Chapter Two: Agency 1

Agency PrincipalAgent Third Party Relationships between: Agents and Principals. Agents and Principals. Agents and the Third Parties Agents and the Third Parties Principals and the Third Parties Principals and the Third Parties 2

Agency Agency  Commercial Law Agency  Commercial Law contractual or quasi-contractual tripartite set of relationships contractual or quasi-contractual tripartite set of relationships A principal explicitly or implicitly, authorises the agent to work under his control and on his behalf. A principal explicitly or implicitly, authorises the agent to work under his control and on his behalf. Agent acts on behalf of Principal  to create a legal relationship  a Third Party. Agent acts on behalf of Principal  to create a legal relationship  a Third Party. negotiate  contractual relationship. negotiate  contractual relationship. 3

The Concept: Rights + liabilities of a Principal + an Agent  reflect commercial needs & legal realities. Rights + liabilities of a Principal + an Agent  reflect commercial needs & legal realities. In any business: In any business: one person to maintain a growing business. one person to maintain a growing business. A corporation is a fictitious legal person A corporation is a fictitious legal person Hence, independent people are contracted by businesses to act on behalf of them. Hence, independent people are contracted by businesses to act on behalf of them. Principals are liable under the contracts made by the Agent  So long as the Agent followed the instructions Principals are liable under the contracts made by the Agent  So long as the Agent followed the instructions Result  the same deal as if the Principal had done it directly. Result  the same deal as if the Principal had done it directly. 4

Innocent Third Parties  approached by an ostensible agent. Third party deals in good faith  relying on the representation of authority. Innocent Third Parties  approached by an ostensible agent. Third party deals in good faith  relying on the representation of authority. In commercial world  it is not cost-effective to check that everyone has the authority to act for another actually has that authority. In commercial world  it is not cost-effective to check that everyone has the authority to act for another actually has that authority. If it appears later that the alleged agent was acting without the consent of the Principal  the Agent will usually be held liable. If it appears later that the alleged agent was acting without the consent of the Principal  the Agent will usually be held liable. This commercial necessity has led  the creation of a body of law (Agency) 5

Principal Principal is a “person, fictitious or otherwise, who authorises an agent to act to create one or more legal relationships with a third party”. Principal is a “person, fictitious or otherwise, who authorises an agent to act to create one or more legal relationships with a third party”. Merchants  professionals  trade  profit. Merchants  professionals  trade  profit. A wholesale merchants  between producer and retail merchants. A wholesale merchants  between producer and retail merchants. A retail merchant or retailor A retail merchant or retailor A merchant classified in pre-modern societies. A merchant classified in pre-modern societies. High (achieving titles like merchant prince) High (achieving titles like merchant prince) Low, such as in Chinese culture, profiting from "mere" trade Low, such as in Chinese culture, profiting from "mere" trade 6

In the US, "merchant" is defined as “any person while engaged in a business or profession” or “a seller who deals regularly in the type of goods sold.” In the US, "merchant" is defined as “any person while engaged in a business or profession” or “a seller who deals regularly in the type of goods sold.” A merchant account is a special account to allow a business to accept credit cards + other forms of payment cards. A merchant account is a special account to allow a business to accept credit cards + other forms of payment cards. Businessperson  businessman or businesswoman  generic term for “someone who is employed at, usually, a profit-oriented enterprise, or involved in the manegement of a company.” Businessperson  businessman or businesswoman  generic term for “someone who is employed at, usually, a profit-oriented enterprise, or involved in the manegement of a company.” 7

Agent Agent is a “person who is authorised to act on behalf of the principal to create a legal relationship with a third party”. Agent is a “person who is authorised to act on behalf of the principal to create a legal relationship with a third party”. Classes of Agents: Classes of Agents: Universal agent holds  broad authority Universal agent holds  broad authority e.g.  power of attorney  (is a legal document whereby a person gives another the power to take decisions with regard to their financial affairs and/or their health and personal welfare) e.g.  power of attorney  (is a legal document whereby a person gives another the power to take decisions with regard to their financial affairs and/or their health and personal welfare) or professional relationship as lawyer with client or professional relationship as lawyer with client General agent holds  limited authority General agent holds  limited authority conduct a series of transactions over a continuous period of time conduct a series of transactions over a continuous period of time Special agent is authorised to conduct either a Special agent is authorised to conduct either a single transaction or single transaction or a specified series of transactions over a limited period of time. a specified series of transactions over a limited period of time. 8

The Authority of the Agent The Principal's words or conduct  reasonably cause the Agent to believe that he is authorised to act. The Principal's words or conduct  reasonably cause the Agent to believe that he is authorised to act. Expressed in a contract Expressed in a contract Implied by words or acts  reasonable for the person to assume the power of an agent. Implied by words or acts  reasonable for the person to assume the power of an agent. 9

First: Actual Authority: 1. If it is clear  the Principal gave actual authority  all agent's actions will bind the Principal. If the Agent acts fraudulently for his own benefit  will bind the Principal unless the third party was aware. If the Agent acts fraudulently for his own benefit  will bind the Principal unless the third party was aware.fraudulently 2. If there is no contract but the Principal's words or conduct reasonably led the third party to believe that the Agent was authorised to act then the Principal will be bound. ( take care of the customer ) 3. If what the Agent proposes to do is reasonably necessary to accomplish an actually authorised transaction, then the Principal will be bound. 10

Second: Apparent or Ostensible Authority If the Principal's words or conduct leads a reasonable person in the Third Party’s position to believe that the Agent was authorised to act If the Principal's words or conduct leads a reasonable person in the Third Party’s position to believe that the Agent was authorised to act 1. Appointing the Agent to a position which carries with it agency-like powers Those who know of the appointment  entitled to assume apparent authority  of occupying such a position. Those who know of the appointment  entitled to assume apparent authority  of occupying such a position. 2. If a Principal creates the impression that an Agent is authorised but there is no actual authority, ( complement of the agent for his previous deals ) Third parties are protected so long as they have acted reasonably  "Agency by Estoppel "  the Principal cannot deny the grant of authority if third parties have changed their positions in reliance on the representations made. Third parties are protected so long as they have acted reasonably  "Agency by Estoppel "  the Principal cannot deny the grant of authority if third parties have changed their positions in reliance on the representations made. Estoppel 11

ِِِِِ Agency by Estoppel “Legally binding agency relationship that may arise where, in fact, no formal agency agreement is in effect. A principal may give an appearance of agency relationship. In such cases, the existence of an agency may be presumed, and the principal may be bound by the acts of the agent performed on the principal's behalf.” “Legally binding agency relationship that may arise where, in fact, no formal agency agreement is in effect. A principal may give an appearance of agency relationship. In such cases, the existence of an agency may be presumed, and the principal may be bound by the acts of the agent performed on the principal's behalf.” 12

Third: Authority by Virtue of a Position Held The purpose is to deter fraud and other harms to individuals dealing with agents The purpose is to deter fraud and other harms to individuals dealing with agents 1. Partners have apparent authority to bind the other partners in the firm Joint and several liabilities Joint and several liabilities 2. Corporations  executives and senior employees with decision-making authority  by virtue of their declared position  have apparent authority to bind the corporation. (even if there is no authority) 3. The Principal may implicitly or explicitly ratify a transaction and accept liability e.g. the principal failure to notify third parties of the Agent's lack of authority  is an implied ratification to those transactions +++ an implied grant of authority for future transactions of a similar nature. e.g. the principal failure to notify third parties of the Agent's lack of authority  is an implied ratification to those transactions +++ an implied grant of authority for future transactions of a similar nature. 13

Liabilities: First: Liability of Principal to Agent: First: Liability of Principal to Agent: The Agent acts within  the actual authority  the Principal must indemnify the Agent for payments The Agent acts within  the actual authority  the Principal must indemnify the Agent for payments made during the course of the relationship made during the course of the relationship expressly authorised or expressly authorised or merely necessary in promoting the Principal’s business merely necessary in promoting the Principal’s business 14

Second: Liability of Agent to Principal: Agent acts without (actual) authority  +++ the Principal is bound towards  third party. Agent acts without (actual) authority  +++ the Principal is bound towards  third party. In this case, the Agent (has apparent authority)  is liable to indemnify the Principal for any resulting loss or damage. In this case, the Agent (has apparent authority)  is liable to indemnify the Principal for any resulting loss or damage. 15

Third: Liability of Agent and Principal to Third Party: Principal Liability: Principal Liability: The Agent has (actual or apparent) authority  will not have liability  so long as The Agent has (actual or apparent) authority  will not have liability  so long as 1. The transactions agreed within the authority 2. The agency was revealed 3. The identity of the Principal was revealed Agent Liability: Agent Liability: The Principal is not bound if the Agent has no authority The Principal is not bound if the Agent has no authority The ostensible Agent is liable to the Third Party for breach of the implied warranty of authority. The ostensible Agent is liable to the Third Party for breach of the implied warranty of authority. 16

Duties: First: Principal Duties: Must make a full disclosure of all information relevant to the transactions  the Agent is authorised to negotiate Must make a full disclosure of all information relevant to the transactions  the Agent is authorised to negotiate Pay the Agent either a prearranged commission, or a reasonable fee established after the fact. Pay the Agent either a prearranged commission, or a reasonable fee established after the fact. 17

Second: Agent Duties : Loyalty to the Principal  involves: 1. Not to accept new obligations that are inconsistent with the duties owed to the Principal. Agents can represent more than one Principal (conflicting or potentially conflicting) only with Agents can represent more than one Principal (conflicting or potentially conflicting) only with full and timely disclosure full and timely disclosure where the different agencies are based on a limited form of authority to prevent a situation where the Agent's loyalty to any one of the Principals is compromised. where the different agencies are based on a limited form of authority to prevent a situation where the Agent's loyalty to any one of the Principals is compromised. Agreement  Principal + Agent may  identify specific types of activities that will not breach the loyalty  (activities) will bind the Principals. Agreement  Principal + Agent may  identify specific types of activities that will not breach the loyalty  (activities) will bind the Principals. 2.Not to make a private profit or unjustly enrich himself from the agency relationship. 18

Termination: An Agent's authority can be terminated at any time The Indian Contract Act  a variety of ways: The Indian Contract Act  a variety of ways:Indian Contract ActIndian Contract Act 1. The business of agency being completed 2. By the agent  renouncing the business of agency 3. By the principal being adjudicated insolvent 4. By the principal revoking the agency – However, principal cannot revoke an agency coupled with interest of the agent in the subject-matter of the agency However, principal cannot revoke an agency coupled with interest of the agent in the subject-matter of the agency e.g., where the goods are consigned to an agent for sale, to recoup himself from the sale proceeds,  in such a case, the principal cannot revoke the agent’s authority till the goods are actually sold. e.g., where the goods are consigned to an agent for sale, to recoup himself from the sale proceeds,  in such a case, the principal cannot revoke the agent’s authority till the goods are actually sold. 19

Principal cannot revoke the agent’s authority after it has been partly exercised Principal cannot revoke the agent’s authority after it has been partly exercised Fixed Period Agency: the principal and the agent cannot terminate the agency before the time expired, except for sufficient cause. Fixed Period Agency: the principal and the agent cannot terminate the agency before the time expired, except for sufficient cause. disobedience of lawful orders, and rude or insulting behaviour has been held to be sufficient cause. disobedience of lawful orders, and rude or insulting behaviour has been held to be sufficient cause. Reasonable notice has to be given by one party to the other. Reasonable notice has to be given by one party to the other. If any of them terminated before time  will be liable to compensate the other for the loss caused to him. If any of them terminated before time  will be liable to compensate the other for the loss caused to him. The termination takes effect to the agent from the time it becomes known to him === the same to third party, until the termination is known to them. The termination takes effect to the agent from the time it becomes known to him === the same to third party, until the termination is known to them. The revocation or renunciation of an agency may be made expressly or impliedly by conduct. The revocation or renunciation of an agency may be made expressly or impliedly by conduct. 20

Agency and Partnership: States are not consistent on the nature of a partnership. States are not consistent on the nature of a partnership. Some states opt for the partnership natural persons  joined the firm. Some states opt for the partnership natural persons  joined the firm.natural personsnatural persons In English law, a partner is the agent of the other partners In English law, a partner is the agent of the other partnersEnglish lawEnglish law Others treat the partnership as a business entity  vest the partnership with a separate legal personality. Others treat the partnership as a business entity  vest the partnership with a separate legal personality.business entitybusiness entity In Scots law a partner is the agent of the partnership. In Scots law a partner is the agent of the partnership.Scots lawScots law In English law a partner who acts within the scope of his authority will bind the partners  even if that implied authority has been revoked or limited  unless the Third Party knows that the authority has been compromised  (notice of the limitation) In English law a partner who acts within the scope of his authority will bind the partners  even if that implied authority has been revoked or limited  unless the Third Party knows that the authority has been compromised  (notice of the limitation) 21

The other partners or the firm (Principal) and Third Parties are entitled to assume that the Principal has been informed of all relevant information. The other partners or the firm (Principal) and Third Parties are entitled to assume that the Principal has been informed of all relevant information. Problems  when one partner acts fraudulently or negligently and causes loss to clients of the firm. Problems  when one partner acts fraudulently or negligently and causes loss to clients of the firm.negligently If the partner is acting against the interests of the firm  There is more likely to be liability in tort (to third party) If the partner is acting against the interests of the firm  There is more likely to be liability in tort (to third party)tort 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. 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. in most jurisdictions, the Third Party can sue the partnership or the individual partners  their liability is joint and several. in most jurisdictions, the Third Party can sue the partnership or the individual partners  their liability is joint and several.joint and severaljoint and several 22

Brokerage Brokerage is considered as a division in commercial law. Brokerage is considered as a division in commercial law. Brokers proceed to bring parties together in order to reach an agreement. Brokers proceed to bring parties together in order to reach an agreement. He is not a party in the transaction He is not a party in the transaction Broker mediates between individuals or corporations for a commission to be paid from the proceeds of the contract. Broker mediates between individuals or corporations for a commission to be paid from the proceeds of the contract. If the transaction is not reached, the broker would not receive a commission. If the transaction is not reached, the broker would not receive a commission. Broker does not conclude the deal on behalf of his client Broker does not conclude the deal on behalf of his client He is not responsible for the implementation of the contract (no liability) He is not responsible for the implementation of the contract (no liability) 23