Contract of Agency

Introduction

A contract of agency creates a legal link between a principal and an agent, allowing the agent to act on the principal’s behalf and affect the principal’s legal position in dealings with third parties. It is central to business: from sales teams and distributors to solicitors, auctioneers and company directors.

This guide sets out how agency relationships are created, the different types of authority, the duties owed by both sides, who is liable when things go wrong, and how agency ends. It also includes leading cases and practical steps for real-world use.

What You'll Learn

• How agency relationships are formed, with or without a written agreement
• The difference between actual, implied, apparent (ostensible), usual and ratified authority
• Key duties owed by agents and principals, including fiduciary duties and indemnities
• Who is liable to third parties in disclosed and undisclosed agency
• How agency terminates and what happens to outstanding obligations
• Practical steps for drafting, managing and evidencing authority
• The main cases you should know for exams and practice

Core Concepts

Creating an Agency Relationship

An agency can arise in several ways:

• Agreement (express or implied)

  • Express: authority given in writing or orally (for example, a written appointment of a sales agent).
  • Implied: inferred from conduct or circumstances (for example, repeatedly allowing a staff member to negotiate and conclude contracts).
  • No special formalities are required in general. However, a power of attorney must be executed as a deed under the Powers of Attorney Act 1971. Authority to execute a deed on behalf of a principal normally requires authority granted by deed.

• By estoppel

  • If the principal represents (by words or conduct) that an agent has authority, and a third party reasonably relies on that representation, the principal may be bound even if the agent had no actual authority. See Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480.

• By necessity

  • In emergencies where it is impossible to contact the principal, and action is needed to protect the principal’s property or interests, the law may recognise agency by necessity (The Great Northern Railway Co v Swaffield (1874) LR 9 Ex 132).

Capacity and consideration:

• The principal must have capacity to contract with the third party. An agent may be a minor, but their personal liability to the principal can be limited by capacity rules.
• Consideration is not required to create an agency relationship, although remuneration is often agreed separately.

Types of Authority: Actual, Implied, Apparent and Ratification

Authority defines when a principal is bound.

• Actual authority

  • Express: clearly granted by the principal.
  • Implied: authority necessary or usual to carry out the express mandate, or inferred from the agent’s position. Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 confirms that implied (often called “usual”) authority is a form of actual authority.

• Apparent (ostensible) authority

  • Arises from a representation by the principal (including by appointing someone to a role) that the agent has authority, reliance by the third party, and a resulting contract within the scope of that representation. Freeman & Lockyer remains the leading case. The “indoor management rule” from Royal British Bank v Turquand (1856) 6 E&B 327 supports a third party’s right to assume a company’s internal procedures have been complied with.

• “Usual” authority and the Watteau problem

  • Watteau v Fenwick [1893] 1 QB 346 has been read as imposing liability on an undisclosed principal for acts within the usual authority of a manager, even absent representation. The case is controversial and its scope is narrow; most cases can be resolved using actual or apparent authority.

• Ratification

  • A principal may adopt an unauthorised act, making it binding from the date of the act (relation back). Conditions include: the principal existed and had capacity at the time; the agent purported to act for the principal; the principal ratifies within a reasonable time with full knowledge of material facts; and the act is lawful and not withdrawn. See Bolton Partners v Lambert (1889) 41 Ch D 295 and Keighley, Maxted & Co v Durant [1901] AC 240.

Duties of Agents

Agents owe contractual and fiduciary duties:

• Follow instructions and act within authority

  • Departing from instructions risks personal liability and loss of remuneration.

• Care and skill

  • Exercise reasonable care and the level of skill reasonably expected of someone in that role.

• Fiduciary duties (no conflict, no profit, confidentiality)

  • Avoid conflicts of interest, do not make secret profits, and keep confidential information private. Bristol and West Building Society v Mothew [1998] Ch 1 explains fiduciary duties; FHR European Ventures LLP v Cedar Capital Partners [2014] UKSC 45 confirms bribes and secret commissions are held on constructive trust for the principal.

• Duty to account

  • Keep proper records, separate the principal’s property, and account for money received.

• No unauthorised delegation

  • Do not delegate without permission, unless customary or necessary.

Breach can lead to remedies such as an account of profits, equitable compensation, rescission, and termination.

Duties of Principals

Principals must support the agent to carry out their mandate:

• Remuneration

  • Pay as agreed, or a reasonable sum if none is stated. Commission is often conditional on achieving the specified result. See Luxor (Eastbourne) Ltd v Cooper [1941] AC 108 (terms govern when commission is earned). For commercial agents, termination compensation or indemnity may be due under the Commercial Agents (Council Directive) Regulations 1993 (as considered in Lonsdale v Howard & Hallam Ltd [2007] UKHL 32).

• Indemnity

  • Reimburse expenses and liabilities properly incurred in the course of authorised acts. Limits apply to sums not properly incurred or no longer held for the principal: Bailey v Angove’s Pty Ltd [2016] UKSC 47.

• Co-operation and information

  • Provide information and access reasonably needed for the agent to perform the mandate.

Liability to and by Third Parties

Who is bound depends on disclosure and authority:

• Disclosed principal

  • If the agent acts with actual or apparent authority for a named or disclosed principal, the contract is between principal and third party. The agent is usually not liable on the contract.

• Undisclosed principal

  • The third party may sue either the agent or the undisclosed principal once revealed (but not recover twice). Limits apply where personal trust or identity was essential to the bargain.

• Agent’s personal liability

  • An agent can be liable if they contract personally, act outside authority, or give a warranty of authority (promising they have authority when they do not). Classic cases: Collen v Wright (1857) 8 E&B 647; Yonge v Toynbee [1910] 1 KB 215. Auctioneers can incur liability on collateral contracts with bidders: Barry v Davies (t/a Heathcote Ball & Co) [2001] 1 All ER 944.

• Tort liability

  • A principal can be vicariously liable for torts committed by an agent acting within the scope of their role, where the relationship is akin to employment. Various Claimants v Barclays Bank plc [2020] UKSC 13 sets out the modern approach.

• Limits on authority

  • If an agent exceeds authority, the principal is not bound unless apparent authority or ratification applies. The agent may be liable to both principal and third party.

Ending the Relationship: Revocation, Renunciation and Frustration

Agency ends by:

• Agreement or completion of the task
• Expiry of a fixed term
• Revocation by the principal or renunciation by the agent (subject to contract terms and reasonable notice)
• Death, loss of capacity, or insolvency (events that remove capacity to contract)
• Frustration or illegality (for example, supervening events that make performance impossible or unlawful). Brexit did not frustrate a long lease: Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch); frustration arguments in agency will be similarly narrow.

Key points on termination:

• Give clear notice to the agent and, to cut off apparent authority, notify third parties who deal with the agent (or publish in the usual channels).
• “Agency coupled with an interest” (where the agent holds a proprietary interest in the subject-matter) may be irrevocable to the extent of that interest.
• On termination, settle accounts, return property, and address post-termination commission or compensation (particularly under the Commercial Agents Regulations).

Key Examples or Case Studies

• Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480

  • Context: A company’s architect acted as if he were managing director.
  • Key point: Apparent authority arises from the principal’s representation and the third party’s reliance.
  • Application: Record board approvals and role titles; manage what is said to counterparties.

• Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549

  • Context: A chairman acted without formal appointment as managing director.
  • Key point: Implied (usual) authority is a form of actual authority based on conduct and position.
  • Application: Regular patterns of behaviour can create actual authority; write down limits.

• Watteau v Fenwick [1893] 1 QB 346

  • Context: A manager bought goods beyond his restricted mandate; the principal was undisclosed.
  • Key point: The court imposed liability on the principal for purchases within the usual authority of a manager. The scope is narrow and much criticised.
  • Application: If you restrict authority, inform counterparties; undisclosed principals carry added risk.

• Bolton Partners v Lambert (1889) 41 Ch D 295

  • Context: An offer was withdrawn but later ratified by the principal.
  • Key point: Ratification relates back to bind the third party from the date of the agent’s act.
  • Application: Move quickly on ratification; ensure the agent acted on your behalf, not their own.

• FHR European Ventures LLP v Cedar Capital Partners [2014] UKSC 45

  • Context: Secret commission received by an agent in a hotel acquisition.
  • Key point: Bribes and secret commissions are held on trust for the principal.
  • Application: Include anti-bribery clauses; require disclosure of all commissions.

• Barry v Davies (t/a Heathcote Ball & Co) [2001] 1 All ER 944

  • Context: Auctioneer refused to sell to the highest bidder.
  • Key point: Auctioneers can be liable on a collateral contract with bidders.
  • Application: Agents conducting auctions should set and follow clear conditions of sale.

Practical Applications

• Define the role in writing

  • State scope, territory, products, pricing discretion, ability to bind, and any spending limits.

• Evidence authority externally

  • Issue letters of authority; update websites and stationery; file company appointments; control who signs contracts.

• Build guardrails

  • Dual sign-off for high-value deals; template contracts; approval matrices; central contract registers.

• Manage conflicts and commissions

  • Insert no-conflict, no-secret-profit and anti-bribery clauses; require prompt accounting; audit rights.

• Verify counterparties’ authority

  • Ask for proof of authority; check Companies House; confirm board approvals; rely on Turquand only where appropriate.

• Plan for termination

  • Include notice periods, post-termination commissions, and confidentiality. For commercial agents, consider whether compensation or an indemnity will apply under the 1993 Regulations.

• Communicate changes promptly

  • When authority changes, notify the agent and third parties to cut off apparent authority.

• Keep records

  • Meeting minutes, written instructions, and correspondence can resolve later disputes on authority and scope.

Summary Checklist

• Is there a clear appointment (express or implied) and does the principal have capacity?
• What type(s) of authority apply: actual (express/implied), apparent, usual, or ratified?
• Have fiduciary risks been addressed (no conflict, no secret profit, confidentiality)?
• Are remuneration, commission triggers, and indemnities clearly drafted?
• Who bears liability to third parties (disclosed/undisclosed principal rules considered)?
• Are warranty of authority risks managed for agents signing documents?
• Are vicarious liability risks addressed (scope of role, supervision, insurance)?
• Is there a termination plan (notice, post-termination sums, Commercial Agents Regulations)?
• Have third parties been notified of changes to prevent lingering apparent authority?

Quick Reference