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

Legal Studies
LEGAL STUDIES
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Legal Studies 1
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.

Legal Studies 2
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

Legal Studies 3
(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