Agency and Vicarious Liability – Study Notes

Agency and Vicarious Liability – Study Notes (BSB250)

The idea of agency: agent, principal and third parties

• An agent is a person acting on behalf of another in business dealings; the person they act for is the principal.
• The agency relationship is a common way for deals to be negotiated via someone other than the principal directly.
• The principal is bound by statements, contracts, or payments made by an agent who is authorised to act on the principal’s behalf; potential liability can extend to torts and crimes committed by the agent within their authority.
• Key terms:
  • Agent = person acting on behalf of the principal
  • Principal = the person for whom the agent acts
  • Third party = the outsider dealing with the agent
• Common principal–agent relationships include:
  • Employer and employee
  • Corporation and director
  • Seller and auctioneer
  • Client and solicitor / real-estate agent / stock broker
  • Partner and partner

Overview of agency: what you need to explain and apply

• Under contract law, determine when you are liable for another’s actions:
  • Describe the legal relationship between the agent and principal
  • Describe the agent’s scope of authority
  • Outline the agent’s duties and entitlements
  • Outline when the agent may be liable
  • Describe how an agency can be terminated
• Under negligence, understand vicarious liability:
  • Describe what vicarious liability is
  • Outline the test for determining vicarious liability for another’s actions

What is an agent? (Definition and roles)

• An agent is someone who acts on behalf of another in dealing with a third party.
• The principal is the person on whose behalf the agent acts.
• In business deals, agents may operate with an express mandate or through inferred authority; the agent’s conduct can bind the principal.

Examples of principal–agent relationships (recognisable forms)

• Employer and employee
• Corporation and director
• Seller and auctioneer
• Client and solicitor / real-estate agent / stock broker
• Partner and partner

Scope of authority: five main ways an agent can be authorised to act on behalf of the principal

• The agent must act within the scope of authority for the principal to avoid personal liability; otherwise the agent may incur liability.
• There are 5 main forms of authority:
  • Express actual authority
  • Implied actual authority
  • Apparent authority
  • Agency of necessity
  • Authority by ratification

Express actual authority

• The principal expressly authorises the agent, either in writing or verbally, to act on the principal’s behalf.
• Example and principle: Freeman & Lockyer v Buckhurst Park Properties Ltd.
• Key content of express authority:
  • Duration of the appointment
  • The precise scope of authority
  • The agent’s entitlement (e.g., commission or payment)
• In Queensland, some agencies can be created orally (verbal appointment suffices for many agency relationships), but certain agencies (e.g., involving the sale of land) require written form by statute.
• Takeaway: When express actual authority exists, the contract is between the principal and the third party; the agent incurs no personal liability.

Implied actual authority

• Not all situations can be foreseen, and it may be onerous to document every authority the agent might need.
• Law recognises implied authority to operate to give effect to expressly authorised acts.
• General principles:
  • Incidental or necessary acts to carry out expressly authorised acts
  • Typically given to individuals in a specific position or capacity
  • Commonly granted to agents in particular kinds of business or markets
• Key authority: ANZ Bank v Ateliers de Constructions Electriques de Charleroi (ANZ Bank v ACEC)
• Practical effect: Implied authority fills gaps to make the agency workable; the principal is bound by acts within implied authority.

Apparent authority

• An agent has apparent authority when a third party reasonably believes the agent has authority, based on the principal’s representations, even if the agent lacked actual authority.
• Test for apparent authority (three elements must be satisfied):
  • The third party did not know the agent lacked authority
  • The principal held out the agent as having authority to act for the principal
  • The third party relied on that holding out, reasonably assuming the agent had actual authority
• If all three elements are met, the principal is bound by the agent’s actions, even if the principal later states the agent had no actual authority.
• Leading authorities illustrating apparent authority include:
  • Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd
  • Summers v Solomon
  • Tooth v Laws

Authority by ratification

• An agent may act without actual or apparent authority; the principal may later ratify the action, making it retrospectively as if the agent had authority at the time.
• Ratification is effective if the principal ratifies within a reasonable time of the act.
• Principal’s ratification operates retrospectively to validate the agent’s earlier act: Bolton Partners v Lambert
• Practical effect: If ratified, the agent’s act is treated as if the agent had actual authority from the outset.

The agent’s duties and entitlements

• The agency relationship creates a special relationship where one person can incur liabilities on behalf of another.
• The agent may take advantage of the principal; hence duties are divided into two categories:
  • Fiduciary duties of loyalty
  • General duties of care and obedience
• Agent’s fiduciary duties (loyalty):
  • Act in the principal’s best interests
  • Avoid conflicts of interest and disclose any conflicts
  • Reject secret commissions
  • Maintain confidentiality
  • Account properly for money and property
• Agent’s care/obedience duties (non-fiduciary duties):
  • Follow instructions
  • Communicate information to the principal
  • Act personally (not delegate without authority)
  • Exercise reasonable skill and care
• Key point: Fiduciary duties require prioritising the principal’s interests over the agent’s own interests; the agent must not create or exploit conflicts without full disclosure.

The fiduciary duty in context

• The BSB250 focus emphasises acting in the principal’s interests and avoiding conflicts of interest.
• If a conflict arises, full disclosure is required; a breach can occur if the agent serves competing principals (e.g., Lintrose Nominees v King shows conflicts of interest are prohibited).
• Secret commissions are forbidden; agents are entitled to their agreed remuneration only and must pass on other money or property to the principal; secret commissions can give rise to criminal liability.

The agent’s entitlements (remuneration and indemnity)

• Remuneration: The agent is entitled to any agreed remuneration (e.g., flat fee, commission or other arrangements).
• Indemnity: The principal must indemnify the agent for activities conducted within the scope of authority and not negligent; includes reimbursement of payments, expenses and liabilities incurred while carrying out the principal’s instructions.

General liability of the agent under contract law

• In general, deals negotiated by the agent are between the principal and the third party; the agent is not personally liable.
• The agent can be personally liable to the third party in the following situations:
  • Intentional liability
  • Undisclosed principal
  • Breach of warranty of authority

Intentional liability

• An agent may be liable to the third party if there is intentional wrongdoing by the agent or explicit contractual terms; in practice this is rare and may arise through explicit terms or customary practice.

Undisclosed principal

• Doctrine: An agent will be liable to the third party if they do not disclose they are acting for a principal.
• The third party can enforce the contract against either the principal or the agent (Clarkson Booker v Andjel).
• Normal rule: The principal can enforce against the third party unless (Said v Butt) one of the conditions applies:
  • The agent did not have authority to act for the principal; OR
  • The agent told the third party they were not an agent; OR
  • The existence of an undisclosed principal is inconsistent with the contract (e.g., contract performed with a private individual as the agent for a party who is central to the contract).

Breach of warranty of authority

• A breach occurs when an agent represents to a third party that they have authority to act for a principal when they do not.
• The agent can be personally liable to the third party, even if they genuinely believed they had authority, if the following are satisfied:
  • The agent claimed they were contracting on behalf of the principal; AND
  • The agent did not have authority to act on the principal’s behalf; AND
  • The third party relied on the agent’s representation and would not have entered the contract otherwise.
• Notable illustration: Penn v Bristol and West Building Society – a solicitor, acting on false authority due to forged signatures, was liable for breach of warranty of authority because the third party relied on the representation.

Termination and aftermath of agency

• An agency can end in several circumstances:
  • The agent completes the tasks assigned by the principal
  • The duration of the appointment expires
  • Principal and agent agree to terminate the relationship
  • Principal dismisses the agent for breach of contract or duties
  • Principal revokes or limits the agent’s authority
• Upon termination, the principal should notify third parties to extinguish the agent’s apparent authority; failure to do so can leave the principal liable for the agent’s actions after termination.
• Direct notice to parties who previously dealt with the agent is best practice ( Summers v Solomon cited as authority).

Vicarious liability: extending liability for negligence

• Vicarious liability is the legal principle by which one person can be liable for the harm caused by another’s actions, mirroring the way agency scales contractual rights and obligations to a broader setting.
• Most commonly arises in employer–employee relationships; however, it is not always straightforward, and the label used by the parties is not determinative.
• Courts use the control test to determine if there is an employer–employee relationship, focusing on how much control the employer has over the worker rather than the label used.

The control test for vicarious liability

• Core idea: liability arises when the employer has control over the worker and the worker is performing the business’s tasks as part of employment, even if the worker’s actions are negligent.
• Key factors used by courts (illustrative list):
  • Who determines how the work is done (route, interaction requirements)
  • Whether the worker can accept or reject work (rosters)
  • Whether the business controls the worker’s presentation (e.g., uniforms)
• Leading authority illustrating the approach: Hollis v Vabu Pty Ltd

Vicarious liability and unauthorized work

• Employers are vicariously liable for the actions of their employees if both of the following hold:
  • There is an employer–employee relationship under the control test; AND
  • The employee was acting in the course of their employment when the negligent act occurred.
• If an employee carries out authorised work in an unauthorised manner, the employer can still be vicariously liable (Century Insurance Co Ltd v Northern Ireland Road Transport Board).
• Conversely, an employer will not be vicariously liable for acts outside the scope of employment (Deatons v Flew).

Case summaries (selected authorities)

• Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480

  • Facts: Kapoor (A) acted as managing director without formal appointment; no board resolution; whether Kapoor had authority to bind the company.
  • Held: No express actual authority; there was no board authority, but consideration of apparent authority possible. Principle: Express actual authority must be clearly identified; apparent authority may still bind the company.

• Australia & New Zealand Bank Ltd v Ateliers de Constructions Electriques de Charleroi [1966] 1 NSWR 19

  • Facts: Helios acted with express power to sell on ACEC’s behalf; paid ACEC by forwarding cheques to ACEC; Helios used funds inconsistently.
  • Held: Helios had no express authority to pay cheques into its own account, but authority could be implied to give business efficacy; the bank’s liability considerations followed ACEC.
  • Principle: Authority can be implied to give business efficacy to an agency relationship.

• Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711

  • Facts: Bayne, company secretary for Fidelis, entered into a car hire contract on Fidelis’s letterhead for personal use; Fidelis disputed liability.
  • Held: Fidelis liable; Bayne had apparent authority because he was company secretary; third party relied on the representation of authority.
  • Principle: Apparent authority can arise where a represented role reasonably implies authority, even if not actual authority.

• Summers v Solomon (1857) 7 E & B 879

  • Facts: Solomon employed a nephew as an agent; the nephew ordered jewelry after the uncle’s authority was terminated; nephew disappeared with goods.
  • Held: Solomon liable; Summers (supplier) did not know authority had ceased; three elements of apparent authority satisfied.
  • Principle: Apparent authority can bind principals where prior representations or conduct suggest ongoing authority.

• Tooth v Laws (1888) 9 LR NSW 154

  • Facts: Laws kept the hotel licensee sign; new owners purchased on credit; whether the new owners acted as Laws’s agent.
  • Held: Laws liable to pay; the sign over the door signified continued representation that the new owners could order on Laws’s behalf.
  • Principle: Apparent authority can bind the principal where a representation (e.g., signage) suggests ongoing authority.

• Bolton Partners v Lambert [1889] 41 Ch D 295

  • Facts: S accepted an offer to purchase property on behalf of BP without authority; BP subsequently ratified the contract.
  • Held: Ratification occurred on 28 January retroactively validates the contract from the date of the agent’s act (9 December).
  • Principle: Ratification acts retrospectively to authorize the agent’s prior act.

• Lintrose Nominees Pty Ltd and Others v King [1995] 1 VR 574

  • Facts: Real estate agent found buyers; conflict of interest when agent advised investment without disclosing agency status.
  • Held: Contract avoidable; disclosure of conflicts is required; agents cannot serve competing principals without disclosure.
  • Principle: Undisclosed conflicts of interest by an agent breach fiduciary duty.

• Clarkson Booker Ltd v Andjel [1964] 2 QB 775

  • Facts: Agent A bought tickets; after unpaid invoices, issues arose about undisclosed principal (P).
  • Held: Third party could sue the agent; the existence of an undisclosed principal is central to the contract in some cases.
  • Principle: A third party can enforce contract with either the agent or the undisclosed principal.

• Said v Butt [1920] 3 KB 497

  • Facts: A friend purchased a ticket for a theatre visit on behalf of the principal whose identity was central to the contract; the principal’s identity remained undisclosed.
  • Held: The undisclosed principal cannot enforce a contract where the identity of the principal is central to the contract.
  • Principle: An undisclosed principal cannot enforce a contract where their identity is central to the contract.

• Penn v Bristol and West Building Society [1997] 3 All ER 470

  • Facts: Forged signatures led solicitor to believe he could act for Mrs. P; lender relied on the solicitor’s authority.
  • Held: Agent liable for breach of warranty of authority; third party relied on the agent’s representation.
  • Principle: Agent liable for misrepresentation of authority when third party relies on it.

• Hollis v Vabu Pty Ltd [2001] HCA 44

  • Facts: Bicycle courier injured plaintiff; issue whether the courier was an employee or independent contractor; who bears liability.
  • Held: Courier was an employee; employer liable under vicarious liability; key factors were control, uniform, payment, and conduct.
  • Principle: Control over the worker, not merely labels, determines vicarious liability.

• Century Insurance Co Ltd v Northern Ireland Road Transport Board [1942] AC 50

  • Facts: Driver employed to deliver petrol; driver smoked while delivering; accident occurred.
  • Held: Employer liable for unauthorised act performed within the course of employment; authorised work performed in an unauthorised manner still falls within vicarious liability.
  • Principle: If an employee is performing authorised work, the employer may be vicariously liable even if the act is negligent or improper.

Practical implications and connections

• Ethical implications: Fiduciary duties place a strong obligation on agents to act with loyalty and disclose conflicts; breaches (secret commissions, undisclosed conflicts) undermine trust and can have criminal consequences.
• Real-world relevance: In corporate governance and everyday business, the distinction between express, implied, and apparent authority determines who bears liability when deals go wrong.
• Legal strategy notes:
  • Clearly delineate the scope of authority in agency documents and communications;
  • Ensure notices of termination are communicated to third parties to prevent ongoing apparent authority;
  • Be mindful of potential vicarious liability when engaging workers who may be misclassified as contractors.

Quick reference: key terms and tests

• Agent: person acting on behalf of the principal
• Principal: the entity for whom the agent acts
• Express actual authority: explicit authorisation by principal (written or oral)
• Implied actual authority: authority inferred to carry out expressly authorised acts
• Apparent authority: third party’s reasonable belief that agent has authority, based on principal’s representations
• Agency of necessity: authority arises out of necessity in urgent or special circumstances (not detailed here)
• Authority by ratification: principal retrospectively approves agent’s act
• Fiduciary duties: loyalty, avoiding conflicts, no secret commissions, confidentiality, proper accounting
• Care/obedience duties: follow instructions, communicate, act personally, exercise reasonable skill and care
• Indemnity: principal reimburses agent for lawful acts performed within authority
• Remuneration: compensation for agent’s services
• Undisclosed principal: agent acts for a principal not disclosed to the third party; third party can sue either agent or principal depending on circumstances
• Breach of warranty of authority: agent misrepresents authority and third party relies
• Vicarious liability: employer liable for employee’s torts committed in the course of employment; determined by control test
• Control test factors (illustrative): who determines how work is done, whether worker can accept/reject work, presentation controls

Case index (for quick lookup)

• Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
• ANZ Bank v ACEC [1966] 1 NSWR 19
• Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711
• Summers v Solomon (1857) 7 E & B 879
• Tooth v Laws (1888) 9 LR NSW 154
• Bolton Partners v Lambert [1889] 41 Ch D 295
• Lintrose Nominees Pty Ltd v King [1995] 1 VR 574
• Clarkson Booker Ltd v Andjel [1964] 2 QB 775
• Said v Butt [1920] 3 KB 497
• Penn v Bristol and West Building Society [1997] 3 All ER 470
• Hollis v Vabu Pty Ltd [2001] HCA 44
• Century Insurance Co Ltd v NI Road Transport Board [1942] AC 50