Introduction
A contract of agency establishes a legally binding relationship where one party, the agent, is authorized to act on behalf of another, the principal. This arrangement is fundamental to commercial interactions, facilitating a wide range of activities from simple sales to complex financial transactions. The agent, acting under the principal's authority, creates legal relationships with third parties. This form of contract requires a clear understanding of technical principles, key requirements, and the specific roles and responsibilities of each party involved. The core concept revolves around the agent's ability to affect the principal's legal position. This article provides a comprehensive exploration of contract of agency.
Formation of an Agency Contract
The formation of a contract of agency requires specific legal elements. First, there must be an agreement. This agreement need not be formal; it can be expressed or implied through conduct. Express agreements are explicitly stated, either orally or in writing, whereas implied agreements are inferred from the actions of the parties. For instance, a business owner explicitly hiring a sales representative constitutes an express agreement. Meanwhile, repeatedly allowing a specific individual to negotiate sales on their behalf might imply an agency agreement. A critical element is the principal's consent, which demonstrates the intention to be legally bound by the agent’s actions. In Southern Foundries Ltd v Shirlaw [1940] AC 701, an implied term was found, demonstrating that the nature of the agreement can imply terms not explicitly stated, showing the importance of context in agency.
Furthermore, contractual capacity is a requirement. Both the principal and the agent must have the legal capacity to contract. For instance, an individual below the age of majority or one deemed legally incompetent cannot validly act as a principal. Finally, consideration is often present; though it need not be as substantial as in other forms of contracts. For example, a small commission can act as consideration in exchange for acting as an agent, while, in some circumstances, even a gratuitous promise to act as an agent may suffice, establishing a valid agency relationship.
Types of Authority in Agency
The authority of an agent is crucial in determining the extent to which a principal is bound by the agent’s actions. Several types of authority exist. Actual authority, either express or implied, derives from the principal's explicit or implicit instructions. For example, a real estate agent has express authority to sell a property, or an employee has implied authority to make purchases necessary for their work. Apparent or ostensible authority, established in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, arises when a principal's conduct leads a third party to reasonably believe that the agent has the necessary authority. For instance, if a business allows an employee to negotiate with suppliers, third parties may reasonably assume this employee has the authority to sign contracts.
Usual authority refers to the authority that an agent in a particular position would normally possess. This does not apply where the third party is aware of limitations of the agent’s authority as established in Watteau v Fenwick [1893] 1 QB 346. Finally, an agent’s authority may also arise by ratification, where a principal approves the unauthorized actions of an agent, creating a binding agreement retroactively.
Agent's Duties to the Principal
An agent owes several duties to the principal. First, the agent must perform their contractual obligations in good faith, acting diligently, honestly, and with due care and skill in performing those obligations. As seen in Lonsdale v Howard & Hallam Ltd [2007] UKHL 32, agents are bound by the terms of their agreements and must act responsibly. An agent also has a duty to act within the scope of their authority, adhering strictly to the principal's instructions. In addition, agents must not delegate their responsibilities without the principal's express consent.
A critical duty is the obligation to avoid conflicts of interest, meaning agents must not exploit their position for personal gain at the expense of the principal. The case of Target Holdings Ltd v Redferns [1995] UKHL 10 shows that even where a trust exists, it may be limited by the specific objectives of the agency. Furthermore, agents have a duty to maintain confidentiality, preserving sensitive information acquired while working for the principal. Finally, an agent is accountable and owes a duty to account by keeping records, providing financial reports and transferring funds to the principal in a timely manner.
Principal's Duties to the Agent
While the agent has significant obligations, the principal also has legal responsibilities. The principal must remunerate the agent according to their agreement. For example, this could be paying a salary, a commission or a specific fee. If the contract does not outline a specific sum, then a reasonable sum must be paid. Furthermore, the principal has a duty to indemnify or reimburse the agent for any expenses properly incurred during the course of their agency, so that the agent is not left out of pocket. However this will only apply to expenses properly incurred as a result of their employment, as seen in Bailey v Angove’s Pty Ltd [2016] UKSC 47 where a principal was not liable for funds that had been received by an agent but that the agent could not account for. The principal also has an obligation to co-operate and not unduly hinder the agent in performing their duties.
The principal should provide accurate information and instructions to enable the agent to execute their role effectively, which will assist to ensure that the agent’s acts bind the principal with third parties. The principal also has a responsibility to act in good faith and honestly with the agent.
Liability in Agency Relationships
Liability in agency contracts arises in various contexts. A principal is liable for actions of an agent when the agent acted within their actual or apparent authority, as seen in Barry v Davies (t/a Heathcote Ball & Co.) [2001] 1 All ER 944 where the auctioneer was held liable for a collateral contract, in circumstances where the owner would not have been. However, if the agent exceeds that authority, liability may lie with the agent only. When the agency is undisclosed, both the principal and agent could potentially be liable to third parties in a contractual dispute. Yet, the principal can step forward to take liability for actions, if the Agent had the requisite ‘usual authority’ or the actions are retrospectively ratified. Furthermore, if there are any issues of negligence on the part of the agent, then liability will be imputed on the principal. The case of Various Claimants v Barclays Bank [2020] UKSC 13 has recently sought to clarify the position of vicarious liability.
An agent may also incur liability. Where the agent acts outside of their authority or breaches their duties, then liability rests with them, and not the Principal. This is also the case where an agent acts on behalf of an undisclosed Principal. Finally, a breach of warranty may exist where the Agent represents authority they do not possess (as identified in Financings Ltd v Stimson [1962] 3 All ER 386).
Termination of Agency Contracts
Agency contracts can terminate in several ways. Termination can be by mutual agreement between the parties or through the completion of the task that the agency was designed for. A contract of agency can also expire if it has a specific duration or when a specific condition is met. The law will also terminate the contract of agency, as is the case when the Principal or the Agent dies, becomes insolvent or lacks the capacity to contract. If an agent breaches the contract or is in bad faith, or an event renders it impossible for them to perform the obligations under the contract, the contract can be terminated. The case of Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch) clarifies the position regarding the doctrine of frustration in contract law. Finally, a principal can revoke the authority, although liability may be incurred if there is a breach of contract.
Conclusion
Contracts of agency are fundamental in commerce, allowing principals to engage in transactions through their appointed agents. The legal principles governing agency relationships are complex, involving distinct elements of contract, tort and property law. The application of these principles can significantly vary based on the specific circumstances. It is essential for all parties in agency contracts to understand the core elements, the requirements that are in place for each party to a contract, the scope of authority, the duties of the agent and the potential liabilities and remedies. This understanding is crucial for maintaining effective and ethical business relationships. Understanding the interplay between the case law and legislation provides a foundation for success in all circumstances that revolve around a contract of agency.
