Definition and elements of agency
Creation and obligations of the agency
Termination of agency
Principal and agent relations with third parties
Agency enables one person, the agent to represent the interests of another, the principal. The agent is authorised by the principal to create or affect legal relations between the principal and a third party. Common examples of an agency relationship are a company and its directors, brokers, partners in a firm and the solicitor/client relationship. The agency relationship is a fiduciary one. Agents have become a necessary part of commerce given the need for businesses to use other people to act on their behalf.
To create an agency relationship you need:
- •a principal and an agent;
- •consensus between the parties that the agent will act on behalf of the principal and be subject to the principal’s control; and
- •capacity of the parties to act.
See The definition and elements of agency.
Agency and other legal relationshipsAgency can be distinguished from other legal relationships such as trusts and bailment as each have their own but different characteristics.
See Agency and other legal relationships.
Classification and types of agentOften agents are classified depending on their level of authority as special agents, general agents or universal agents. An agent’s level of authority can be determined from the agency agreement or the conduct of the parties or from the agent’s position. For example, the managing director of a company has the implied authority to do all those acts that fall within the usual scope of that office. Alternatively, an agent can be said to have had “apparent authority” (also called “ostensible authority”) arising from the principal’s representations to a third party. If the principal creates the impression that the agent is authorised to act, then they are estopped from later denying the authority of the agent.
See Classification and types of agent.
See Types of authority — express/implied/ostensible.
Nationally, there are numerous pieces of legislation that to varying degrees create or affect the agency relationship.
See Legislation.
An agency may come into existence through the more common way of an agreement between the parties, however, it can also arise in other ways including by:
- • express or implied agreement of the parties if the elements of a contract at law are established, eg offer, acceptance and consideration or alternatively there is sufficient evidence to show that the actions and conduct of the parties impliedly established an agency agreement;
- • operation of law, eg because of circumstances of necessity the agent has been conferred authority, beyond that given by any contract between the parties, to do an act in relation to the principal’s property. Statute can also create an agency, eg every partner in a partnership is an agent of the firm; or
- • ratification where the principal adopts the acts of its agent and becomes bound by the contract with the third party.
What follows the appointment of the agent is the creation of three legal relationships:
- •between the principal and the agent;
- •between the agent and third parties; and
- •between the principal and third parties.
The law recognises various rights and duties on the agent and on the principal. These duties arise from the agency agreement, common law and equity.
The agent’s dutiesExamples of the types of duties imposed on an agent include:
- •the duty to exercise due care, skill and diligence;
- •the duty to act in the principal’s interests; and
- •the duty to keep the agent’s property separate from the property of the principal.
The standard of care expected of an agent will vary depending on whether the agent is being paid or whether the agent is providing agency services at no cost to the principal. A paid agent will usually be expected to exercise a higher standard of care than the standard of care expected of an agent providing agency services gratuitously.
In addition to the agent’s duties at law or by virtue of the contract of agency, an agent also has fiduciary duties due to the agent holding a position of trust and confidence. If an agent benefits from his or her position as agent to the detriment of the principal, the principal can apply to court to seek equitable relief.
See The agent’s duties.
The principal’s dutiesA principal’s main duties to the agent are:
- •the duty to remunerate; and
- •the duty to indemnify.
Unless it is agreed that the agent will not be paid for their services, the principal is obliged to compensate the agent with a fee for services and reimburse the agent for expenses incurred while performing the agent’s duties.
An agency agreement can be terminated in several different ways.
The principal and agent may mutually agree to terminate the agency agreement. The agreement may also provide the grounds for termination by one party, eg, because of default.
Sometimes the agreement will specify a time frame for the agent to complete its task, eg, a real estate agent may be given 45 days to sell the principal’s property. If there is no set period for when the agency agreement will end, the principal can terminate the agency by giving the agent a reasonable period of notice.
An agency agreement will also end if either the principal or agent dies or one party becomes bankrupt.
See Termination by agreement, revocation, or operation of law.
Effects of terminationOnce terminated, the agent no longer has authority to act on behalf of the principal and third parties who may have been dealing with the agent should be notified that the agency has come to an end.
In agency law there are three classes of principal, and they are known as:
- • the disclosed principal;
- • the partially disclosed principal; and
- • the undisclosed principal.
The effect of these classifications is that they define a principal’s, and potentially an agent’s liability to third parties under contracts entered into by the agent. For example, if an agent discloses the identity of the principal and the agent is acting in the capacity of an agent with authority, the principal is bound to honour the terms of the agreement with the third party. If, on the other hand, the agent contracts with a third party without disclosing the identity of their principal or that an agency relationship exists, the agent, not the principal, may be personally liable under the contract.
In the situation where the existence of the agency is disclosed to the third party but the identity of the principal is not then, if the agent is acting with authority, the agent should not have any liability. Agency is an exception to the common law doctrine of privity of contract.
See Disclosed, partially disclosed and undisclosed principal.
See also Privity of contract.
See also Relationship between principals and third parties.
Breach of authority when an agent contracts outside of their actual or apparent authorityAgents must ensure they act within the scope of their actual or apparent authority if they want to avoid liability. Known as a breach of warranty of authority, where an agent contracts outside of their actual or apparent authority and a third party acts to their detriment on the representation, the agent is liable to the third party for their loss.
See Breach of warranty of authority.
See also Liability of agent or principal for wrongs.
RemediesWhere an agent has breached its duties to the principal, remedies available to the principal include damages, an account of profits and in some cases rescission of the agency agreement.
See Remedies.
