The definition of agency in business law is a complex area of law that can affect parties across contracts and industries – from major construction projects with superintendents through to manufacturing and distribution.
A broad definition of agency in business law is when one party (the principal) grants another party (the agent) authority to act on behalf of the principal to deal with a third party. It needs to be clear who the agent is and who they are acting on behalf of, the authority of the agent and the timeframe for which the agent can act on behalf of the principal.
Some of the principles and concepts of agency are addressed below.
Essential features of agency in business law
- Agency – is a fiduciary relationship.
- Consent – the Principal must consent to the agent acting of their behalf and to be bound to third parties that the agent engages on the principal’s behalf.
- No ongoing duty – once the principal and third party are in a legal relationship, the agent is no longer part of the relationship. The agent has no ongoing rights or duties to the transaction itself.
An agent can only bind the Principal within the scope of the agent’s authority. In the event an agent exceeds its scope of authority the principal can choose to ratify (uphold) the decision of the agent or reject it.
An agent’s authority can be actual or apparent:
- Actual authority is when agency is authorised expressly or impliedly by the agent’s principal. It occurs through a consensual agreement to which the principal and agent are parties. When actual authority is granted to an agent, the scope of the agent’s authority is ascertained by applying the ordinary principles of contract construction and interpretation.
- Apparent or ostensible authority concerns the authority of an agent from the perspective of a third party. If a third party is led to believe by the representation of the principal that the agent has an apparent authority and the agent commits the principal to a third party within that authority, then the principal can be bound to the same extent as if the principal expressly authorised the agent to do so.
Agent’s duties to a Principal
The majority of agents in the construction and the commercial world will enter into written contracts that outline the obligation of the agent. Therefore, an agent’s obligations and duties to a principal will largely depend on the terms of the contract and the extent of the authority provided. A number of duties still exist at common law. Mainly that the agent undertakes to act in the principals best interests and to exercise their authority with discretion in a legal and practical sense.
Generally, an agent that breaches their obligations to the principal, or exceeds their scope of authority will have void their right to remuneration.
Duties of Principal to an Agent
As above, if a contract exists between the principal and agent, the principal must uphold the obligations identified in the contract. At common law, unless contracted otherwise, the principal has a duty to:
- pay the agent remuneration or commission;
- reimburse the agent’s expense, and;
- indemnify the agent against losses.
Liability of an agent
The general rule is that once an agent has executed a contract on behalf of its principal it is no longer a party to the agreement and is therefore indemnified from liabilities that ensue. Situations where the agent can be held liable include:
- When it is not sufficiently clear that the ‘agent’ is acting as the agent. Where it is undisclosed or not sufficiently clear the third party can choose to enforce the contract on either the principal or the agent. This occurred in Cincotta v Russo (2019). Our article on that case here.
- If the agent executes a deed in its own name, the deed must state include a statement outlining it the agent executed it on behalf of the principal.
- If the contract includes situations in which the agent can be held liable.
- Where the agent executes a contract as an agent but rather is acting on its own behalf.
An agent can also be held liable in tort. The common tortious liabilities concern negligence, misrepresentation and deceit.
Liability of a Principal
Agency changes the legal relations between the principal and third party. It is a useful tool to limit liability. Liability can still arise, liability most commonly arises dependant on the construction of the contract as demonstrated in the following circumstances:
- A principal can be held liable under a contract that an agent enters on behalf of the principal even if the agent exercised authority beyond its scope in the principal that led the agent and third party to believe the agent did have authority.
- A principal can be held liable for a contract it has never seen if the agents the scope of the agent’s authority.
Take away: the law of agency poses risks to principals, third parties and agents alike, all of which should take the necessary steps to best protect themselves.
- Agent – the main risk for an agent is being held liable for a contract they entered into on behalf of a principal. To avoid this, an agent should make sufficiently clear that they are executing the contract on behalf of the principal and clearly understand the extent and scope of any authority provided.
- Principal – the main risk posed to a principal is being entered into a contract that is unsuitable. To avoid this the principal should always have a written agreement with the agent that has a detailed scope of authority to suit the principal’s intentions.
- Third Party – the main risk that a third party faces is from an unauthorised agent. When dealing with an agent, or if a third party suspects they’re dealing with an agent they should ask for a letter of authority or make the contract conditional on ratification by the principal.
If you have any questions regarding the law of agency, please do not hesitate to contact Morrissey Law + Advisory.
Disclaimer: This publication by Morrissey Law & Advisory is for general information and commentary only and should not be considered or relied upon as legal advice. Formal legal advice should be sought in relation to any matters or transactions that may arise in relation with communication.