In addition to these rules, the case of (National Westminster Bank Plc v. Morgan, [1983])
added to the traditional rules especially in cases involving banks and their clients. Lord Scarman
added that even though a case could involve parties who are in a special relationship, this
relationship should not automatically lead to the presumption of undue influence. He added that
the party claiming to have been unduly influenced must show that it lost something of value, i.e.
a ‘manifest disadvantage’.
A refinement of the traditional classification has led to the classification of undue
influence into three classes. The first class is an actual undue influence. This has retained the
traditional principles where the party alleging actual undue influence has to prove it. In addition,
the party has to show evidence of coercion, and the coercion happened due to the fact that the
defendant was in a position that he/she could exercise a clear degree of dominance. A third
element is that the undue influence led to a disadvantaged transaction, but this applies to
situations where it is not clear that the defendant used undue influence. For instance, in (Bank of
Credit and Commerce International SA v. Aboody, [1990]) the court rejected a claim of actual
undue influence since the claimant did not show a proof of a disadvantageous transaction. In
cases where actual undue influence is clear, such as the case of (CIBC v. Pitt, [1994]), the court
held that there was no need for a manifested disadvantaged transaction.
The second class of undue influence has been known as class 2A. This is the category of
presumed undue influence, and it requires the party claiming that there was the influence to

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demonstrate the existence of a special relationship or attachment. The special relationship should
be one that involves trust and confidence. After proving the existence of a relationship, it would
then be upon the defendant to show that there was no undue influence. For example, in (Royal
Bank of Scot. PLC v. Etridge (No. 2), [2002]), the husband provided wrong information
regarding the amount of loan needed, and he convinced the wife to allow him to use their
matrimonial home as loan security. In this case, the stated that the bank should have taken steps
of bringing notice and legal advice to the wife. Another example is the case of (Lancashire Loans
Co v. Black, [1933]) where the mother lied to the daughter in convincing her to become a
guarantor for her business loan.
The third class of undue influence is called class 2B, and this involves presumed undue
influence which is based on trust and confidence or fiduciary relationship. This category is an
extension of category 2A where the court believes that there is presumed undue influence
resulting automatically from the relationship. In class 2A, the court allows a party to show that
there is a presumed undue influence based on the trust and confidence that existed in their
relationship For instance, in (Lloyds Bank v. Bundy, [1975]), the business farmer had previously
mortgaged the farm twice for his son ’s business. On both times, it was the assistant manager
who went and negotiated with the father on behalf of the bank. For a third time, the bank
assistant manager told the father that if he mortgaged the farm a third time, the son’s business
would stabilize. However, the business did not stabilize and the bank sought to recover the loan.
A claim of undue influence succeeded based on the fact that the father had trusted the assistant
manager. In the case of (Union Fidelity Trustee Co of Australia Ltd v. Gibson, [1971]), the court
advised that as far as the defendant can demonstrate that the claimant well-understood the

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repercussions of the transaction in a reasonable man’s position, and the claimant used his free
judgment, the transaction will stand.
Application
On application, this case would require looking for the evidence of undue influence by
analyzing the facts, and finding whether they fit either class 1, class 2A or class 2B. Starting with
class 1, this would require Bruno to prove his case by providing evidence of coercion, a proof
that the coercion happened because Bruno was exercising a dominant position, and the coercion
led him to accept the agreement. However, this test would fail since there is was no evidence of
coercion.
The class 2A would require a test whether Sylbo and Bruno had a special relationship, the
relationship caused Sylbo to exercise some dominance, and a presence of a disadvantageous
transaction. Again, even though there is evidence of a disadvantageous transaction, the fact that
Sylbo and Bruno had only met for one day disapproves this assumption.
The third test involves looking for the elements of class 2B undue influence. Here we
would need to find whether there could be instances of trust and confidence, and a
disadvantageous transaction. One class case that defined a test for finding a fiduciary relationship
was settled in (Frame v. Smith, [1987]). In this case, the judge said that fiduciary relationship
involves one party that has discretionary powers, a second party which is weak and vulnerable on
the expense of the other, and the discretionary powers of the stronger party change the legal
position of the weaker party. Again in (Daly v Sydney Stock Exchange Ltd, [1986]), the judges
said that there is always trust and confidence when one party relies on the advice of the other.
Also in (Aequitas v AEFC, [2001]), he affirmed that there is always trust and confidence when
one party expects the other to take care of its interests. Therefore, when Bruno was bringing the

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issue of separation, it could be said that he was seeking advice from Sylbo. The advice given by
Sylbo that Bruno should go to Italy is another evidence of Sylbo using the trust he was accorded
by Bruno for the advice. Lastly, a disadvantageous transaction proves that there was class 2A
presumed undue influence.
Conclusion
Bruno was vulnerable to the fact that he had separated from his wife to an extent of
suffering depression and being compounded by an excessive consumption of alcohol. Bruno took
advantage of his vulnerability to induce him to sell his land. Therefore, the court should cancel
the transaction.

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References
Aequitas v AEFC [2001] NSWSC 14.
Allcard v. Skinner [1887] Ch D 36.
Bank of Credit and Commerce International SA v. Aboody [1990] QB 1 1990.
Baskind, E., Osborne, G. and Roach, L., 2016. Commercial Law. 2nd ed. UK: Oxford University
Press.
Chen-Wishart, M., Loke, A. and Vogenauer, S., 2018. Formation and Third Party Beneficiaries.
1st ed. UK: Oxford University Press.
Chitty, J., 2012. Chitty on Contracts: General principles. Sweet & Maxwell.
CIBC v. Pitt [1994] AC 1 1994.
Daly v Sydney Stock Exchange Ltd [1986] 160 CLR 371.
Frame v. Smith [1987] SCR 2 1987.
Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd [1964] QB 2 1964.
Hely-Hutchinson v. Brayhead Ltd [1968] QB 1 1968.
Ireland v Livingstone [1872] LR 5 HL 395.
Lancashire Loans Co v. Black [1933] KB 1 1933.
Lloyds Bank v. Bundy [1975] All ER 3 1975.
Mann, R.A. and Roberts, B.S., 2018. Essentials of Business Law and the Legal Environment.
12th ed. Mason, OH: Cengage Learning.
Miller, R.L. and Jentz, G.A., 2010. Cengage Advantage Books: Business Law Today: The
Essentials. 9th ed. Mason, OH: Cengage Learning.
National Westminster Bank Plc v. Morgan [1983] All ER 3 1983.
Rama Corp Ltd v Proved Tin and General Investments Ltd [1952] 2 QB 147.
Royal Bank of Scot. PLC v. Etridge (No. 2) [2002] UKHL 2002.
Sale of Goods Act, 1954.
South Sydney District Rugby League Football Club Ltd v. News Ltd [2000] ALR 177.
Union Fidelity Trustee Co of Australia Ltd v. Gibson [1971] VR 1971.

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Watteau v. Fenwick [1893] QB 1 1893.
Williams v. Bayley [1866] LR 1 HL 200.