Agency notes
MBAZ605: Business Law - Commercial Transactions
Overview of Agency
Definition of an Agent:
An agent is a person engaged by a principal to act on their behalf, thereby affecting the legal position (rights and liabilities) of the principal in relation to third parties.
An agent may enter into contracts with third parties on behalf of the principal, indicating two distinct contractual relationships:
Contract of Agency: This is the agreement that establishes and governs the relationship between the principal and the agent, defining the scope of the agent's authority and duties.
Contract with Third Party: This contract is formed directly between the principal and the third party, as a result of the agent's authorized actions. The agent effectively brings the principal and the third party into a legal relationship, without necessarily becoming a party to the third-party contract themselves.
Authority in Agency
Agency is fundamentally based on the concept of authority, which determines an agent's power to bind the principal.
There are two main types of authority, which can sometimes overlap:
Actual Authority:
Occurs when a principal actually confers authority upon an agent, granting them the power to act on their behalf.
This authority can be:
Expressed: Clearly stated or explicitly given, either orally or in writing (e.g., through a power of attorney or specific instructions).
Implied: Inferred from the circumstances, the conduct of the parties, the nature of the agent's position, or prior dealings. It includes authority that is incidental to express authority, customary for a particular type of agent, or necessary to carry out the express authority.
As demonstrated in Freeman v Buckhurst Park Properties, actual implied authority can arise from the actions and positions given to an individual, even without explicit formal appointment.
Apparent Authority (or Ostensible Authority):
Occurs when a principal, through words or conduct, holds out an agent as having authority to a third party, even if the agent does not have actual authority.
The principal cannot later deny the existence of this authority if the third party reasonably relied on the principal's representation.
This representation creating apparent authority can be express (e.g., public announcement) or implied (e.g., allowing an individual to act as if they hold a certain position).
Freeman v Buckhurst Park Properties is a key case illustrating that apparent authority arises from representations made by the principal to the third party, leading the third party to believe the agent has authority.
Companies Act 1993
Section 18: This section codifies aspects of the "indoor management rule" (also known as Turquand's Rule) in relation to companies and agency, protecting third parties who deal with companies in good faith. Details on its specific provisions are discussed further below.
Examples Illustrating Authority
Example 1:
Joan, CEO of X Ltd, attempts to enter into a million agreement on behalf of X Ltd with Y Ltd.
Analysis: The context here is insufficient to determine if Joan has actual authority (express or implied). A CEO typically has broad implied authority, but without more information, it's unclear if this specific transaction falls within it.
Example 2:
Joan is appointed CEO and has a prominent external communication role, routinely engaging in business negotiations. Joan enters into a million agreement on behalf of X Ltd, which is normal for CEOs concerning such transactions.
Analysis: This scenario strongly suggests Joan has implied actual authority due to her position and the customary duties associated with it. It also points to apparent authority as third parties would reasonably assume a CEO has such power.
Example 3:
The Board of Directors of X Ltd passes a resolution restricting contracts over without specific written approval. Joan attempts to enter into a million agreement without such approval. Thus, her actual authority is questioned despite her CEO title.
Analysis: Joan lacks actual authority for this specific transaction due to the board's internal restriction. However, a third party unaware of this internal restriction might still be able to enforce the contract based on Joan's apparent authority as CEO, especially under Section 18 of the Companies Act 1993.
Example 4:
The Board expressly authorizes Joan to enter agreements up to million. Joan lawfully enters a million agreement in this scenario, demonstrating clear authority.
Analysis: Joan possesses express actual authority in this situation, as the board explicitly granted her the power for transactions up to million.
Example 5:
Joan introduces herself as CEO but actually has no formal relationship or appointment with X Ltd and attempts to enter a million agreement. She lacks authority entirely.
Analysis: This is a case of complete lack of authority. Joan has neither actual nor apparent authority because X Ltd has not appointed her or made any representation to a third party that she is their agent. She would likely be held liable for breach of warranty of authority.
Ratification of Authority
Definition:
Ratification occurs when a person (the principal) subsequently approves and adopts an act performed by another person (the agent) who acted on their behalf but without initial authority (or exceeded their authority).
For valid ratification:
The agent must have purported to act for a named or ascertainable principal.
The principal must have been in existence at the time of the agent's act.
The principal must have had the legal capacity to perform the act themselves at the time the agent acted and at the time of ratification.
The ratification must be of the whole act, not just part of it.
Referenced in Keighley, Maxsted & Co v Durant, which established that an undisclosed principal (where the agent does not disclose they are acting for a principal at all) cannot later ratify the agent's unauthorized act.
Duties of Agents
Agents owe significant duties to their principals, primarily arising from the fiduciary nature of the relationship:
Duty to perform tasks as agreed: This includes a duty of obedience, requiring the agent to follow all lawful instructions given by the principal.
Duty to act in accordance with actual authority: The agent must not exceed the scope of authority granted by the principal, whether express or implied.
Duty of reasonable care and skill: An agent must exercise the degree of care and skill that a reasonable person in their position would exercise, or a higher degree if they hold themselves out as having special skills (e.g., a professional agent).
Duty to act in the best interest of the principal: This is a core fiduciary duty, requiring the agent to avoid conflicts of interest, not make secret profits, and always prioritize the principal's interests over their own or those of others.
Duty to account for any money received as an agent: Agents must keep proper records of all transactions, funds, and property received and expended on behalf of the principal and must be prepared to hand over all such property and accounting on demand.
Duty of confidentiality: Agents must not disclose confidential information gained during the agency, even after the termination of the agency relationship.
Duties of Principals
Principals also have obligations towards their agents, typically outlined in the agency contract:
The principal must pay commission or other remuneration to the agent as agreed upon, once the agent has fulfilled their contractual obligations.
Principals also have a duty to indemnify the agent for expenses lawfully incurred and liabilities undertaken in the course of performing their duties, provided these were within the scope of authority and not due to the agent's own default.
A duty not to willfully obstruct the agent in the performance of their duties.
Warranty of Authority
Definition:
A warranty of authority is an implied contractual obligation that an agent owes directly to a third party, confirming that they possess the authority they claim to have from their principal.
If an agent, without actual authority, purports to act for a principal and thereby induces a third party to enter into a contract, the agent can be sued by the third party for breach of this warranty. The agent is personally liable for damages (i.e., loss suffered by the third party due to the purported contract not being enforceable against the principal).
Referenced in Collen v Wright, where the agent was held personally liable to the third party for damages when they falsely represented having authority from their principal to lease a farm.
Termination of Agency
An agency relationship may be terminated through various means:
Performance of duties: When the specific purpose for which the agency was created has been achieved.
Mutual agreement: The principal and agent agree to end the relationship.
Repudiation (termination without lawful cause): Either the agent or principal can unilaterally terminate the agency, though this may lead to a claim for damages for breach of the agency contract.
Effluxion of time: If the agency was for a fixed period, it terminates upon expiry of that period.
Death, insanity, or bankruptcy: The death or mental incapacity of either the principal or the agent, or the bankruptcy of the principal, typically terminates the agency.
Companies Act 1993: Section 18(1)
Provision for Dealings: Section 18(1) is crucial for protecting third parties dealing with companies by limiting when a company can deny the authority of its agents. A company cannot assert against a dealing party that:
The Act or the constitution have not been complied with: This covers internal procedural irregularities (e.g., a meeting not being properly convened, or a resolution not being correctly passed) that a third party would not reasonably know about.
A director lacks the authority that is typically held by a director running a similar business type: This grants apparent authority to directors for actions that are customary for their position in comparable companies, protecting third parties who assume such authority.
A person who appears to be a director, employee, or agent lacks the authority to perform customary duties of that role: This extends similar protection to other employees or agents who are represented by the company as holding a particular position, reinforcing the concept of apparent authority based on normal job functions.
Furthermore, someone appearing to have authority who does not, cannot exercise that authority unless the dealing party has knowledge relevant to their position or relationship with the company: This crucial proviso states that the protection offered by Section 18(1) does not apply if the third party actually knows (or ought reasonably to know) that the director, employee, or agent lacks the authority they claim. The third party cannot rely on Section 18 if they are aware of the internal limitation or lack of authority.
Case References
Levin Meats Ltd v Perfect Packaging Ltd (HC 2011):
Mr. Grey, acting as General Manager/CEO, attempted to purchase equipment on behalf of LML for without sufficient actual authorization from the Board. The case likely explored whether Mr. Grey had apparent authority or if Section 18 protected the third party despite internal restrictions.
Ken Jones Building Supplies Ltd v Edendale Investments Ltd (HC 2013):
Mr. Waters, a director, purportedly offered a guarantee from EIL of another company's debt with KJBSL without proper authority. This case likely examined the extent of a director's implied or apparent authority to bind a company to a guarantee, often a highly restricted power, and the application of Section 18.
TVBI Company Ltd v World TV Ltd (HC 2019):
Mr. Ho, as Director, Board Chair, and CEO, attempted to enter a licensing contract on behalf of WTVL, which was objected to by the board despite prior similar approvals. The case probably delved into whether Mr. Ho's multiple senior roles conferred sufficient apparent authority, especially in the face of subsequent board disapproval, and how Section 18 applies when there are internal conflicts.
Partnership Law Act 2019: Section 18
Power of Partner to Bind Firm: This section governs the ability of a partner to bind the partnership firm and their fellow partners.
An act by a partner (A) can bind the firm and A's partners if done in the usual manner of conducting business for that firm or a firm of that kind. This means that if a partner acts within the scope of what is customary for the partnership's business, their actions will generally be binding on the firm, implying a form of actual or apparent authority by virtue of partnership.
However, this does not hold if the firm can prove that:
(a) Partner A lacks actual authority for the specific matter (e.g., there was an internal agreement among partners restricting A's power); AND
(b) The third party involved:
(i) knows that Partner A lacks the authority for that specific act; or
(ii) does not know or believe Partner A to be a partner in the firm. If the third party is unaware of A's partnership status, they cannot rely on the 'usual course of business' rule to bind the firm.