Law of agency

Actual authority can be of two kinds. Either the principal may have expressly conferred authority on the agent, or authority may be implied. Authority arises by consensual agreement, and whether it exists is a question of fact. An agent, as a general rule, is only entitled to indemnity from the principal if they have acted within the scope of their actual authority, and if they act outside of that authority they may be in breach of contract, and liable to a third party for breach of the implied warranty of authority.

Express actual authority means an agent has been expressly told they may act on behalf of a principal.

Implied actual authority, also called "usual authority", is authority an agent has by virtue of being reasonably necessary to carry out his express authority. As such, it can be inferred by virtue of a position held by an agent. For example, partners have authority to bind the other partners in the firm, their liability being joint and several, and in a corporation, all executives and senior employees with decision-making authority by virtue of their position have authority to bind the corporation. Other forms of implied actual authority include customary authority. This is where customs of a trade imply the agent to have certain powers. In wool buying industries it is customary for traders to purchase in their own names.[2] Also incidental authority, where an agent is supposed to have any authority to complete other tasks which are necessary and incidental to completing the express actual authority. This must be no more than necessary[3]

Apparent authority (also called "ostensible authority") exists where the principal's words or conduct would lead a reasonable person in the third party's position to believe that the agent was authorized to act, even if the principal and the purported agent had never discussed such a relationship. For example, where one person appoints a person to a position which carries with it agency-like powers, those who know of the appointment are entitled to assume that there is apparent authority to do the things ordinarily entrusted to one occupying such a position. If a principal creates the impression that an agent is authorized but there is no actual authority, third parties are protected so long as they have acted reasonably. This is sometimes termed "agency by estoppel" or the "doctrine of holding out", where the principal will be estopped from denying the grant of authority if third parties have changed their positions to their detriment in reliance on the representations made.[4]

• Rama Corporation Ltd v Proved Tin and General Investments Ltd [1952] 2 QB 147, Slade J, "Ostensible or apparent authority... is merely a form of estoppel, indeed, it has been termed agency by estoppel and you cannot call in aid an estoppel unless you have three ingredients: (i) a representation, (ii) reliance on the representation, and (iii) an alteration of your position resulting from such reliance."

In the case of Watteau v Fenwick,[5] Lord Coleridge CJ on the Queen's Bench concurred with an opinion by Wills J that a third party could hold personally liable a principal who he did not know about when he sold cigars to an agent that was acting outside of its authority. Wills J held that "the principal is liable for all the acts of the agent which are within the authority usually confided to an agent of that character, notwithstanding limitations, as between the principal and the agent, put upon that authority." This decision is heavily criticised and doubted,[6] though not entirely overruled in the UK. It is sometimes referred to as "usual authority" (though not in the sense used by Lord Denning MR in Hely-Hutchinson, where it is synonymous with "implied actual authority"). It has been explained as a form of apparent authority, or "inherent agency power".

Authority by virtue of a position held to deter fraud and other harms that may befall individuals dealing with agents, there is a concept of Inherent Agency power, which is power derived solely by virtue of the agency relation.[7] For example, partners have apparent authority to bind the other partners in the firm, their liability being joint and several (see below), and in a corporation, all executives and senior employees with decision-making authority by virtue of their declared position have apparent authority to bind the corporation.

Even if the agent does act without authority, the principal may ratify the transaction and accept liability on the transactions as negotiated. This may be express or implied from the principal's behavior, e.g. if the agent has purported to act in a number of situations and the principal has knowingly acquiesced, the failure to notify all concerned of the agent's lack of authority is an implied ratification to those transactions and an implied grant of authority for future transactions of a similar nature.

If the agent has actual or apparent authority, the agent will not be liable for acts performed within the scope of such authority, as long as the relationship of the agency and the identity of the principal have been disclosed. When the agency is undisclosed or partially disclosed, however, both the agent and the principal are liable. Where the principal is not bound because the agent has no actual or apparent authority, the purported agent is liable to the third party for breach of the implied warranty of authority.

If the agent has acted without actual authority, but the principal is nevertheless bound because the agent had apparent authority, the agent is liable to indemnify the principal for any resulting loss or damage.

If the agent has acted within the scope of the actual authority given, the principal must indemnify the agent for payments made during the course of the relationship whether the expenditure was expressly authorized or merely necessary in promoting the principal's business.

Real estate transactions refer to real estate brokerage, and mortgage brokerage. In real estate brokerage, the buyers or sellers are the principals themselves and the broker or his salesperson who represents each principal is his agent.

Agency law in the United Kingdom is a component of UK commercial law, and forms a core set of rules necessary for the smooth functioning of business. Agency law is primarily governed by the Common law and to a lesser extent by statutory instruments.

In 1986, the European Communities enacted Directive 86/653/EEC on self-employed commercial agents. In the UK, this was implemented into national law in the Commercial Agents Regulations 1993.[11] Thus, agent and principals in a commercial agency relationship are subject both to the Common law and the Commercial Agents Regulations.

The Commercial Agents Regulations require agents to act “dutifully and in good faith” in performing their activities (Reg. 3); co-extensively, principals are required principals to act “dutifully and in good faith” in their “relations” with their commercial agents (Reg 4). Though there is no statutory definition of this obligation to act “dutifully and in good faith”, it has been suggested that it requires principals and agents to act "with honesty, openness and regard for the interests of the other party to the transaction". Two "normative precepts" [12] assist in concretising this standard of conduct:

"Firstly, expressing honesty and openness, commercial agents and principals must mutually co-operate in the performance of their agreement. Conduct in good faith requires that each party proactively take action to assist the other in the realisation of their bargain, as opposed to mere abstention from obstructive behaviour. However, whether a party has acted in good faith must not be determined by reference to a moral or metaphysical notion of co-operation; this assessment must be based on an objective appraisal of the actual commercial agency relationship. Accordingly, the intensity of the required co-operation will vary, depending on the terms of the contract and the pertinent commercial practices.

Secondly, commercial agents and principals must not exploit asymmetries in their agency relationship in such a manner that frustrates the legitimate expectations of the other party. In this respect, whether a conduct is in breach of the Obligation must be appraised holistically, considering all aspects of the relationship; material facts will include the contractual and commercial leverage of each party, their objective intentions as enshrined in the contract, and the business practices of the sector in question. Nevertheless, the starting axiom of this investigation must be that these are commercial relationships in which professionals are expected to be self-reliant and must be free to pursue their self-interest. Critically, this will not be an estimation aimed at achieving ontological fairness, a just bargain or equilibrium between the giving and receiving of commercial agents and principals".[12]

In Ireland, Directive 86/653/EEC was implemented in the Commercial Agents Regulations of 1994 and 1997.[13]

In India, for the purposes of contractual law, section 182 of the Contract Act 1872 defines Agent as “a person employed to do any act for another or to represent another in dealings with third persons”.[14]

According to section 184 as between the principal and third persons, any person (whether he has contractual capacity or not) may become an agent. Thus, a minor or a person of unsound mind can also become an agent.