Agency (law)
From Wikipedia, the free encyclopedia
Agency is an area of Commercial law dealing with a contractual or quasi-contractual tripartite set of relationships when an Agent is authorized to act on behalf of another (called the Principal) 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 principle in operation is usually represented in the Latin 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 and strict liability in which one person is held liable in Criminal law or Tort for the acts or omissions of another.
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[edit] The concepts
The reciprocal rights and liabilities of Principal and Agent reflect commercial needs and legal realities. In any business of size, it is not possible for one person to travel everywhere to negotiate all the transactions necessary to maintain or grow the business. These problems are increased if the business is a corporation, because it is then a fictitious legal person and, as such, it can only act through human agents. Hence, independent people are contracted by businesses to buy and sell goods and services on behalf of those businesses. When agreements are made, the Principal is liable under the contract(s) made by the Agent. So long as the Agent has done what he or she was instructed to do, the result is the same as if the Principal had done it directly.
If the issue is considered from the view of innocent Third Parties, they are approached by a person who is clearly identified as acting for another. They deal with that person in good faith, relying on the representation of authority. Indeed, in a busy commercial world, it would not be cost-effective to check that everyone who is represented as having the authority to act for another actually has that authority. Deals are done at face value in the majority of routine situations. If it should later appear that the alleged agent was acting without the consent of the Principal, the Agent will usually be held liable. Any other decision would be unduly disruptive to the usual flow of trade. This commercial necessity has led to the creation of a body of law that applies in any situation, commercial or otherwise, where one person is seen to be acting for another.
[edit] Brief statement of legal principles
There are three broad classes of Agent:
- Universal Agents hold broad authority to act on behalf of the Principal, e.g. they may hold a power of attorney (also known as a mandate in civil law jurisdictions) or have a professional relationship, say, as lawyer and client.
- General Agents hold a more limited authority to conduct a series of transactions over a continuous period of time; and
- Special Agents are authorized to conduct either only a single transaction or a specified series of transactions over a limited period of time.
[edit] Authority
For these purposes, the Principal must give, or be deemed to give, the Agent authority to act.
- Actual authority:
- This arises where the Principal's words or conduct reasonably cause the Agent to believe that he or she has been authorized to act. This may be express in the form of a contract or implied because what is said or done make it reasonably necessary for the person to assume the powers of an Agent. If it is clear that the Principal gave actual authority to Agent, all the Agent's actions falling within the scope of the authority given will bind the Principal. This will be the result even if, having actual authority; the Agent in fact acts fraudulently for his own benefit unless the Third Party was aware of the Agent's personal agenda. If there is no contract but the Principal's words or conduct reasonably led the Third Party to believe that the Agent was authorized to act, or if what the Agent proposes to do is incidental and reasonably necessary to accomplish an actually authorized transaction or a transaction that usually accompanies it, then the Principal will be bound.
- Apparent or ostensible authority:
- If 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, say by appointing the Agent 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" 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.
- Authority by virtue of a position held:
- For example, partners have apparent authority to bind the other partners in the firm, their liability being joint and several (see below), and in a corporation, 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.
[edit] Liability of Agent to Third Party
If the Agent has actual or apparent authority, the Agent will not have liability on any transactions agreed within the scope of that authority so long as the Principal was disclosed, i.e. the fact of the agency was revealed and the identity of the Principal revealed. But where the agency is undisclosed or partially disclosed, both the Agent and the Principal are bound. Where the Principal is not bound because the Agent had no actual or apparent authority, the purported Agent is liable to the Third Party for breach of the implied warranty of authority.
[edit] 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.
[edit] 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.
[edit] Liability of Third Party to Principal
The Third Person will be liable to the Principal on the terms of the agreement made with the Agent unless the Principal was undisclosed and there is clear evidence that either the Agent or the Principal knew that the Third Party would not have entered into the agreement if he or she had known of the Principal's involvement.
[edit] Duties
The Agent's primary fiduciary duty is to be loyal to the Principal. This involves duties:
- Not to accept any new obligations that are inconsistent with the duties owed to the Principal. Agents can represent the interests of more than one Principal, conflicting or potentially conflicting, only on the basis of full and timely disclosure or 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. For this purpose, express clauses in the agreement signed by each Principal with the Agent may identify specific types or categories of activities that will not breach the duty of loyalty and so long as these exceptions are not unreasonable, they will bind the Principals.
- Not to make a private profit or unjustly enrich himself from the agency relationship.
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 the commission or fee as agreed, or a reasonable fee if none was agreed.
[edit] 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.
[edit] Agency and partnership
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 persons who have joined the firm. Others treat the partnership as a business entity and, like a corporation, vest the partnership with a separate legal personality. Hence, for example, in English law, a partner is the agent of the other partners whereas, in Scots law 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. In the English Partnership Act 1890 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 (see Law Commission Report 283 [1]): partners will bind the partnership rather than their fellow partners individually. For these purposes, the knowledge of the partner acting will be imputed 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 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 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.
[edit] Agency relationships
Agency relationships are common in many professional areas.
- employment procurement
- real estate transactions (real estate brokerage, mortgage brokerage). In real estate brokerage, the buyers or sellers are the Principals themselves and the broker or his/her salesperson who represents each Principal is his/her Agent.
- financial advice (insurance agency, stock brokerage, accountancy)
- contract negotiation and promotion (business management) such as for publishing, music, movies, theatre, show business and sport.
