Legal Aspects of Business: Principal and Agent Relationships

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Legal Aspects of Business
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Contents
Introduction......................................................................................................................................3
Principal and Agent: Relationship...............................................................................................4
Agency Relationship: Key features.............................................................................................4
Authority of an Agent..................................................................................................................5
Actual Authority......................................................................................................................5
Apparent or ostensible authority..............................................................................................5
Usual Authority.......................................................................................................................7
Authority by Ratification.........................................................................................................8
Conclusion.......................................................................................................................................9
References......................................................................................................................................10
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Introduction
The relationship of agency can be termed as the capacity to act. The law of agency allows to
person to act on behalf of another. The person acting on behalf of another is the principal and the
person on whose behalf such other person is acting is the agent. The corporations and various
other organizations and agencies perform their activities and operations by way of agency. The
realtionship of agency mainly operates based upon the fiduciary relationhip between principal
and agent and the consent given by the principal to act on his behalf. However, there are certain
agency relationships which are not based on any consent. This resport is presenting the various
agency concepts and the main emphasis is given to the agency relationship with no consent.
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Principal and Agent: Relationship
According to GHL Fridman, the relationship of agency can be defined as existing between two
persons among which one, called the agent represents another, called the principal, under law
and has the authority to alter his legal position in front of strangers, called the third parties by
way of disposition of property or entering into contracts.
The relationship between principal and agent can be defined as a relationship recognised by law
as the power in hands of another, called the agent, to alter duties, rights or relationships of the
first person, called the principal (Gailmard, 2012). The main aim of the agent is to faciliattae
contracts on behalf of principal with third party. In this reationship, the agenct benefits by
receiving the commission from the principal or supplier. Therefore, under agency law, there are
three types of relationships that are dealt with. These are:
 Principal and agent
 Agent and third party
 Principal and third party
Agency Relationship: Key features
Fiduciary Relationship: The relationship of principal and agent depends upon the trust. The
principal relies upo the agent for all of his activities and duties. He assigns the duties and
resposnibilities to agent either expressly or impliedly based on the confidence and trust.
Liability of Principal: This is the most significnt characteristic of an agency relationship. Based
on the terms and conditions of a contract of agency, the principal shall be liable for the actions of
his agent. The agent must act within the authorty given by his principal as under certain
circumstances, the agent is held personally liable (Lee and Taylor, 2014). Based on the general
rule of agency, the principal shall be liable and accountable in case of any loss that may have
caused to the third party for the actions of the agent. Therefore, any losses suffered by third party
as a result of actions of agent, the principal shall be laible to compensate the third party.
Consent: The relationship of principal and agent are based upon the trust and confidence that is
commended by the principal in agent. However, for the purpose of enforcement of the agency
contract, the principal must have given his express or implied consent to the agent to act on his
behalf.
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Contractual capacity: The relatioship of agency comes into existence with a legal contract and
for a valid contract, it is importat that both principal and agent are legally capable of entering in a
contract (Cheng-Han, 2012). They must not be disqualified by law to enter into a contract.
Authority of an Agent
For an agency relationship, the authority of agent is a siginificant characteristic. Under the
agency laws, a agent shall be authorized to perform only those acts which have been consented
by his principal. However, under certain circusmtances, acts are not been consented are also
performed by the agent. Irrespective of the consent, principal is held bound by the actions of his
agent. The authority to act on behalf of principal can be given to an agent in various ways.
Therefore, the various types of authorities that can be given to an agent includes actual authority,
apparent authority and usual authority.
Actual Authority
Under this types of authority, the agent is authorised to act on behalf of the principal expressly or
impliedly.In other words, an authority can be termed as actual when the words of the principal or
his conduct creates an impression on the agent that he is authorised to represent himself against
third partise on principal’s behalf. The actual authority can be given to the agent expressly or
impliedly.
Express Authority: In this authority, an express agreement is signe between principal and agent
under which the agent is authorised to principal to act on his behalf. The example of such type of
authority can be seen as an agreement under which the president is authorised by the board of
directors of compay for purchase of a new land (Gailmard, 2012). Such authority is given to
perform a specific act or represent the principal in a particular area.
Implied Authority: This is an actual authority by which the agent is autorised under an
agreement to represent the principal but he may not be authorised for any particular act. The
agent is granted the authority to perform all the acts which may be necessary to carry out his pre-
defined duties. For example: when a clerk is hired by the general manager of a departmental
store, then such store shall be bound by his contract, even though such approitment was not
expressly authorised.
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Therefore, actual authority is a type of authoriuty under which the agent is aurthorised to
represent the principal or act on his behalf with his consent and such consent is given either
expressly or impliedly. In a decided case of Freeman And Lockyer V. Burkhurst Park
Properties Ltd (1964), actual authority of an agent was decribed by the judicial authorities. They
described the actual authority as the legal relationship between the agent and principal which is
created by way of an agreement and they alone are parties to that agreement. The scope of such
authority shall be determined based on the terms and conditiosn of contract and the ordinary
meaning as may be construed from any such contrcat. However, such interpretation shall include
implication of the express words, course of dealing betwee parties and usage of trade (French,
2015). It was furthe stated that such authority shall be categorised as express if given by words
and it shall be classified as implied if it is inferred by surrounding circumstances or conduct of
parties.
Another example of implied actual authority can be referred from the case of Hely-Hutchinson v
Brayhead Ltd [1967]. The implied authority of an agent can be identified by way of conduct of
parties and case circumstances. In th given case, a member from amongst directors was
appointed as managing director. He was thereby authorise to perform all such acts as the office
would otherwise be authorised to do.
Apparent or ostensible authority
It is another type of authority under which even though no consent is given to agent for acting on
principal’s behalf, yet he is bound by his actions. Under this type of authority, a reasonable third
party is under an impression that an individual has authority to act as agent of principal. This
implies that the principal is bound by the actions of agent, even though there was no express or
implied consent of the principal for acting as agent (Allen and Kraakman, 2016). Therefore, in
this type of authority, the agent only has the appearance of authority and not the actual authority.
Under this type of authority an estoppel is raised as there is an assurance given to third party on
which it relies and denying such authority would be inequitable for the principal. In certain
circumstances, the actual and apparent authority coincide with each other. For example- in the
event of appointment of a managing director who also happens to be a board manager, he is not
only conferred with the implied authority but is also given the authority to do all suct activties
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which are otherwise conferred in that office. This type of authority is commonly referred as
ostensible or apparent authority.
The doctrine of apparent authority can be made enforceable only when the three essential
conditions are fulfilled. All these conditions are mandatory for holding a pricipal liable for the
acts of his agent. These conditions are as follows:
 There is a represntation made by agent that he is authorised expressly or impliedly to act
on behalf of the principal.
 The reprsentation of apparent authority i.e there exists an authority to act on behalf of
principal is made by any person who has an actual authority to act on behalf of principal
under any other circumstances (Taylor and Van Every, 2014).
 Due to such represntation, the third party was influenced to enter into a contrcat and such
contract is entered into by the third party on relaince of agent’s authority to act of
principal’s behalf.
As there is no consent in case of apparent authority, the principal can be made bound for
apparent authority only when all the abovementioned conditiosn are fulfilled. Upon fulfillment
of all such conditions, the apparent authority is made enforceable and valid under the agency
law.
The doctrine of apparent authority can be made more clear if referred to the decided cases. In a
decided case of Summer v Salomon [1857], a jewellery shop was owned by Solomon in Lewes
and the management of shop was in hands of is nephew Abraham. In general course of busines,
Solomon used to order jewellery from Summers, a jeweller in London and the Solomon only
used to clear the payment. One day, when solomon was out of town, his nephew ordered the
jewellery and ran away with them (Frank, 2017). Summer asked Solomon to clear the payment
but he denied. A suit was filed against Solomon for payment and it was decided that his nephew
was acting as his agent and had an apparent authority. Therefore, Solomon was held liable to
make the payment.
Further, the principles of agency relatinship and authority as summarised under the case of
Ukraine vs The law debenture trust corporation [2018] are as follows:
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 An agency can be of two types actual and apparent. Under actual authority, the agent is
truly authorised to act whereas under apparent authority, the principal by his conduct
or words creates an impression that the agenct is authorised to act on his behalf and
that he is authorised to hold the principal liable.
 The actual authority can be categorised into implied or express.
 Under express authority, the agent is given express authority to act on his behalf for a
particular transaction or a series of transaction for a particular class.
 Under implied authority, there are circumstances in which the authority of agent was
falling short of words and the agent is authrised to act on behalf of principal in various
transactions (Tosato, 2016).
 Appointment of chief exective of any company is an example of implied authority as
by such appoitment, the agent is authorised to enter into all the transactions as
conferred upon him by office of executive.
 With reference to case of Freeman & Lockyer, the implied authority can also be said to
have come into effect when there is no such appoitment to office and yet the agent acts
as if he has been appointed and the acting of agenct in such way is approved by the
principal.
 Under any circumstances where the principal holds an agent to be acting on his behalf
by his conduct, shall be deemed to be an ostensible authority (Ottow, 2015).
 Usually, the circumstances in which the implied actual authority has been given will
also give rise to apparent authority.
Usual Authority
This is a type of authority conferred upon an agent by virtue of his usual position or by custom. It
can be seen as an independendent type of authority or as an expanded scope of apparent or actual
authority.
Watteau v Fenwick [1893] is a landmark case under which an undisclosed principal was held
liable for the actions of his agent. Watteau was the suppplier of cigars to the beer house
‘Victoria’. The beer house was operated by ‘Humble’ who was not the owner. However, he used
to order cigars as and when required. He eventually failed to make the payemnt for supplied
cigars. Watteau filed a claim for payemt against Fenwick, the original owner (Bachtler and
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Ferry, 2015). Fewick defended himself stating that no authority was given to Humble to order
cigars. However, the court held him liable stating that he had a general autority to act on behalf
of the owner and therefore, Fenwick is liable to make the payment. An appeal was made to this
decision which was also rejected and Fenwick was held liable as an undisclosed principal.
Therefore, in this case, it shall be deemed that Humble had the usual authority to act on behalf of
Fenwick.
Authority by Ratification
This is a type of authority under which the agent does not actually have the authority when he
acted on behalf of principal but the principal later ratiifies the position and made himelf bound
by actions of agent.
This doctrine can be referred to the case of Keighley, Maxstead & Co v Durant [1901]. The
court in the given case stated that when a person enters into a contract on behalf of another
person without authority and such position is eventually ratified by the person on whose behalf
the contract has been made, then such person on whose behalf the contract is made shall be
deemed to be a party to contract, even though he is actually not a party to contract (Watts, 2015).
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Conclusion
The report concludes that the agency law is a significant apart of the commercial law as the
corporations and other business organziatiosn can opearte only through agency. The main aim of
law of agency is to ensure that the commercial parties are bought together to form contractual
relations through agents and it ensures that such agents are not held liable for contractual terms
under adverse circusmatnces. The principal must have completed trust and confidence in agent
for ensuring that he bargains on his behalf in his interest. The law of agency bought out the
fiduciary realtionship by relying on the trust and confidence placed by principal in agent. Strict
obligatiosn are imposed under the law of agency. However, the whole law of agency revolves
around the principle of authority. The principal can be made bound by way of authority. Such
authority may be given with or without consent.
In my opinion, the concept of consent and authority is highly significant for the purpose of
enforcement of rights and liabilities under the contract of agency. The obligations of parties can
be determined based on such rights and liabilities and the parties must ensure that the authority
or consent is given in acordance to the principles of law of agency. A principal can be made eve
without consent and this principal has been enacted for protection of best interest of the third
party who acts by estoppel.
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References
 Allen, W.T. and Kraakman, R., 2016. Commentaries and cases on the law of business
organization. Wolters Kluwer law & business.
 Bachtler, J. and Ferry, M., 2015. Conditionalities and the performance of European
structural funds: A principal–agent analysis of control mechanisms in European union
cohesion policy. Regional Studies, 49(8), pp.1258-1273.
 Cheng-Han, T., 2012. Authority, vicarious liability and misrepresentation. Sing. J. Legal
Stud., p.92.
 Frank, M., 2017. Satan's Servant or Authorities' Agent? Publicans in Eighteenth-Century
Germany. In The world of the tavern. Routledge.
 French, P.A., 2015. Corporate moral agency. Wiley Encyclopedia of Management, pp.1-
3.
 Gailmard, S., 2012. Accountability and principal-agent models. Chapter prepared for the
Oxford Handbook of Public Accountability.
 Gailmard, S., 2012. Accountability and principal-agent models. Chapter prepared for the
Oxford Handbook of Public Accountability.
 Lee, J. and Taylor, M.S., 2014. Dual roles in psychological contracts: When managers
take both agent and principal roles. Human Resource Management Review, 24(1), pp.95-
107.
 Ottow, A., 2015. Market and competition authorities: good agency principles. OUP
Oxford.
 Taylor, J.R. and Van Every, E.J., 2014. When organization fails: Why authority matters.
Routledge.
 Tosato, A., 2016. Commercial agency and the duty to act in good faith. Oxford Journal
of Legal Studies, 36(3), pp.661-695.
 Watts, P., 2015. Contracts Made by Agents on Behalf of Principals with Latent Mental
Incapacity: The Common Law Position. The Cambridge Law Journal, 74(1), pp.140-154.
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