Law of Agency: Definition and Description

Introducing Agency

The agency relationship is a fiduciary relationship based on consent. Consent is given to the 'agent' on behalf of a 'principal', giving them authority in specified matters to deal with 'third parties'. This consent gives the agent both a right and a power to act on the principal's behalf. The agent's power is derived from contract, but the right isn't. The principal remains capable of removing their right at a moment's notice; the autonomy of decision-making being so fundamental. The agent may sue for their losses because of contractual breach, but they cannot continue to legitimately act on the principal's behalf. 

There are 2 faces of agency to be aware of, the 'internal' aspect, and the 'external' aspect. The former concerns the principal/agent relationship, while the latter concerns the principal and agent's relationship with the third party

Regarding the external aspect, the third party may be aware that the agent works for a principal, and they may know who that is. In this case the principal is a 'disclosed' principal. If the third party is aware the agent acts for a principal, but doesn't know who, the principal is 'unnamed'. If the third party thinks the agent is in fact the principal, then the agent acts for an 'undisclosed principal' (discussed later in more detail). 

Regarding the internal aspect, there are sometimes issues as to whether the two parties actually have an agency relationship in operation. The word 'agent' is frequently misused (per Lord Herschell in Kennedy v Trafford) as many people engaged in business do not understand this term, specifically in the context of a 'buyer' and an 'agent for sale' (per Greer LJ in Lamb & Sons v Goring Brick). Thus, actual use of the word 'agent' is of itself, not very informative (per John Donaldson MR in Potters v Custom & Excise Commissioners). 

A common example of the agency/principal relationship is that of a company and its directors. A company is a legal person which, evidently, cannot act for itself. It needs people, aka directors, to do that. Thus, the directors are the agents of the company principal. It is only when the directors convene as a board that the 'company' (the principal) makes its own decision. 

The core features of agency

Indisputably concerns a fiduciary relationship - a special equitable relationship based on trust. This relationship is subject to strict equitable duties (discussed later).

Based on authority

One side of agency is the agent's authority to bind his principal. He acts wearing the principal's skin (not literally) - the agent's power is facsimile of the principal's own power. If the agent acts within his authority, then the principal is liable for the agent's faults - even where he acts fraudulently (HL: Lloyds v Grace & Smith). The question  arises as to whether the methods the agent used to achieve his prescribed goal were in fact unauthorised: (per Lord Woolf MR: Credit Lyonnais Bank v ECGD). 

A power-liability relationship

What lies at the heart of the consent based authority is this: the agent can affect the principal's legal position; the principal has his legal position altered by the agent. Thus, the agent's power to bind the principal is limited to what the principal himself can be bound to. If the principal dies, becomes insane, bankrupt or insolvent, then the agent's power automatically ceases. Likewise, the agent also needs to be of a sound mind: Norwich Building Society v Steed per Scott LJ. 

Under the classic form of agency, the agent brings the principal and the third party into relations with each other, but the agent does not incur any rights or liabilities under the resulting contract (Phonogram Ltd v Lane per Lord Denning MR). Thus at common law the only person who may sued or be sued on the contract is the principal.

There are circumstances where this is not the case however, such as with undisclosed principals - the third party needs someone to sue, and they only know about the agent. The manner in signing (such as a deed or signing as themselves) or trade custom, could also lead to an agent being liable on the contract (Hutchinson v Tatham). Agent's known as 'del credre agents' take extra commission (usually double) to act as a surety on the contract. He risks being sued on the contract if the principal doesn't perform, but he receives rewards for this risk. However, nowadays this is very rare, and commission agents would be very reluctant to undertake such risks (per Buxton LJ in Blything v FA Dekker).

The Creation of Agency

Contractual and Gratuitous Agency

Although more and more common, a written contract isn't necessary for agency as consent lies at the heart of the relationship. Furthermore, non-contractual duties (i.e. fiduciary duties) may continue to bind an agent after the termination of the agency, or even bind the agent if the relationship is gratuitous ab initio - Yasuda Fire v Orion Marine Insurance per Colman J.

In a contractual agency there is consideration, and an obligation both on the agent to perform his services, and on the principal to pay remuneration. This exists independently of the contract itself - it is a normal incident of agency. Apart from any (unwritten) intention of the parties, the court will impose this obligation under what the court finds reasonable and just in the circumstances: CA Brook's Wharf v Goodman Bros. 

Agency Arising as a Matter of Law

The consensual nature of the relationship is reciprocal: the principal consents that the agent may act on his behalf and affect his relationship with third parties, while the agent agrees to do this. This relationship is often express, but it may also be implied by the conduct of the parties, specifically at the time the relationship was created. Even if they profess to disclaim it, if the parties have conducted themselves in a manner that amounts to creating an agency relationship at law, then such a relationship will be held to exist (Garnac Grain v Fairclough per Lord Pearson). Misuse of terms, inconsistent conduct, confused evidence may be factors which result in difficulties discerning the true nature of the relationship (see Rix J in The 'Nea Tyhi').

The above shows that, as Montrose explains: ‘The power of an agent is not strictly conferred by the principal but by law’. However, one can never refute the principal's withdrawal of authority - this power is absolute. 

Thus, whether a transaction concerns agency, is a matter of evidential proof dependent on the particular facts: Blything v Dekker. The mode of paying the agent (except mark-up sales) isn't determinative. The amount of commission or whether this is deducted from what the principal makes does not turn an agent into a purchaser: (per Lord Jessel MR: ex p Bright re Smith). CA Targe Towing v Marine Blast Mance LJ accepted the correct approach is to imply an agreement only ‘where one party has conducted himself towards another in such a way that it is reasonable for that other to infer from that conduct consent to the agency relationship’.