Agency (law)

Agency (law)

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Encyclopedia
The law of agency is an area of commercial law
Commercial law
Commercial law is the body of law that governs business and commercial transactions...

 dealing with a contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

ual or quasi-contract
Quasi-contract
A quasi-contract is a fictional contract created by courts for equitable, not contractual purposes. A quasi-contract is not an actual contract, but is a legal substitute for a contract formed to impose equity between two parties. The concept of a quasi-contract is that of a contract that should...

ual, or non-contractual set of relationships when a person, called the agent, is authorized to act on behalf of another (called the principal
Principal (law)
In commercial law, a principal is a person, legal or natural, who authorizes an agent to act to create one or more legal relationships with a third party...

) to create a legal relationship with a third party. Succinctly, it may be referred to as the relationship between a principal and an agent whereby the principal, expressly or impliedly, authorizes the agent to work under his control and on his behalf. The agent is, thus, required to negotiate on behalf of the principal or bring him and third parties into contractual relationship. This branch of law separates and regulates the relationships between:
  • Agents and principals;
  • Agents and the third parties with whom they deal on their principals' behalf; and
  • Principals and the third parties when the agents purport to deal on their behalf.


The common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...

 principle in operation is usually represented in the Latin
Latin
Latin is an Italic language originally spoken in Latium and Ancient Rome. It, along with most European languages, is a descendant of the ancient Proto-Indo-European language. Although it is considered a dead language, a number of scholars and members of the Christian clergy speak it fluently, and...

 phrase, qui facit per alium, facit per se, i.e. the one who acts through another, acts in his or her own interests and it is a parallel concept to vicarious liability
Vicarious liability
Vicarious liability is a form of strict, secondary liability that arises under the common law doctrine of agency – respondeat superior – the responsibility of the superior for the acts of their subordinate, or, in a broader sense, the responsibility of any third party that had the "right, ability...

 and strict liability
Strict liability
In law, strict liability is a standard for liability which may exist in either a criminal or civil context. A rule specifying strict liability makes a person legally responsible for the damage and loss caused by his or her acts and omissions regardless of culpability...

 in which one person is held liable in criminal law
Criminal law
Criminal law, is the body of law that relates to crime. It might be defined as the body of rules that defines conduct that is not allowed because it is held to threaten, harm or endanger the safety and welfare of people, and that sets out the punishment to be imposed on people who do not obey...

 or tort
Tort
A tort, in common law jurisdictions, is a wrong that involves a breach of a civil duty owed to someone else. It is differentiated from a crime, which involves a breach of a duty owed to society in general...

 for the acts or omissions of another.

In India, section 182 of the Contract Act 1872
Indian Contract Act 1872
Indian Contract Act 1872 is the main source of law regulating contracts in Indian law, as subsequently amended.It determines the circumstances in which promise made by the parties to a contract shall be legally binding on them. All of us enter into a number of contracts everyday knowingly or...

 defines Agent as “a person employed to do any act for another or to represent another in dealings with third persons”.

The concepts


The reciprocal rights and liabilities between a principal and an agent reflect commercial and legal realities. A business owner often relies on an employee or another person to conduct a business. In the case of a corporation, since a corporation is a fictitious legal person, it can only act through human agents. The principal is bound by the contract entered into by the agent, so long as the agent performs within the scope of the agency.

A third party may rely in good faith on the representation by a person who identifies himself as an agent for another. It is not always cost effective to check whether someone who is represented as having the authority to act for another actually has such authority. If it is subsequently found that the alleged agent was acting without necessary authority, the agent will generally be held liable.

Brief statement of legal principles


There are three broad classes of agent
  1. Universal agents hold broad authority to act on behalf of the principal, e.g. they may hold a power of attorney
    Power of attorney
    A power of attorney or letter of attorney is a written authorization to represent or act on another's behalf in private affairs, business, or some other legal matter...

     (also known as a mandate in civil law
    Civil law (legal system)
    Civil law is a legal system inspired by Roman law and whose primary feature is that laws are codified into collections, as compared to common law systems that gives great precedential weight to common law on the principle that it is unfair to treat similar facts differently on different...

     jurisdiction
    Jurisdiction
    Jurisdiction is the practical authority granted to a formally constituted legal body or to a political leader to deal with and make pronouncements on legal matters and, by implication, to administer justice within a defined area of responsibility...

    s) or have a professional relationship, say, as lawyer
    Lawyer
    A lawyer, according to Black's Law Dictionary, is "a person learned in the law; as an attorney, counsel or solicitor; a person who is practicing law." Law is the system of rules of conduct established by the sovereign government of a society to correct wrongs, maintain the stability of political...

     and client.
  2. General agents hold a more limited authority to conduct a series of transactions over a continuous period of time; and
  3. Special agents are authorized to conduct either only a single transaction or a specified series of transactions over a limited period of time.

Authority


An agent who acts within the scope of authority conferred by his or her principal binds the principal in the obligations he or she creates against third parties. There are essentially three kinds of authority recognized in the law: actual authority (whether express or implied), apparent authority, and ratified authority (explained here).

Actual authority



Actual authority can be of two kinds. Either the principal may have expressly conferred authority on the agent, or authority may be implied. Authority arises by consensual agreement, and whether it exists is a question of fact. An agent, as a general rule, is only entitled to indemnity from the principal if he or she has acted within the scope of her actual authority, and may be in breach of contract, and liable to a third party for breach of the implied warranty of authority. In tort, a claimant may not recover from the principal unless the agent is acting within the scope of employment.

Express actual authority
Express actual authority means an agent has been expressly told he or she may act on behalf of a principal.
  • Ireland v Livingstone (1872) LR 5 HL 395


Implied actual authority
Implied actual authority, also called "usual authority", is authority an agent has by virtue of being reasonably necessary to carry out his express authority. As such, it can be inferred by virtue of a position held by an agent. For example, partners have authority to bind the other partners in the firm, their liability being joint and several, and in a corporation, all executives and senior employees with decision-making authority by virtue of their position have authority to bind the corporation.
  • Hely-Hutchinson v Brayhead Ltd
    Hely-Hutchinson v Brayhead Ltd
    Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 is a UK company law case on the authority of agents to act for a company.-Facts:Lord Suirdale sued Brayhead Ltd for losses incurred after a failed takeover deal...

    [1968] 1 QB 549

Apparent authority



Apparent authority (also called "ostensible authority") exists where the principal's words or conduct would lead a reasonable person in the third party's position to believe that the agent was authorized to act, even if the principal and the purported agent had never discussed such a relationship. For example, where one person appoints a person to a position which carries with it agency-like powers, those who know of the appointment are entitled to assume that there is apparent authority to do the things ordinarily entrusted to one occupying such a position. If a principal creates the impression that an agent is authorized but there is no actual authority, third parties are protected so long as they have acted reasonably. This is sometimes termed "agency by estoppel
Estoppel
Estoppel in its broadest sense is a legal term referring to a series of legal and equitable doctrines that preclude "a person from denying or asserting anything to the contrary of that which has, in contemplation of law, been established as the truth, either by the acts of judicial or legislative...

" or the "doctrine of holding out", where the principal will be estopped from denying the grant of authority if third parties have changed their positions to their detriment in reliance on the representations made.
  • Rama Corporation Ltd v Proved Tin and General Investments Ltd [1952] 2 QB 147, Slade J, "Ostensible or apparent authority... is merely a form of estoppel, indeed, it has been termed agency by estoppel and you cannot call in aid an estoppel unless you have three ingredients: (i) a representation, (ii) reliance on the representation, and (iii) an alteration of your position resulting from such reliance."
  • Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
  • The Raffaella or Egyptian International Foreign Trade Co v Soplex Wholesale Supplies Ltd and PS Refson & Co Ltd [1985] 2 Lloyd's Rep 36

Watteau v Fenwick


In the case of Watteau v Fenwick, Lord Coleridge CJ on the Queen's Bench concurred with an opinion by Wills J that a third party could hold personally liable a principal who he did know about when he sold cigars to an agent that was acting outside of its authority. Wills J held that "the principal is liable for all the acts of the agent which are within the authority usually confided to an agent of that character, notwithstanding limitations, as between the principal and the agent, put upon that authority." This decision is heavily criticised and doubted, though not entirely overruled in the UK. It is sometimes referred to as "usual authority" (though not in the sense used by Lord Denning MR in Hely-Hutchinson, where it is synonymous with "implied actual authority"). It has been explained as a form of apparent authority, or "inherent agency power.
  • Authority by virtue of a position held to deter:
fraud and other harms that may befall individuals dealing with agents, there is a concept of Inherent Agency power, which is power derived solely by virtue of the agency relation.
For example, partners
Partnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...

 have apparent authority to bind the other partners in the firm, their liability being joint and several
Joint and several liability
Where two or more persons are liable in respect of the same liability, in most common law legal systems they may either be:* jointly liable, or* severally liable, or* jointly and severally liable.-Joint liability:...

 (see below), and in a corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...

, all executives and senior employees with decision-making authority by virtue of their declared position have apparent authority to bind the corporation.


Even if the agent does act without authority, the principal may ratify the transaction and accept liability on the transactions as negotiated. This may be express or implied from the principal's behavior, e.g. if the agent has purported to act in a number of situations and the principal has knowingly acquiesced, the failure to notify all concerned of the agent's lack of authority is an implied ratification to those transactions and an implied grant of authority for future transactions of a similar nature.

Liability of agent to third party


If the agent has actual or apparent authority, the agent will not be liable for acts performed within the scope of such authority, so long as the relationship of the agency and the identity of the principal have been disclosed. When the agency is undisclosed or partially disclosed, however, both the agent and the principal are liable. Where the principal is not bound because the agent has no actual or apparent authority, the purported agent is liable to the third party for breach of the implied warranty of authority.

Liability of agent to principal


If the agent has acted without actual authority, but the principal is nevertheless bound because the agent had apparent authority, the agent is liable to indemnify the principal for any resulting loss or damage.

Liability of principal to agent


If the agent has acted within the scope of the actual authority given, the principal must indemnify the agent for payments made during the course of the relationship whether the expenditure was expressly authorized or merely necessary in promoting the principal's business.

Duties


An agent owes the principal a number of duties. These include:
  • a duty to undertake the task or tasks specified by the terms of the agency (that is, the agent must not do things that he has not been authorised by the principal to do);
  • a duty to discharge his duties with care and due diligence; and
  • a duty to avoid conflict of interest between the interests of the principal and his own (that is, the agent cannot engage in conduct where stands to gain a benefit for himself to the detriment of the principal).


An agent must not accept any new obligations that are inconsistent with the duties owed to the principal. An agent can represent the interests of more than one principal, conflicting or potentially conflicting, only after full disclosure and consent of the principal.

An agent also must not engage in self-dealing
Self-dealing
Self-dealing is the conduct of a trustee, an attorney, a corporate officer, or other fiduciary that consists of taking advantage of his position in a transaction and acting for his own interests rather than for the interests of the beneficiaries of the trust, corporate shareholders, or his clients...

, or otherwise unduly enrich himself from the agency. An agent must not usurp an opportunity from the principal by taking it for himself or passing it on to a third party.

In return, the principal must make a full disclosure of all information relevant to the transactions that the agent is authorized to negotiate and pay the agent either a prearranged commission
Commission (remuneration)
The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. Payments often will be calculated on the basis of a percentage of the goods sold...

, or a reasonable fee established after the fact.

Termination


An agent's authority can be terminated at any time. If the trust between the agent and principal has broken down, it is not reasonable to allow the principal to remain at risk in any transactions that the agent might conclude during a period of notice.

As per sections 201 to 210 of the Indian Contract Act 1872
Indian Contract Act 1872
Indian Contract Act 1872 is the main source of law regulating contracts in Indian law, as subsequently amended.It determines the circumstances in which promise made by the parties to a contract shall be legally binding on them. All of us enter into a number of contracts everyday knowingly or...

, an agency may come to an end in a variety of ways:
  1. Withdrawal by the agent – however, the principal cannot revoke an agency coupled with interest to the prejudice of such interest. An agency is coupled with interest when the agent himself has an interest in the subject-matter of the agency, e.g., where the goods are consigned by an upcountry constituent to a commission agent for sale, with poor to recoup himself from the sale proceeds, the advances made by him to the principal against the security of the goods; in such a case, the principal cannot revoke the agent’s authority till the goods are actually sold, nor is the agency terminated by death or insanity (illustrations to section 201);
  2. By the agent renouncing the business of agency;
  3. By the business of agency being completed;
  4. By the principal being adjudicated insolvent (section 201).


The principal also cannot revoke the agent’s authority after it has been partly exercised, so as to bind the principal (section 204), though he can always do so, before such authority has been so exercised (section 203).

Further, as per section 205, if the agency is for a fixed period, the principal cannot terminate the agency before the time expired, except for sufficient cause. If he does, he is liable to compensate the agent for the loss caused to him thereby. The same rules apply where the agent, renounces an agency for a fixed period. Notice in this connection that want of skill, continuous disobedience of lawful orders, and rude or insulting behavior has been held to be sufficient cause for dismissal of an agent. Further, reasonable notice has to be given by one party to the other; otherwise, damage resulting from want of such notice, will have to be paid (section 206). As per section 207, the revocation or renunciation of an agency may be made expressly or impliedly by conduct. The termination does not take effect as regards the agent, till it becomes known to him and as regards third party, till the termination is known to them (section 208).

When an agent’s authority is terminated, it operates as a termination of subagent also (section 210).

This has become a more difficult area as states are not consistent on the nature of a partnership. Some states opt for the partnership as no more than an aggregate of the natural person
Natural person
Variously, in jurisprudence, a natural person is a human being, as opposed to an artificial, legal or juristic person, i.e., an organization that the law treats for some purposes as if it were a person distinct from its members or owner...

s who have joined the firm. Others treat the partnership as a business entity and, like a corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...

, vest the partnership with a separate legal personality. Hence, for example, in English law
English law
English law is the legal system of England and Wales, and is the basis of common law legal systems used in most Commonwealth countries and the United States except Louisiana...

, a partner is the agent of the other partners whereas, in Scots law
Scots law
Scots law is the legal system of Scotland. It is considered a hybrid or mixed legal system as it traces its roots to a number of different historical sources. With English law and Northern Irish law it forms the legal system of the United Kingdom; it shares with the two other systems some...

 where there is a separate personality, a partner is the agent of the partnership. This form of agency is inherent in the status of a partner and does not arise out of a contract of agency with a principal. The English Partnership Act 1890
Partnership Act 1890
The Partnership Act 1890 is a Act of the Parliament of the United Kingdom, which governs the rights and duties of people who carry on business in common with a view to profit.-Main provisions:...

 provides that a partner who acts within the scope of his actual authority (express or implied) will bind the partnership when he does anything in the ordinary course of carrying on partnership business. Even if that implied authority has been revoked or limited, the partner will have apparent authority unless the third party knows that the authority has been compromised. Hence, if the partnership wishes to limit any partner's authority, it must give express notice of the limitation to the world. However, there would be little substantive difference if English law was amended: partners will bind the partnership rather than their fellow partners individually. For these purposes, the knowledge of the partner acting will be imputed
Imputation (law)
In law, the principle of imputation or attribution underpins the concept that ignorantia juris non excusat—ignorance of the law does not excuse. All laws are published and available for study in all developed states...

 to the other partners or the firm if a separate personality. The other partners or the firm are the principal and third parties are entitled to assume that the principal has been informed of all relevant information. This causes problems when one partner acts fraudulently or negligently
Negligence
Negligence is a failure to exercise the care that a reasonably prudent person would exercise in like circumstances. The area of tort law known as negligence involves harm caused by carelessness, not intentional harm.According to Jay M...

 and causes loss to clients of the firm. In most states, a distinction is drawn between knowledge of the firm's general business activities and the confidential affairs as they affect one client. Thus, there is no imputation if the partner is acting against the interests of the firm as a fraud. There is more likely to be liability in tort
Tort
A tort, in common law jurisdictions, is a wrong that involves a breach of a civil duty owed to someone else. It is differentiated from a crime, which involves a breach of a duty owed to society in general...

 if the partnership benefited by receiving fee income for the work negligently performed, even if only as an aspect of the standard provisions of vicarious liability. Whether the injured party wishes to sue the partnership or the individual partners is usually a matter for the plaintiff since, in most jurisdictions, their liability is joint and several
Joint and several liability
Where two or more persons are liable in respect of the same liability, in most common law legal systems they may either be:* jointly liable, or* severally liable, or* jointly and severally liable.-Joint liability:...

.

Agency relationships


Agency relationships are common in many profession
Profession
A profession is a vocation founded upon specialized educational training, the purpose of which is to supply disinterested counsel and service to others, for a direct and definite compensation, wholly apart from expectation of other business gain....

al areas.
  • employment
    Employment
    Employment is a contract between two parties, one being the employer and the other being the employee. An employee may be defined as:- Employee :...

    .
  • real estate
    Real estate
    In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...

     transactions (real estate broker
    Real estate broker
    A real estate broker, real estate agent or realtor is a party who acts as an intermediary between sellers and buyers of real estate/real property and attempts to find sellers who wish to sell and buyers who wish to buy...

    age, mortgage broker
    Mortgage broker
    A mortgage broker acts as an intermediary whose brokers mortgage loans on behalf of individuals or businesses.Traditionally, banks and other lending institutions have sold their own products. However as markets for mortgages have become more competitive, the role of the mortgage broker has become...

    age). In real estate brokerage, the buyers or sellers are the principals themselves and the broker or his salesperson who represents each principal is his agent.
  • financial advice (insurance agency, stock broker
    Stock broker
    A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...

    age, accountancy
    Accountancy
    Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in...

    )
  • contract negotiation and promotion
    Promotion (marketing)
    Promotion is one of the four elements of marketing mix . It is the communication link between sellers and buyers for the purpose of influencing, informing, or persuading a potential buyer's purchasing decision....

     (business management) such as for publishing
    Publishing
    Publishing is the process of production and dissemination of literature or information—the activity of making information available to the general public...

    , fashion model, music
    Music
    Music is an art form whose medium is sound and silence. Its common elements are pitch , rhythm , dynamics, and the sonic qualities of timbre and texture...

    , movies, theatre
    Theatre
    Theatre is a collaborative form of fine art that uses live performers to present the experience of a real or imagined event before a live audience in a specific place. The performers may communicate this experience to the audience through combinations of gesture, speech, song, music or dance...

    , show business
    Show business
    Show business, sometimes shortened to show biz, is a vernacular term for all aspects of entertainment. The word applies to all aspects of the entertainment industry from the business side to the creative element ....

    , and sport
    Sport
    A Sport is all forms of physical activity which, through casual or organised participation, aim to use, maintain or improve physical fitness and provide entertainment to participants. Sport may be competitive, where a winner or winners can be identified by objective means, and may require a degree...

    .


An agent in commercial law
Commercial law
Commercial law is the body of law that governs business and commercial transactions...

 (also referred to as a manager) is a person who is authorised to act on behalf of another (called the principal
Principal (law)
In commercial law, a principal is a person, legal or natural, who authorizes an agent to act to create one or more legal relationships with a third party...

 or client) to create a legal relationship with a third party.

See also



  • Agent of Record
    Agent of Record
    An agent of record is an individual or a legal entity with a duly properly executed in line with the prevailing legal norms and regulations contractual agreement with an insurance policy owner...

  • Agency in English law
    Agency in English law
    Agency in English law is a component of UK commercial law, and forms a core set of rules necessary for the smooth functioning of business.-Authority:...

  • Corporate officer
  • Employee
  • Entertainment law
    Entertainment law
    Entertainment law or media law is a term for a mix of more traditional categories of law with a focus on providing legal services to the entertainment industry. The principal areas of Entertainment Law overlap substantially with the well-known and conventional field of intellectual property law...

  • Independent contractor
    Independent contractor
    An independent contractor is a natural person, business, or corporation that provides goods or services to another entity under terms specified in a contract or within a verbal agreement. Unlike an employee, an independent contractor does not work regularly for an employer but works as and when...

  • Literary agent
    Literary agent
    A literary agent is an agent who represents writers and their written works to publishers, theatrical producers and film producers and assists in the sale and deal negotiation of the same. Literary agents most often represent novelists, screenwriters and major non-fiction writers...

  • Ostensible authority
  • Principal–agent problem
  • Cestui que
  • Registered agent
    Registered Agent
    A registered agent, also known as a resident agent or statutory agent, in United States business law, is a business or individual designated to receive service of process when a business entity is a party in a legal action such as a lawsuit or summons...

  • Hawala
    Hawala
    Hawala is an informal value transfer system based on the performance and honor of a huge network of money brokers, which are primarily located in the Middle East, North Africa, the Horn of Africa, and South Asia...