UNIT 5 – The Law of Agency

An agency is the relationship which exists between one person called an agent and another called
the principal. An agent is a person who is used to effect a contract between his principal and a
third party.

The principal is the person on whose behalf the agent acts.

In effecting the contract the agent does not become a party to the contract and is therefore, under
normal circumstances, not liable to the third party with whom he made the contract.

An agent need not have capacity to contract because he is not a party to the contract.

CREATION OF AN AGENCY RELATIONSHIP

An agency can be created in the following ways:

1. By express agreement
2. By necessity
3. By implication/estoppel
4. By ratification

Agency by Express Agreement

The agent is given the authority verbally – orally or in writing to act on behalf of the principal.

Agency by Necessity

If a person without authority acts on the behalf of another then the “principal” is not liable.
However, such person (principal) can be liable for a contract that is made on his behalf and
without his permission. The following conditions must however be satisfied.

(a) There must have been an emergency causing the agent to act as he did.

(b) It must have been impossible to get instructions from the principal.

(c) The agent must have acted in good faith and in the interest of all the parties.

CASE: Great Northern Railway v Swaffield (1874)

A horse was sent by rail and on its arrival at its destination there was no one to collect it. GNR
incurred the expense of stabling the horse for the night. It was held that GNR was an agent of
necessity who had implied authority to incur the expense in question.
Agency by Implication / Estoppel

If a person by his word or conduct leads a third party to believe that another has authority to act
on his behalf and that third party enters a contract with the apparent agent, the apparent principal
will be bound to such contract as if he had expressly authorized it. The principal will be
prevented (estopped) from denying that an agency relationship exists.

CASE: Pickering v Busk (1812)

A broker was employed by a merchant to buy hemp. After he had completed the purchase the
broker retained the hemp at his wharf, at the request of the merchant. He then sold the goods.
The purchaser was held to have obtained a good title to the goods because the broker was
apparently an agent to sell, and the merchant was estopped by his conduct from denying the
agency.

Agency by Ratification

If a duly appointed agent exceeds his authority or a person having no authority acts on behalf of
another, then the principal may ratify a contract which was made on his behalf and is therefore
liable on the contract. The following conditions must however be satisfied:

1. The agent must have named his principal or stated that he was acting on someone’s
behalf.

2. He (principal) must have had capacity at the time of the contract and at the time of
ratification.

3. The principal must have full knowledge of all the material facts and was prepared to
ratify in any case.

4. The contract must not be a void contract.

CASE: Brook v Hook (1871)

A man forged his uncle’s signature on a promissory note. When a third party came into
possession of the note and discovered the forgery, he intended to bring proceedings against the
forger. The uncle then purported to ratify his nephew’s act by signing the note, but later refused
to honour it. It was held that the ratification was ineffective and the promise was therefore void.
 CASE: Bolton Partners vs Lambert (1888)

The managing director of a company acting as an agent of the company, but without authority to
do
so, accepted an offer by the defendant for the purchase of company property. The defendant
later
withdrew his offer, but the company then ratified the manager’s acceptance. It was held that D
was
bound by the contract as the ratification was retrospective to the time of the manager’s
acceptance.

DUTIES OF THE PRINCIPAL TO THE AGENT

1. Pay – the principal must pay the agent the agreed remuneration and if nothing was agreed
he must pay a reasonable sum, based on the custom of the trade.

2. Indemnity – he must compensate for any expense incurred during the normal course of
the agent’s duty.

DUTIES OF THE AGENT TO THE PRINCIPAL

1. He must obey the principals lawful instructions unless he is acting gratituously.

CASE: Turpin v Bilton (1843)

An insurance broker, in return for a fee, agreed to effect insurance on the plaintiff’s ship. He
failed to do so and the ship was lost. The broker was held liable to the plaintiff.

1. He must exercise reasonable care and skill in the performance of his duties. The degree
of skill expected depends on the circumstances. For e.g., if the agent is a professional,
then more skill is required of him, than that of a layman or apprentice.

2. He must act in good faith (honesty, trust, confidence) and in the interest of his principal.

CASE: Armstrong v Jackson (1917)

The plaintiff employed the defendant, a stockbroker, to buy some shares for him. In fact the
defendant sold his own shares to the plaintiff. It was held that the plaintiff could rescind the
contract. The agent’s interest as seller was to sell at the highest possible price, whereas his duty
as agent was to buy at the lowest possible price – clearly a conflict of interest and duty. He must
not make a secret profit; that is he must not use his position to secure a benefit for himself.
 (a) he must not let his interest conflict with that of his principal even if his action was
not meant to defraud his principal.

(b) he must not make a secret profit, that is, he must not use his principal’s position to
secure a benefit for himself.

CASE: Lucifero v Castel

An agent appointed to purchase a yacht for his principal bought the yacht himself and then sold
it to his principal at a profit, the principal being unaware that he was buying the agent’s own
property. The agent had to pay his profit to the

(c) he must not delegate the performance of his duty, unless this is expressly
(written /orally) or impliedly agreed upon.

(d) he must not mix his financial affairs with that of his principal.
TERMINATION OF AGENCY

There are three (3) main ways of terminating the agency:

1. By the act of the parties

2. By operation of law
3. By completion of the agency agreement

By the act of the parties

(a) By mutual agreement (both agree to end the agency).

(b) By notice of principal or the agent.

NB – Notice of termination of the agent’s authority must be given by the principal to the third
parties with whom the agent dealt.

(c) If the agent commits a serious breach of an express or implied duty. e.g. delegation - the
principal may terminate the agency without notice and sue for damages. If the agent
made a secret profit the principal is entitled to it even if the principal could not have
made the profit himself.

By operation of law

(a) On the death or insanity of either the principal or the agent.

(b) The bankruptcy of the principal.

(c) Frustration of the contract

By completion of the agency agreement

(a) The period fixed for the agreement comes to an end.

(b) The purpose for which the agreement was created is completed.