Business Law: Authority and Liability in Agency Relationships and Corporate Law

Running head: BUSINESS LAW
Business Law
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1BUSINESS LAW
Question 1:
Issue:
The issue in this case that whether there was an authority on the part of Sara and Peter to
deal with Gabby and Mary respectively on the behalf of Terrence. And if so, is Terrence liable to
pay Gordon the demanding amount.
Law:
According to the law of agency, there is an agreement between an individual who
entrusts his rights or authority to another individual to act on his behalf or negotiate with the
third parties. The individual conferring the authority is called principal and the right conferred on
another person is his agent. It is worth noting that in case of law of agency, the agent is bound to
act according to the instructions provided by his principal. However, in certain cases, whether
the principal is held liable for the acts of their agents, it is important to recognize the fact that
whether there was authority on the part of the agent. Authority under the law of agency can be
summarized into-
 Actual authority or express authority.
 By implied appointment on the part of the principal.
 Authority arising due to necessity.
 Ostensible authority.
Actual Authority:
In general, an authority is entrusted to the agent by the principal however, if such agent
acts outside the authority provided to him, then in such cases the principal shall not be bound for

2BUSINESS LAW
the acts of the agent. The agent, in this regard shall be held liable to the third party personally for
breach of warranty in relation to the authority provided to him. In Watteau v Fenwick [1893] 1
QB 346, it was observed that the owner of the pub directed the manager by way of actual or
express authority for not to buy cigarettes. In this case, the manager (agent) was not held liable in
this case due to the reason that the purchase of cigars from the very beginning fell within the
authority of the pub managers in England. In this case, it was observed that the pub manager did
not breach his actual authority which was authorized to him.
Implied Authority:
Agency can be formed as a result of implied authority on the part of the principal.
Implied authority is something which is not specifically mentioned in the contract. For instance,
when the principal allows the agent to order specific goods on his behalf and thereby habitually
pays him for the same, an implied authority is formed which was observed in Watteau v
Fenwick [1893] 1 QB 346.
Ostensible or Apparent Authority:
Apparent or ostensible authority can arise in situations where the principal in his own
conduct makes the agent believe that he has the authority on the behalf of the principal to make
contract with third parties. In cases, where a prior authority was vested on the agent to act on
behalf of the principal however, the authority was terminated by the principal without informing
the agent. In Freeman & Lockyer v Buckhurst Park Properties [1964] 1 All ER 630, it was
observed that the company gave the authority to one of the directors to act as an M.D on various
situations. The nature of the principal-agency relationship was such that it occurred to the third
parties to believe that the actual authority is vested on the M.D.