Law of Agency: Relationship between Principal and Agent

This article discusses the Law of Agency and its application in two different cases. It covers the duties of an agent, undisclosed principle, and ostensible authority. It also discusses the laws governing company incorporation and business ethics in Australia.

Running head: LAW OF AGENCY
Law of Agency
Name of the Student
Name of the University
Author Note

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LAW OF AGENCY
ANSWER TO Q1
Issue
The present case deals with the Law of Agency wherein there exists a relationship of
principal and agent between Terrence and Sara and between Terrence and Peter. The major issue
in the present case is whether Sara is duty bound under the agreement of agency to inform a third
party about the agreement of agency that exists between the principal and the agent and in case
of failure, is there any breach of contract?
There are two separate cases in the present fact, governing the relation of Terrence with
Sara and the relation of Terrence with Peter giving rise to two different situations. In case of the
relation of agency between Terrence and Peter, the major issue is whether an agent is duty bound
to follow instructions of the principal and is there a case of breach in cases the agent does not
follow the instructions. Another issue governing the relation between Terrence and Peter is
whether proper termination has been made to Peter by Terrence and is Terrence liable to pay
Gordon the amount after terminating him.
Law
In the present case, the parties are governed by the relation of agent and principal.
Agency can be said to be a special kind of contract that governs the relation of a principal and
agent, where the agent is answerable to the principal and the principal is in charge of the agents
(Hanson, 2016). Law of Agency manages the relation between principals and agents under
Australian Law. Australian Law is majorly influenced by Common Law principles and are
majorly in line with United Kingdom laws. The principles guiding Agency Laws in Australia are
widely influenced by the laws of United Kingdom.

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Law of Agency is a special kind of contract where the agreement between principal and
agent are legally binding. In an agency agreement, the principal is the primary authority who
confers powers on the agent to make contracts on his behalf with a third party (Beaupert, Steele
& Gooding, 2017) . In general cases of contract, there is an agreement which is a pre-requisite
for entering into a contract but in cases of agency, there might be an exception of an absence of
an agreement. Agency contracts are lawful even when there is no lawful agreement between the
parties. Again, in cases of general contract, there is a consideration without which contracts are
void ab initio but in cases of agency, there is no requirement of consideration and agency
contracts can be non-gratuitous, that is, without any consideration. A contract should have a
minimum of two parties but since agency contract is a special kind of contract, it has three
parties-the principal, the agent and the third party. Though the agent works under the authority of
the principal, in cases of any liability, it always arises between the principal and the third party
and never between the agent and the third party.
Undisclosed principle is the when a relationship exists between the principal and the third
party even when the agent has not disclosed the relationship of agency that exists between the
agent and the principal (Garcia, Rodriguez & Fdez, 2015). Doctrine of election happens when
the third party has the right to choose from whom to demand performance. Siu Yin Kwan v
Eastern Insurance Co Ltd [1994] 2 AC 199 ahs laid down the principle that when the third party
believes that the agent is acting on his behalf and based on a particular skill has demanded a
particular job, the third party will demand that performance from the agent and not the principal.
Under the Law of Agency, the duty of the agent is to follow the principal’s directors and
strictly adhere to them. In cases of breach of fiduciary relationship by the agent, he is liable to
the principal because it is his duty to act in good faith and exercise skill and judgment, as has

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been laid down in the case of Watteau v Fernwick. Therefore, the duty of the agent is to strictly
adhere to the instructions of the principal. Ostensible authority is when by implied conduct of the
party, the 3rd party is made to believe that there exists a relationship of agency between the agent
and the principal and the agent is working under the authority of the principal. Freeman &
Lockyer v Buckhurst Park Properties [1964] 1 All ER 630, it was held that when the 3rd aprty
believes that agent has an authority to deal with him, the principal is stopped from denying his
authority. Ostensible authority is an exception to the termination clause of agency. It was also
held that, the key to fixing liability to the principal is to see if the principal has done anything
that gave the 3rd party the notion that the agent was acting under the authority of the principal.
Application
Under the laws of agency, Terrence is the principal and Sara is the agent who works
under his authority. Applying the rule of Undisclosed principle, Sara did not notify Gabby that
she was working under the authority of Terrence and had taken the order. Gabby was unaware of
the agency relationship that was existing between Terrence and Sara. Gabby has the power to
elect who will perform the duty in the present case (Stout & Blair, 2017).
Terrence instructs Peter to buy silver and not gold but Peter does not fulfil his
fiduciary duties that exist under agency law and breaches the contract. Unhappy with the
defiance of Peter, Terrence fires him but keeps his business email active from where Peter makes
a deal with Gordon. Applying the rule of ostensible authority, Gordon thought that Peter was still
an agent of Terrence and that he was dealing with Terrence.

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CONCLSUION
Gabby can elect who she wants to design the elephant brooch for her and Sara has not
breached any contract.
Peter is bound by fiduciary relation to follow the instructions of Terrence and there he is
liable for breach of contract. Terrence has to pay Gordon because by keeping the business email
of Peter active, he has given the impression to Gordon that the agency relationship between
Terrence and Peter exists and that Gordon is dealing with Peter.
ANALYSIS OF ANWER 2
Issue
The present case deals with the laws of company incorporation and business ethics. The
concerned parties are the shareholders of a company and the issue is whether the failure to pay
an amount of 2000000 will lead to a breach of contract. Another issue pursuant to the present
case is regarding the Commonwealth legislations’ authorities regarding cancelling the
application of license for explosives manufacturing.
Law
Initially, when the commonwealth had the power to legislate in matters regarding to
companies by virtue of section 51(xx) of the Constitution, it only had jurisdiction of New South
Wales and the power only was limited to the incorporation in New South Wales and not the
whole of Australia (Hannigan, 2015). Australia follows common law principles and the laws of
the United Kingdom and therefore the laws followed are those of the United Kingdom. The
Commonwealth is enabled to make laws under the Corporations Act, 2001 and that there is a

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national Companies Act that governs all business laws in Australia. All corporations in Australia
are regulated by the Australian Securities and Investments (Commission) and the ASIC is
governed by the Australian Securities and Investments Commission Act 1989. The ASIC has
various roles to play and it acts as the guardian of the company protecting the rights of the
shareholders, directors and investors (Coffee, Sale & Henderson , 2015). The ASIC has both
criminal and civil jurisdictions and also has the power to fix damages in cases of breach of
contract. the ASIC can attach pecuniary penalty in cases of a company breaching the principles
of the Corporations Act. Under S. 1311, if a company fails to do anything which a company
should do in the regular course of its business, penalty is attached for breach. The penalty is
imposed by the company under section 1317 of the Corporations Act. In cases of contravention
of the principles of the company as under Section 1317L, the company can recover the same by
compensation through the provisions of section 1317G. A company can be made liable as a
natural person under the Corporations Act after its incorporations (McQueen, 2016). 50 of the
ASIC Act help to protect the rights of the shareholders and acts as a shield against malfeasant
directors. Corporate veil as a concept applies when a company under the veil of a company acts
in unlawful ways. In the case of Solomon v Solomon Co Ltd [1897] AC 22, it was held that the
company was separate from its shareholders and that in case a company intends to defraud, the
company will be held liable (Chen, Ramsay & Welsh, 2016).
The Commonwealth legislation gives power to the ASIC to reject the application for
license of any company if it has any criminal record. In case, the director or the shareholder of
the company has any conviction record, the Corporations Act, 2001 has enough power to cancel
the license. By virtue of section 206B of the Corporations Act, license shall not be granted to a

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company that has a past criminal record. Criminal record in the past will lead to automatic
disqualification.
Application
In the current case, the facts point towards a breach of contract by Roger, who owns 92
shares in his company and is the owner of the same. By way of written agreement, a contract was
signed between United Chemicals Ltd and Industrial Machines by way of which it was agreed
that an amount of $6000000 will be paid in three instalments in three consecutive years, that is
2015, 2016 and 2017. Owing to the downfall in the business Roger, could not pay the last
instalment and as a result he was sued. A contract was entered into between the parties and there
has been a breach of that agreement due to the failure to pay the sum. A contract is binding and
in cases of failure to pay, the director has to pay damages. A shareholder shall exercise due
diligence while exercising his duties and in cases of grave breach, he shall be made liable.
The Commonwealth legislations state that anyone with criminal record shall not be given
a license for manufacture of explosives. Roger was convicted of theft in the year 2005 and has a
criminal conviction report and therefore he was not allowed by the Commonwealth Department
of Industry to set up the explosives factory. A high degree of care and duty is put on the ASIC to
ensure the safety of the workers and the prime reason behind not granting license to explosive
manufacturing factories because the ASIC is duty bound to ensure that the workers and the
citizens are safe. In this case, Roger having a criminal record has not been allowed to set up the
factory as he was convicted in the year 2005. Under the powers of the Parliament, the ASIC has
huge powers to ensure that a company does not indulge in nefarious activities. In case of a
company trying to breach the conditions as laid down in the Corporations Act, the ASIC can

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attach criminal liabilities and fix liabilities for damages. Therefore, combining the two activities
of Roger, it can be said that the ASIC has the power to exercise its powers to ensure the rights of
the debtors against the unlawful activities of the shareholders. In case of breach of contract, the
ASIC can fix liabilities and attach pecuniary relief to the affected debtors. The ASIC under the
commonwealth laws have powers to give license to a company as well as cancel applications for
license in cases there is a previous mandate that prohibits a company from being incorporated.
Conclusion
Roger has breached the written contract and therefore is liable for breach of contract.
Roger has failed to make the payment of $2000000 and is therefore liable to the debtors.
Owing to the Commonwealth legislations, Department of Industry is justified in rejecting
the License for the manufacture of explosives.

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References
Beaupert, F., Steele, L., & Gooding, P. (2017). Introduction to disability, rights and law reform
in Australia: Pushing beyond legal futures. Law in Context, 35(2), 1.
Chen, V., Ramsay, I., & Welsh, M. (2016). Corporate law reform in Australia: An analysis of the
influence of ownership structures and corporate failure.
Coffee Jr, J. C., Sale, H., & Henderson, M. T. (2015). Securities regulation: Cases and materials.
García, J. A., Rodriguez‐Sánchez, R., & Fdez‐Valdivia, J. (2015). The principal‐agent problem
in peer review. Journal of the Association for Information Science and
Technology, 66(2), 297-308.
Hannigan, B. (2015). Company law. Oxford University Press, USA.
Hanson, T. (2016). AUSTRALIA MUST RESPOND TO CHINA'S'LITTLE GREEN
FISHERMEN'. Ausmarine, 38(7), 23.
McQueen, R. (2016). A Social History of Company Law: Great Britain and the Australian
Colonies 1854–1920. Routledge.
Stout, L. A., & Blair, M. M. (2017). A team production theory of corporate law. In Corporate
Governance (pp. 169-250). Gower.