Understanding the legal relationship of agency

The importance of establishing whether a legal relationship of agency exists, and if so, to what extent, can be critical when ascertaining whether a person had authority to enter into an agreement on behalf of another person or entity.  The precise legal nature of the relationship may be important to the parties if either are attempting to enforce their rights under an agreement between them.

What does the agency relationship involve?

An agency relation between two parties is a relationship:

“involving authority or capacity in one person (the agent) to create or affect legal relations between another person (the principal) and third parties.”

In other words, the agency relationship involves appointing a person or entity (Agent), to act on behalf of another person or entity (Principal) when dealing with third parties.

The agency relationship may arise by:

• agreement between the Principal and Agent, either by express agreement or implied in a variety of ways;
• the Principal’s ratification of actions performed by the Agent; and
• estoppel.

The extent of the Agent’s authority

One of the most important aspects of the agency relationship is the extent of the Agent’s authority.  An Agent must act only within their authority.  Where an Agent acts outside of the scope of their authority, for example, entering into an agreement with a third party on behalf of the Principal which is outside the scope of their authority, the agreement will not be enforceable against the Principal.

There are two (2) different types of authority than an Agent may holds, these are:

• actual authority; and
• ostensible authority.

Actual authority

The Agent’s actual authority is that which the Principal has actually granted it.  Actual authority may be express, that is, by way of an agency agreement that states the scope of the Agent’s authority, or implied by circumstance.

Circumstances where an Agent may have the implied authority to act in a certain manner may include where there is:

• a custom or trade in the relevant industry;
• a course of past dealing where the Agent has performed such actions on behalf of the Principal; and
• a need for the implied authority to make a commercial agreement, including the agency agreement itself, effective.

Ostensible authority

Ostensible authority is based on the equitable principle of estoppel.  The Agent’s ostensible authority is that which third parties would understand the Agent to be authorised to do on behalf of the Principal, based on the actions of the Principal.  In other words, if the Principal by their words or conduct (or lack thereof) “holds out” that the Agent (or alleged Agent) is authorised to perform certain acts, these acts will be within the ostensible authority of the Agent.

Rights and obligations of the Principal

The Principal will be liable for the actions of the Agent that are carried out in accordance with their authority.  The Principal is also subject to the obligations contained in the agency agreement.  These will by their nature vary between circumstances, but common obligations of Principals include:

• remuneration of the Agent for performance of their duties; and
• indemnification of the Agent against.

Rights and obligations of the Agent

The relationship between an Agent and their Principal is, much like that between a solicitor and their client, a fiduciary relationship.  In the agency relationship, the Agent owes a fiduciary duty to the Principal, which compels the Agent to act only in the best interests of the Principal.

The fiduciary duty prevents the Agent from acting in a manner that:

• conflicts with the interests of the Principal; and
• causes the Agent to gain an undisclosed, personal benefit by virtue of their position as Agent.

Outside of the fiduciary duty an Agent owes their Principal, an Agent also has other duties, including by not limited to:

• complying with the terms of the agency agreement;
• acting only within the scope of their authority; and
• acting personally, that is, they must not subcontract their duties to another party.

Liability for actions of the Agent

The appointment of an Agent is a serious decision that carries great risk for the Principal.  The major source of risk arises due to the liability for actions committed by the Agent that are within the scope of their authority.

It is discussed above how the Agent can create legal obligations between the Principal and third parties that are enforceable by such third parties against the Agent.  For this reason, it is important that the authority of Agents is clearly defined, and strictly regulated, so as to avoid any liability for actions of the Agent that are outside that which was contemplated initially.

Liability for the actions on the agent in tort

The Principles liability for the actions of their Agent is not limited to commercial dealings and it extends to torts committed by the Agent against third parties when the Agent is acting within the scope of their authority. For example, where an Agent who has the authority to negotiate on behalf the Principal defames a third party in the furtherance of negotiations, the Principal may be liable as a party should the third party commence proceedings.

Links and further references

Cases

Pirie Street Stage 1 P/L v Trotman & Anor And Stewart & Ors [2015] SADC 123

Price v Southern Cross Television (TNT9) Pty Ltd [2014] TASSC 70

Sweeney v Boylan Nominees Pty Ltd [2006] HCA 19

International Harvester Company of Australia Pty Ltd v Carrigan’s Hazeldene Pastoral Co [1958] HCA 16

Further information about agency relationship

If you require further information about the agency relationship or a dispute based on this relationship, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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