The Agency Principal Relationship

Institution:

Many of the contracts performed in commercial or business contexts are not formed directly by the parties. Instead, these parties are represented by their ‘agents’ who are simply people they appoint to act on their behalf. For example, when a person orders a meal in a restaurant, a contract is formed between the customer and the owner of the restaurant. But, the owner of the restaurant is represented by a waiter, who is thus considered an agent for the restaurant owner. In law, the relationship between the waiter and the restaurant owner is espoused within a legal framework called the agent-principle relationship (Agbonika, 2015). Ideally, the agent is the person acting on behalf (i.e. the waiter) of the parties involved in the contract while the principles are the actual parties (i.e. the restaurant owner) engaging in the contract. This essay aims to evaluate closely the nature of the agency-principle relationship. Specifically, the paper will have its first focus on different types of agency relationships and the authorities involved therein. Secondly, giving examples and case studies, the paper will deeply evaluate one type of agency relationship called the apparent or ostensible authority.

The Agency Relationship

Usually, the agency relationship involves three parties, namely the agent (who acts on behalf of the principle), the principle and the third party. The principle is the person who authorizes the agent to perform a contract with the third party. However, according to Busch et al (2016), the contract would only valid if the agent is acting with consent (also known authority) from the principle. This implies that if the agent is acting with authority from the principle, then the contract is between the third party and the principle, thus the agent has no liability in the contract even if they personally appended their signature (Lee, 2015). Therefore, it is apparent that the consent or authority is a matter of importance in any agency relationship, and in most cases, according to Campbell (2009), it is the consent/authority that determines the validity or invalidity of the contract. The following are the types of authority in an agency relationship. Usually, the agency relationship involves three parties, namely the agent (who acts on behalf of the principle), the principle and the third party. The principle is the person who authorizes the agent to perform a contract with the third party. However, according to Busch et al (2016), the contract would only valid if the agent is acting with consent (also known authority) from the principle. This implies that if the agent is acting with authority from the principle, then the contract is between the third party and the principle, thus the agent has no liability in the contract even if they personally appended their signature (Lee, 2015). Therefore, it is apparent that the consent or authority is a matter of importance in any agency relationship, and in most cases, according to Campbell (2009), it is the consent/authority that determines the validity or invalidity of the contract. The following are the types of authority in an agency relationship.

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Types of Agency Authority

There are two main ways in which authority given to an agent can be assumed to exist i.e. authority with the consent of the principle and authority without the consent of the principle. Under authority with consent from the principle, according to Singleton (2015), the agent holds either an actual express authority or an actual implied authority. On the other hand, an authority without consent may be in the form of apparent authority, usual authority or authority by necessity (see figure 1).

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Actual Express Authority

Considered one of the easiest forms authority to understand, express actual authority occurs when the agent is expressly authorised by the principle, verbally or in writing, to make a contract on their behalf (Hynes & Loewenstein, 2016). Thus, the principal explicitly instructs the agent to make the contract or the agent can act based on their job duty to do so. A typical example of actual express authority is that of the power of attorney relationship. In this relationship, the principal puts in writing a grant which gives the agent an express actual authority to act on their behalf. For example, John is employed in XYZ Limited. He appends his signature on a document indicating that he will be selling cosmetic products manufactured by XYZ directly to retailers. Therefore, John has express actual authority to perform a sales contract with the retailers involving the sale of XYZ manufactured cosmetic products.

In the case of Castillo vs. Farms of Ohio, some farm workers were recruited to work for Case Farms by American’s Tempcorps (ATC), a recruitment agency contracted by Case Farms. Upon being transported to Ohio by ATC, the workers realised that they were to live and work in what they defined as ‘deplorable and distressing’ conditions, and filed a court case against Case Farms. However, whereas their poor working conditions were undisputable, an issue arose on whether there was an agent-principle relationship between ATC and Case Farms, and whether Case Farms was liable for the workers’ poor living/working conditions. The court held that Case Farms was liable because, as the court explained, a principal is liable for the actions of the agent provided there is an actual agency relationship created by the principle’s express authority or delegation to the agent.

Actual Implied Authority

The agent can be authorised by the principal to act on their behalf by implication. According to Burrows (2015), an agent gains actual implied authority by virtue of being appointed to a position or holding a title bestowed to them by the principle, in a way that makes it obvious that the agent will have the authority to perform a contract. For example, if a person is appointed to manage a shop, they have the implied authority to perform any contract on behalf of the shop owner. In this case, therefore, the shop manager will have implied authority to order new supplies to restock the shop. However, Lorat (2009) points out that this authority only applies where the principle is disclosed or partially disclosed, thus there is no actual implied authority in a case where the principle is undisclosed.

The principle of actual implied authority is well revealed in the case of Watteau v Fenwick 1893. In this case, the defendant employed a shop manager in a shop whose license was still on the manager’s name. While the manager was forbidden by the defendant from buying cigarettes on credit, the manager disregarded the forbiddance. A case was filed by the plaintiff claiming the price of the cigarettes from the defendant. Upon deliberating on the matter, the court concluded that the defendant was liable because having employed the manager to be in charge of the shop, he had given an implied authority to the manager to perform any credit purchases. Even if the plaintiff did not know of the credit restrictions given to the manager, he relied on the manager’s implied authority to successfully make his case.

Apparent or Ostensible Authority

Apparent or ostensible authority is a form of non-consent authority which is best understood by way of example. So, imagine that A asks B to sell a bicycle on his behalf and makes it very clear to B that the bicycle should be sold for at least £200. It means that A has appointed B as his agent to enter into a contract on his behalf with anyone who would buy the bicycle. What if B sold the bicycle for £175? B shall have clearly failed to follow A’s instructions. But, can the person who purchased the bicycle at £175 keep the bicycle? Or is A entitled to get the bicycle back? Is the contract valid? Or, does the fact that B failed to follow A’s instructions and acted without A’s actual authority means that the contract is invalid? According to Tonnon & Allen (2002), even if the agent did not act on the actual authority of the principle, the agent may still have an authority called ostensible or apparent authority to bind the principle into the contract.

Therefore, from the example above, it comes out clearly that apparent authority occurs when there is a reasonable representation of the agent to have the authority to perform a contract on behalf of the principle. In this case, therefore, the agent’s actions bind the principle to the contract because any reasonable third party would believe these representations. Noteworthy, according to Floyd & Allen (2002), the principle of ostensible authority only applies where the principal is partly disclosed or fully disclosed to the third party.

Usual Authority

Usual authority covers for the acts that are not accounted for in implied actual authority or express authority but are usually associated with agents of the same character as those in implied actual authority or express authority (Floyd & Allen, 2002). Therefore, according to Pivar & Bruss (2003) usual authority is the authority that a third party would believe an agent of the same type or employee holding the same position to have and use to perform a contract. It means identifying the authority that any reasonable third party would believe that someone in the same position as the agent would have. However, a successful identification of this authority would depend on the third party’s knowledge (Gillies, 2004). If they are aware of the agent’s authority limits, then such knowledge would not be contradicted by any implication. This means that usual authority always emanates from and is usually an extension of other kinds of authority such as apparent authority or implied actual authority.

Agency by Necessity

According to Campbell (2009), this form of authority arises in the context of an imposed duty of someone to act on behalf of the other to prevent an injury that may be irreparable. It usually applies to wealth management and the creation of trusts. For example, if a family member who is an agent or is in possession of the family’s wealth is ill, or is incapacitated through an accident, another family member with same understanding and capabilities to oversee the property may take over the family’s property as an agent of necessity (Agbonika, 2015) However, Busch et al (2016) stipulate that there are three main conditions that must be satisfied for this principle to apply. First, the situation must be impossible for the agent to get the principal’s consent. For example, in the case of Springer vs. Great Western Railway, a carrier realised that a consignment of fruits was going bad. The carrier sold the fruits to a different client other than the consignee’s intended client. It was held that the carrier was liable because they could seek new instructions from the owner.

Secondly, the agent’s performance must only be triggered by an emergency. For example, in the case of Prager vs. Blatspeiel, an agent bought skin on behalf of the principal. A war erupted before A could send the skin to the principal. Despite not being able to communicate with the principal, it was held that A was not an agent of necessity because the skins could have been kept until the war ended, thus, there was no emergency.

A deeper analysis of Apparent or Ostensible Authority

Essentially, apparent or ostensible authority exists when the actions or representations (either by conduct or words) of the principal makes a third party believe in the agent’s action in behalf of the principle when in fact the agent has no real authority to act on behalf of the principle (Agbonika, 2015). According to Campbell (2009), it means that the agent only appears to have the authority from the principal while in the real sense they do not have such authority. Nonetheless, if the agent enters into a contract based on the principal’s representations, the principal will be legally bound to the contract. This means that if the principal represents himself by action or words as the authority to the agent, and the third party acts upon the contract based on these representations, the principle is estopped from denying that they are bound by the contract – this is called ‘agency by estoppel’. However, Busch et al (2016) argue that there are three requirements to be satisfied for ostensible authority to exist:

The third party must have performed the contract without any knowledge of implied actual or express authority held by the agent;

Like in the above-mentioned case of A vs. B, the third party did not know that B was not authorised to sell the bicycle at a price below £200. Therefore they entered into the contract knowing that the third party had the full authority to sell the bicycle at £175, binding the principal to the contract. A similar example exists in the case of Grease Monkey International vs. Montoya. In this case, Mr. Sensenig was hired by a bank as the bank’s president. He then began soliciting money from former bank clients in the pretext of doing it for the company. After pocketing around half a million dollars, the customers sensed the fraud and having realised that the bank’s board of directors gave the president an authority to borrow money without its considerable approval, they sued the bank for a refund. The court held that the bank was liable for not exercising supervision over their president. Even though a previous ruling had been made that the bank's liability was only limited to the president’s actions to benefit the bank, the discovery by the victims that the bank had failed to exercise supervision over the president contributed much to the ruling. Therefore it was confirmed that the victims performed the contract without any knowledge that the president held implied authority to solicit money from them.

If it was held out by the principle that the agent has the authority to act on behalf of the principle i.e. by holding out the agent as having authority in the past or by appointing the agent to a particular position

In the above-mentioned bicycle case, A held out B to sell the bicycle on his behalf, and therefore the second requirement is fulfilled. A similar example is evident in the case of Ramsey vs. Love, where Hutcheson managed Love’s business operations and entered into several contracts including one of a property lease of £640,000 without Love’s authority. In doing so, Hutcheson went as far as using an auto penning machine to append Love’s signature on the contract documents. Love went to court to have him declared unbounded by Hutcheson’s contractual agreements with the third party. It was held that by giving Hutcheson the general authority to run his business operations, it was an apparent authority from Love for Hutcheson to perform all manner of transactions on behalf of Love, even in transactions that Love was not informed in advance that his personal guarantee would be given.

The third party assumed that the agent had actual authority

Finally, in the bicycle case above, the third party trusted that B had the full authority and entitled to sell the bicycle for £175, and therefore the third requirement was fulfilled. A similar example is the case of Freeman and Lockyer v Buckhurst Park Properties, where Freeman was contracted by Buckhurst’s corporate director to develop plans for a property to be developed by Buckhurst, even though the Director did not have the authority to do so. When the building fell and Freeman architects were not paid for their services, they sued the company and the court held that whereas the Director did not have an actual authority to hire the architects, they entered the contract under the assumption that they were hired under an apparent authority. Buckhurst was therefore bound by the contract.

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References

  • AGBONIKA, J. A. A. (2015). Law of agency: commercial law.
  • BUSCH, D., MACGREGOR, L., & WATTS, P. G. (2016). Agency law in commercial practice. Oxford, Oxford University Press.
  • BURROWS, H. A., QC, FBA. (2015). Principles of english commercial law. Oxford University Press, 2015.
  • CAMPBELL, D. (2009). International agency and distribution law. [Salzburg, Austria], Yorkhill Law Pub.
  • CASTILLO V. CASE FARMS OF OHIO, Inc., 96 F. Supp. 2d 578 (W.D. Tex. 1999)
  • FLOYD, C. F., & ALLEN, M. T. (2002). Real estate principles. Chicago, Ill, Dearborn Real Estate Education.
  • FREEMAN AND LOCKYER V BUCKHURST PARK PROPERTIEs (Mangal) Ltd [1964] 2 QB 480
  • GILLIES, P. (2004). Business law. Sydney, Federation Press.
  • HYNES, J. D., & LOEWENSTEIN, M. J. (2016). Agency, partnership, and the LLC: the law of unincorporated business enterprises : cases, materials, problems. LORAT, N. (2009). Client Agency Relationship. München, GRIN Verlag GmbH.
  • LEE, R. G. (2015). Blackstone's statutes on public law & human rights, 2015-2016. MONTOYA V. GREASE MONKEY HOLDING CORP., 883 P.2d 486 (Colo. App. 1994) PIVAR, W. H., & BRUSS, R. (2003). California real estate law. Chicago, Dearborn Real Estate Education.
  • PRAGER V BLATSPIEL, STAMP AND HEACOCK Ltd: 1924 SINGLETON, S. (2015). Commercial agency agreements: law and practice. London : Bloomsbury Professional, 2015.
  • SPRINGER V GREAT WESTERN RAILWAY [1921] 1 KB 257 TAN, C. H. (2017). The law of agency. Singapore : Academy Publishing, 2017. TONNON, A. (2005). Washington real estate law. Bellevue, WA, Rockwell Pub. RAMSAY V LOVE [2015] EWHC 65 (Ch) WATTEAU V FENWICK, [1893] 1 QB 346, Liability of Undisclosed Principle

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