Law of Agency: Liability of Principal and Agent in Transactions

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Contents
Solution 1....................................................................................................................................................2
Issues.......................................................................................................................................................2
Related Law.............................................................................................................................................2
Application of law to facts.......................................................................................................................3
Conclusion...............................................................................................................................................5
Reference List.............................................................................................................................................6

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Solution 1
Issues
1. Can TP enforce the transaction entered by A on P’s behalf against P (upon learning of
her identity).
2. If A would had disclosed that she was acting as P’s agent on P’s behalf at the
beginning of her negotiations with TP then can TP recover from P.
3. Can A be liable to TP in the circumstances given in point above?
4. In case P had chosen to accept the contract entered into by A but TP refused to
honour it as per the given case then can P can enforce transaction upon TP.
Related Law
The given problem provided is related to law of agency. An agency is established when one
person (agent) acts on behalf of the other person (principal) and the acts done by such other
person acting on behalf of the first person will make the first person liable. For instance, an
employee acting on behalf of his employer is an act of agency wherein employee is the agent of
the employer1
In agency relation, an agent is the person who acts on behalf of his principal and the acts of the
agent are construed to be the acts of the principal only. An agent must act as per the authority
given to him by his principal. The acts of agents done in usual course of business binds the
principal and the principal is bound to honor the commitments of his agents. The authority of an
agent can be bifurcated into2:
i. An Actual Authority is that kind of authority which is with the agent and is provided
by the principal to him by expressive words or impliedly. The acts of the agents under
the actual authority bind the principal and are analyzed in Freeman & Lockyer v
Buckhurst Park Properties (Magnal) Ltd3.
ii. An Ostensible Authority is that authority which is given by the principal to his agent
by his conduct and by such conduct the principal makes it believe to the third party
1 Gino Evan Dal Pont, Law of agency, Butterworths, 2001.
2 Peter Gillie, Business Law, Federation Press, 2004.
3 Freeman & Lockyer v Buckhurst Park Properties (Magnal) Ltd [1964].

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that his agent is authorized to do certain acts and an agent acting as per the conduct of
his principal binds the principal. The principal of the ostensible authority is stated in
the case law of Hely-Hutchinson v Brayhead4
Sometimes an agent exceeds his authority and acts beyond the scope of his authority. In such
cases, the principal can deny the acts of his agents provided the third party knew that the agent
had exceeded his authority. But in case the third party did not had knowledge of the agent
exceeding authority, then, the principal is bound to the third party for the transaction entered by
an agent on behalf of his principal. A rule to protect third parties under the law of agency is
known as the rule of indoor management under which if the third party in good faith enters into
transaction with an agent, then, in such case the third party can enforce the transaction with the
principal and is rightly analyzed in Royal British Bank v Turquand5.6
In case an agent enters into transaction with third party without disclosing he is an agent acting
for other person, then, in such case the contract entered by an agent with third party is considered
to be his personal transaction as same had been done by him in his personal capacity. The case
law of Crabtree-Vickers Pty Ltd v ADMAA Co Pty Ltd7 is based on this principal only. In such
case the third party can claim from an agent only. In case the principal ratifies the acts of his
agent then the third party can claim from the principal in such case.
In certain cases an agent enters into a transaction beyond his authority, then, in such cases the
principal is not liable for acts of his agent but if principal ratifies the acts of his agent then in
such case the third party can claim from the principal The case law based on the above principal
is Union Bank of Australia Ltd v Rudder8.
Application of law to facts
A is instructed by P to purchase jewellery which should be not more than $50,000 from TP, and
further P tells A not to disclose that she is purchasing this jewellery as she wanted to keep her
identity secretive to TP.
4 Hely-Hutchinson v Brayhead [1968].
5 Royal British Bank v Turquand (1856).
6 Paul Latimer, Australian Business Law 2012, CCH Australia Limited, 2011.
7 Crabtree-Vickers Pty Ltd v ADMAA Co Pty Ltd (1975).
8 Union Bank of Australia Ltd v Rudder (1911).