I.

CONTRACT LAW

Agency (excerpt from KE1IÀY-HOLMES-I IAYWARI), Business Law, London, 2005)

 CHAPTER 11

AGENCY

11.1 INTRODUCTION
The prmicples of agency law provide the basis for an understandmg of many issues
relatmng to partnerships and some of those relatmng to reglstered companies The
general assumpthon 1s that mdivxduals engagmng in busmness actìvxty carry on that
busmess by themselves, and on their own behalf, either mdnvidually or collectivehy It
1S not uncormmon, however, for such indivxduals to engage others to represent them
and negotiate busmness deals on thenr behalf Indeed, the role of the 'mriddleman' 1S a
commonplace one in business and commerce. The legal relatonship betxxeen such a
representathve, or middIeman, and the busmness person makmng use of them ìs
governed by the law of agency Agency principles also apply n relation to comparues
registered under the compames legislation and the directors and other officers of such
compames.

11.2 DEFINITION OF 'AGENCY'

An agent 1s a person wxho is empowered to represent another legal party, called the
principali and brings the principal into a legai relatìonship xxìth a third party. It should 3r
be emphasised that the contract entered mto 1S between the principal and the tlurd
party. In the normal course of events, the agent has no personal rnghts or habrhties in
relation to the contract Thrs outcome represents an accepted exception to the usual
operation of the doctrhne of prìvity in contract law (see above, 5 6)
Smice the agent 1S not actually entermg mito contractual relathons wx ìth the third
party, there 1s no requrrement that the agent has contractual capacity, although, based
on the same reasormng, it is essenial that the principal has fltl contractual capacity
Thus, it is possible for a principal to use a mmor as an agent, even though the minor
mnght not have contractual capacatv to enter into the contract ori their own behalf
There are numerous examples of agency relationshlps For example, as theìr names
imply, estate agents and travel agents are expressiy appomted to facilitate particular
transactions Additionall\, empIoyees may act as agents of their employers m certain
circumstances, or frnends may act as agents for one another
Some forms of agency mernt particular consideration, as folloxw s
e A general agent, as the titIe mndcates, has the power to act for a principal generally
m relation to a particular area of busmess, whereas a special agent only has the
authornty to act in one particular transaction
A del credere agent is one who, in return for anr additional coimmssion by way of
A*
pavment, guarantees to the principal that, in the event of a third party's failure to
pay for goods received, the agent will make good the loss
* A commission agent 1s a hybrid form which lies midxax betìxxeen a fuli
principal/agent relationshìp and the relationshìp of an independent trader and
client In essence, the agent stands betvi een the principal and the thlrd party and

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 262 Busmess Law
Chapter 11 Agency 263

estabhshes no contract bern;een those two partes The effect 1s that, although the
agents had no entitlement to coummssion, as the property owner had not agreed to
commission agent owes the duthes of an agent to bis or her prmcipal, he or she their actng as bis agent.
contracts with the third party as a principal in his or her own right The
effectiveness of this procedure 1s undermuned by the normal operation of the The principal/agent relationship canr be created m a number of ways It ma; arnse
agency law relating to an undisclosed prmcipal (see below, 11 6 2) as the outcome of a dstcnct contract, which may be made either orally or m writnng, or
t may be established purely gratuitously, where some person simply agrees to act for
• The position of a mercantile agent/factor 1s defined in the Factors Act 1889 as an
another. The relationslup may also anse from the actions of the parties
agent.
It is usuai to consider the creation of the principal/agency relationshtp under five
hav ng in the customary course of his busmess as such agent authority eilther to sell
goods, or to consign goods for the purpose of sale, or to buy goods, or to raise money dsctnct categories
on the security of goods
However, of perhaps more contemporary importance are marketmng agents, 11.3.1 Express appointment
distnbution agents and the question of franchismg
Thcs is the most common manner m whtch a prmcipal/agent relatuonship comes mto
• Marketng agents have only hmited authority They can only mtroduce potential
existence. In this situaton, the agent 1S specifically appomted by the prmncipal to carry
customers to theìr prmncipals and do not have the authority either to negotiate or to
out a particular task or to undertake some general function. In most situations, the
enter mto contracts on behalf of their prmcipalc
appomntment of the agent will tself involve the establishment of a contractual
* Distribution agents are appomted by supphers to arrange the distribution of theìr relationshup between the prmcipal and the agent, but need not necessarily depend
products nwithm a particular area The distributore ordmarnly cannot bmd the upon a contract ben;een those parties
supplier, except where they have expressly been given the authoritv to do so
For the most part, there are no formal requirements for the appomntment of an
* Franchismg arrangements arnse wvhere the orngmaal developer of a busmess decides, agent, although, where the agent tS to be gìven the power to execute deeds m the
for whatever reason, to allow others to use theìr goodniiI to conduct an principal's name, they must themselves be appomted by way of a deed (that 1S, they
independent busmess, usmg the original name of the busmess TWo promment are given power of attorney)
examples of franchises are McDonalds and The Body Shop, although there are
many others It 1S essential to emphasise that any such relationship does not arnse
11.3.2 Ratification
from, or give rise to, a relatìoncshp of principal and agent Indeed, dt 1S
commonplace, if not umiversal, that franchise agreements mnclude an express clause
An agencv 1S created by ratification nwhen a person who has no authority purports to
to the effect that no such relationship tS to be established
contract wnth a third party on behalf of a principal Ratification 's the express
D Commercial agents are specifically covered by the Commercial Agents (Councìl acceptance of the contract by the prmcipal Where the prmcipal elects to ratify the
Direchtve) Regulations 1993, which were enacted in order to comply wnth EC contract, it gìves retrospective valhdìty to the action of the purported agent There are,
Dlirective 86/653 The Regulations defmne a commercial agent as a self-emploved however, certam conditions wnach have to be fully complbed wnth before the prmcipal
mtermediarv who has continumng authority to negtiate the sale or purchasc of cari effechively adopt the contract, as follotws
goods on behalf of another person, or to negotiate and conclude such transactions
* The prziicìpa/ uiist have been in exìstence at the time that the agent entered iito the
on behalf of that person Although mtended to harmonmse the operation and effect
CO71tract
of agency law withm the European Union, the regulations do not mtroduce anv
major substanrive change mto UK agency law The effect of the Regulathons will be Thus, for example, in Ke/rier v Baxter (1866), where promoters attempted to enter
consedered m more detail below at 11 5 3 irto a contnact on behalf of the as yet unformed company, it was held that the
comparin could not ratrfY the contract after it was created and that the promoters,
e A power of attorney arises where an agencv 1s specifically created by way of a
as agents, were personall liable on the contract (This 1S now given statutory effect
deed.
under s 36C of the Compamues Act 1985 )
* The priiczpai aiiiist hlave had legaZ capacity to e1itei l11tO the coììtìact when il ceas H1iade
11.3 CREATION OF AGENCY When the capacity of compames to enter mnto a busmess transachon was hlmited by
the operation of the docthrie of Lilti a veres, it was clearly established that they could
No one can act as an agent without the consent of the pimncpal, although consent need not ratif an; such ti/tra vres contracts Similarl;, ìt 1s not possible for miors to
not be expressly stated ratify a crontract, e;aen though it was made in theur name
In Vvhite v Lucas (1887), a firm of estate agents clalmed to act on behalf of the onn-er • An iindesciosed pri;scipalcainíot ratìfy a coitract
of a particular propertv, though that person had denied them permisseon to act on has The agent must have declared that he or she was actnrg for the prmcipal If the
behalf lVhen the owner sold the property to a third party, who was mntroduced agent appeared to be actmg on bls or her own accouut, then the prmcipal cannot
through the estate agents, they cialmed thear commicssion It iwas held that the estate later adopt the contact (see Keìgh/ei Maxted & Co v DìTrant (1901))

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264 Business Law Chapter 11 Agency 265

* The principal wiust adopt the whole of the contract the railway company could have contacted the plaìitiff to seek his further
It ìs not operi to the pricipal to pick and choose wìhich parts of the contract to instructions.
adopt, they must accept all of ìts terms * The person seeking to estabZish the agency by necesszty mnust have acted bonafide in the
* Ratefication ìnist take piace eithìi a reasonable time mnterests of the principal (see Sachs v Miklos (1948))
It 1s not possible to state xith certamnty what will be considered as a reasonable
time in any particular case Where, however, the third party wìth whom the agent 11.3.5 Estoppel
contracted becomes aware that the agent has acted without authority, a time hmit
can be set, wi thm which the principal must indicate their adoption of the contract This form of agency 1s also known as 'agency by holdmg out' and arnses where the
for ilt to be effectve principal has led other parties to believe that a person has the authority to represent
hbm or her (The authority possessed by the agent is referred to as 'apparent authority'
- see below, 11 4 2 ) In such circumstances, even though no principal/agency
11.3.3 Implication relationsrlp actually exists m fact, the principal is prevented (estopped) from denymg
the existence of the agency relationship and 1s bound by the action of his or her
This form of agency arnses from the relationship that exists betheen the principal and purported agent as regards any third partì' who acted in the bellef of its existence.
the agent and from which ìt 1s assumed that the principal has given authonrty to the
other person to act as bls or her agent Thus, it is implied from the particular position • To rely on agency by estoppel, the principae mnust have inade a re'presentatioln as to the
held by indviduais that they have the authornty to enter into contractual relatìons on anthorìty of the agent
behalf of their principal So, whether an employee has the actual authority to contract In Free1nan ancd Lockyer v Bztck1lìirst Park Properties Ltd (1964), a property company
ori behalf of bls or her employer depends on the position held by the emplovee, and, had four directors, but one director effecthvely conhrolled the company and made
for example, it was decided in Panoraenza Develeopnents v Fidelis Funrishing Fcbrics Ltd contracts as lf he were the managmg director, even though he had never actually
(1971) that a company secretary had the implied authority to make contracts in the been appomted to that position and, therefore, as an individual, had no authornth
company's name relathg to the day to day runrmng of the company to bmnd the company The other directors, however, w-ere aware of this activhty anrd
Problems most often occur in relation to the implìed extent of a person's authority, acquiesced m it When the company was sued m relation to one of the contracts
rather than their actual appomtment (but see Hely-Hutchinson v Bi-Oyhead Ltd (1967) as entered into by the unauthornsed director, it was held that it was liable, as the
an example of the latter) board xihich had the actual authornty to bmd the company had held out the
mdividual dìrector as having the necessary authority to enter such contracts It
was, therefore, a case of agency by estoppel
11.3.4 Necessity
* As with estoppel generally, the pai ty seeking to uise ìt must haee relìed on the
Agency by necessitI occurs under circumstances wihere, although there 1s no 1 presenitati1en
agreement betwveen the partes, an emergency requires that an agent take particular In Overbeooke Estates Ltd v Gleììconbe PropE rties Ltd (1974), a notice xwhlch expressly
acton in order to protect the mterests of the principal The usual situation whìch grves demed the authoritv of an auctìoneer to make such statements as actuallv tumed
rise to agency by necessit5 occurs where the agent ìs in possession of the prmcìpal's out to be false was successfully relied on as a defence by the aucthoneer's
property and, due to some unforeseen emergency, the agent has to take acthon to employers
safeguard that property
In orderforagency by ììecessity to anse, there needs to be a @enim1ìe erlergency
In Creat Noe thern Railway Co v Swaffield (1874), the radLvvay company transported 11.4 THE AUTHORITY OF AN AGENT
the defendant's horse and, when no one arnived to collect it at ìts destination, ìt
In order to bind a principal, any contract entered mto must be withmn the lnmits of the
was placed in a livery stable It wvas held that the company was enritled te recover
authorntv extended to the agent The authoritv of an agent cari be either actual or
the cost of stabling; as necessiht had forced them to act as thev had done as the
apparent
defendant s agents
• The1e aii7ztilsoe be 1lO pìactical way of obtaeinin. fin the1 in strLictíens feni the pi i7mOpa1
11.4.1 Actual authority
In Spiiìicr-ev Great TVestern Reilc",ay Co (1921), a consigrment of tomatoes arrived at
port after a delayed Journey due to storms A ralbì aV strnke would have caused Actual authority can anse in t ,-o ways
further delay in getting the tomatoes to their destiation, so the railwaa compani
* Express actual ai'therit11
decided to sell the tomatoes locally It vv-as held that the radlwiay companv xias
responsible to the plaintiff for the dLfference betw een the price achieved and the ThIs is explhcitly granted by the principal to the agent The agent 1s instructed as to
market price m London The defence of agency of necessitì was not avallable, as xwhat particular tasks are required to perform and 1s riformed of the precise
powers giv en in order to fulfii those tasks
266 Business Law Chapter 11 Agency 267

o IMrpled actual authority In Yonge v Toynbee (1910), a firm of solicitors was mstructed to mstitute proceedmgs
This refers to the way miwblch the scope of express authority may be mcreased agamst a third party Without their knowledge, their client was certhfied insane, and
Thlrd parties are entitled to assume that agents holding a particular position have although this automaticallv ended the agency relationship, they conthnued with the
all the powers that are usually provided to such an agent Without actual proceedmgs The thlrd party successfully recovered damages for breach of warrant of
knowledge to the contrari, they may safely assume that the agent has the usual authontv, since the solictors wv\ere no longer actmg for their former client
authornty that goes with their position (This has been referred to above m relation
to imphed agency)
In i\atteau v Fenriwck (1893), the new ownners of a hotel contmued to employ the 11.5 THE RELATIONSHIP OF PRINCIPAL AND AGENT
previous owner as its manager They expressly forbade him to buv certain arthcles,
The folloiwm-g considers the reciprocal rights and duties that principal and agent owe
includmg cigars The manager, however, bought cagars from a third party, who
later sued the owners for pavment as the manager's prmcipal It was held that the to each other
purchase of cigars wxas within the usual authority of a manager of such an
estabhshment and that for a limutation on such usual authornty to be effective, it 11.5.1 The duties of agent to principal
must be commurucated to any third party
The agent owes a number of duties, both express and umplied, to the prncipal These
duties are as follows
11.4.2 Apparent authority
8 To perforrn the agreed unrdertakmgaccordiug te the instrictions of the priiicipal
Apparent authornty 1s an aspect of agency by estoppel considered above at 11.3 5 A failure to carr'y out mstructions wfIl leave the agent open to an action for breach
It can anse m two distmct wais of contract This, of course, does not apply in the case of gratuitous agencies, where
* iWhere a person mnakes a representatuon to thlrd parties that a particularpersoli has the there is no obligation whatsoever on the agent to perform the agreed task See
authority to act as their ageìit without actually appoeìtinn the agent Turprn v Bilton (1843), where an agent was held lhable for the loss sustamed bv his
In such a case, the person makmg the representation is bound by the actions of the faldure to msure his prmcipal's shlp prior to its smiang
apparent agent (see Freemiiani aind Lockyei v Buckhurst Park Propertles Ltd (1964)) The * To exercise due care and sbIli
prìncipal iS also lhable for the actions of the agent where it Is known that the agent i An agent will owe a duty to act with reasonable care and skllI, regardless of
claums to be his or her agent and iet does nothmg to correct that impression whether the agency relationshìp 1S contractual or gratuwtous The level of sklll to be
• Where a principe! has preuioushy represeíited to a third party that an aeTent has the exercised, however, should be that appropriate to the agent s professional capacity
autheorit to act oer their behalf and this may introduce a distnction in the levels expected of different agents For
example, a solicitor would be expected to show the level of care and skilI that
Even 1f the principal has subsequently revoked the agent's authority, he or she mav
would be expected of a competent member of that profession, whereas a layperson
still be liable for the acthons of the former agent, unless he or she has informed
actig in a gratuitous capacity would only be expected to perform with such
tblrd parties who had previously dealt with the agent about the new situation (see
degree of care and skll as a reasonable person would exercise m the conduct of
Ii'fìls Faber &Co Ltd v Joyce (1911))
their own affairs See Keppel v W\heeler (1927), where the defendant estate agents
i
were held liable for fallng to secure the maxìmum possible pnce for a property
11.4.3 Warrant of authority
i * To cairy Out tastiructioispersolially
lf a person clalms to act as agent, but without the authoritv to do so, the supposed Unless expresslv or impliedly authornsed to delegate the wvork, an agent owes a
principal will not be bound by any agreement entered into. Neither Is there a contract duty to the pr1ncipal to act personally in the completion of the task The rnght to
between the supposed agent and the third parti, for the reason that the third parti delégate may be agreed expressly by the prmcipal, or it may be implied from
intended to deal not with the purported agent but with the supposed principal customarv practice or arnse as a matter of necessitv In any such case, the agent
However, the supposed agent may lay themselves open to an action for breach of I remaus lilable to the prmcipal for the proper performance of the agreed contract
warrant of authorntv i e To accouat
If anr agent contracts with a third partyi on behalf of a pruicipal, the agent umphedly
guarantees that the princìpal exists and has contractual capacity The agent also
i There IS an implied duty that the agent keep proper accounts of all transactuons
entered mto on behalf of the principal The agent is required to account for all
rmplies that he or she has the authorhtv to make contracts on behalf of that principal If monev and other property recelved on the prmcipal's behalf and should keep bls
any of these Lmplied warranties prove to be untrue, then the thurd partt may sue the or her own property separate from that of the principal
agent in quasi-contract for breach of warrant of authorntv Such an acton may anse
ii
In addition to these contractual duties, there are general equitable duties whuch flow
even though the agent was genumely unawi are of any lack of authourit
from the fact that the agency relationship 1s a fiduciari one, that 1s, one based on trust
i These general fiduciari duties are as follows

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268 Business Lawr

to permit a conflict of mterest te aise

\oTt 11.5.2 The rights of an agent
An agent must not allow the possibihty of personal mterest to conflict with the It 1s a simple matter of fact that the common law does not generally provide agents
mterests of bis or her principal without disclosmg that possibility to the principal with as many rnghts in relation to the number of duties that it ìmposes on them The
iipon full disclosure, it 1s up to the principal to decide whether or not to proceed agent, however, does benefit from the clear estabbshment of three general rnghts These
wìth the particular transaction lf there is a breach of thls duty, the principal mav nghts are as follows.
set aside the contract so affected and claim anv profit which mrght have been made
* To clain remuneratìonlorservíces peiformed
by the agent
It is usual m agency agreements for the amount of payment to be stated, elther m
In McPherson v VA7att (1877), a solicitor used his brother as a nommee to purchase
the form of wiages or commussion or, mdeed, both XVbere a commercial agreement
property which he was engaged to sell It was held that since the solicitor had
is sdlent on the matter of payment, the court willimpi> a term into the agreement,
allowed a conflhct of mterest to anse, the sale could be set aside It was mnmaterial requirmg the payment of a reasonable remuneration Such a term will not be
that a fanr price w'as offered for the property
rmplied in contradiction of the express terms of the agreement. See Re Richmnonzd
The corollary to the above case 1s that the agent must not sell bis or her own Gate Property Co Ltd (1965), where it was held that no remuneration could be
propertv to the principal wi thout fully disclosmg the fact (see Harrods v Lemon clairned where an agreement stated that pavment would be determmed by the
(1931)) T'is leads into the next duty directors of the compani, but they had not actually decided on any payment
* Not to make a secret profit or omisuse confidenitwI znjormatìon *To claii mde mnty agaìnst the prìncìpal for all expenses legìtìmately ìncìurred in the
An agent who uses his or her position as an agent to secure financial advantage for perforrnaIceof seil ces
hbm or herself, without full disclosure to bis principal, 1S in breach of fiduciarv Both contractual and non-contractual agents are entitled to recover money spent in
duty Upon disclosure, the principal may authonse the agent's profit, but fui! the course of performmg their agreed task In the case of the former, the remedy 1s
dcsclosure is a necessary precondition (see Hfppislev vKnRee Bros (1905) for a clear- based on an Lmplied contractual term, in the case of a gratuitous agent, ìt is based
cut case) An example of the strictness with which thus principle 1s enforced may be on the remedy of restitution Money can, of course, only be claimed where the
seen m the case of Boardman v POizpps (1967), m wxlch agents were held to account agent has been actmg withm bis or her actual authonity
for profits made from information whìch they had gamed from theìr positon as
* To exercìse a lien over propei ty owned by the prìncìpal
agents, even though theìr action also benefited the company for wblch they were
actng. This a right to retain the prmcipal's goods, where they have lawfullv come mito
1s
the agent's possession, and hold them agamst any debts outstandmg to him or her
* Not to take a bribe
as a result of the agency agreement The nature of the ben 1s usually a particular
This duty may be seen as merely a particular aspect of the general duty not to one relatmg to specific goods which are subject to the agreement, not a general one
make a secret profit, but it goes so much to the root of the agency relationslip that wxhbch entìtles the agent to retam any of the principal's goods, even where no
it 1s usuallv treated as a distmnct headmg in its oxi nnght Again, for clear-cut cases, monev ìs owed in relation to those specìfic goods The general lien is onlv
see Boston Deep Sea FPsh/ìng & Ice Co Ltd v Ansell (1957), in whìch the managmg recogmsed oufthe basìs of an express term m the contract, or as a result of judiciatl
director of the company was held to have breached his fiducian, duties as an agent recognised customn, as m the area of banklmg
by acceptmg a bribe m return for orders See also Mllaiesan v MaùIaysan Go'e'nnimeint
Officers Co-operatroe Hoììsì xg Socìety (1978), where the plamhtff received a bribe to
perrut a third party to profit at his principal's expense 11.5.3 Commercial Agents (Council Directive) Regulations 1993
\Vhere it 1s found that an agent has taken a briibe, the followmg civil. remedìes are These Regulations implement Councl Directie 86/653/EEC on the Co-ordination of
open to the prmclpal the Laws of Member States relating to Sehf-Employed Commercial Agents, and carne
to repudiate the contract wi th the third party, mto force at the begrmng of 1994 Regulations 3-5 set out the rnghts and oblgations as
to dismass the agent without notice, benieen commercial agents and therr prmncipals, regs 6-12 deal w'th remuneration;
and regs 13-16 deal with the conclusion and termination of the agency contract
D to refuse to pay anv monev oTwed to the agent or to recover such money
Regulations 17-19 contain previsions relatmng to the mndemnmtv or compensation
alreadv paid,
pavable to a conurercial agent on ternmmahtion of bis agency conthact, and reg 20 relates
to claìm the amount of the bìibe, and to the validity of restramit of trade clauses
to claiun damages in the tort of deceit for any loss sustamed as a result of the Considermig the provisiorxs in more detal
payment of the bribe
oreg 3 provides that agents must act dutifully and m good faith in the mterests of
The payment of the bribe ma; also haie constìtuted a breach of criminal Iaw their principal The agents must negotiate in a proper manner, execute the
contracts they are contracted to undertake, commuricate all necessary information
to, and compì> with all reasonable mistructions from, theur pìmcipal,

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 Chapter 11 Agency 271
Z/U Busmess Law

* reg 4 relates to principals' duties and requires that they provide their agentsw¾th High Court, contrary to general common law principles, held that, under the
the necessary documentation relatng to the goods concemed, obtain information Regulations, an mdependent agency had a v alue, wrhich was akm to the value of 'i
necessary for the performance of the agency contract and,m particular, notify the the good¾1ll in a business Anv assessment of that value, at or just before
commercial agentwithm a reasonable period once thev anticipate that the volume termination, required consideration of various factors, mncludmng the agent's
of commercial transactions will be significantlylower than that which the expenditure mcurred in earnmg the corimission, the duration and history of the
commercial agent could normally bave expected Additionally, a princpai shall agreement, provision for notice, etc, and was not susceptible to the applhcation of a
imform the commercial agent, within a reasonabie period, of their acceptance or simple formula
refusal of a commercial transactionwhich the commercial agoent has procuredfor e In Ingmar GB Ltd v Eaton Leonard Inc (formerly Eaton Leoicai-d Technolopes Inc) (2001),
them, whl1st Morland J felt himself bound to recogmse the hierarchical supernority of the
* reg 14 prov'des that agents are entitled to notice of termination of theorsituation, Scottish Court of Session decision as stated m Douglas Kiing v T Tunnock Ltd in
relation to a piece of Brithsh legislation, he nonetheless felt more in sympathy with
* reg 17 states that commercial agents are entitled to indemmnty or compensation on
termmation of the agency agreement, and the approach adopted by the High Court m Barrett McKenZie & Co Ltd v Escada
(UK) Ltd Hlis mechanism for achieving both ends was to decide that the Scottish
* reg 20 states that any agreementsin restraint of trade in agencv contracts are only court had laid down 'not a principie of law but a guideline that in many cases
effect've if they are m writing Such restramts must relate solely to the type of may be appropriate' However, in the present case, he found it not appropriate and ,'4

goods dealt wìth under the agency agreement and must be limìted to the thus he could effectihvely avold followimg the Court of Session s decision.
geographical area, or the particular customer group, allocatedto the agent In any
case, such restraints may onlybe valid for a maximum period of two vears The situation as to the precise w ay in which reg 17 compensation payments are to be
(cf general contractsin restraint of trade above at 7 6 3) calculated remains uncertam Although much academic wiork supports the approach 3-

of the English High Court, it remamns for the final resolution to be determenod by the
The relationsìhp of the Commercial Agents (Council Directive) Regulations 1993 House of Lords, eother in that form or as the Privy Councl in relation to Scottish cases
(SI 1993/3053) and the common law was considered in Duffenv FRABo SpA (1998), in
whbchbt was held that although a dismissed agent could notenforce a 'liquidated
damages clause inhis contractbecause itwas really a penaltv clause, he mìght notbe
restricted to mereìy clamLing common law' damages, as the Regulations allowed him to
11 6 RELATIONS WITH THIRD PARTIES
clarm 'compensation' whlch mrughtwell involve a premium over the level of ordinary
In the words of Wright J m Montgoonene v UK Mutual Steamship Association (1891), once
damages (see further, above, 8 7 3). i'
an agenr creates a contract betoveen the principal and a third party, prwia facde at
Recently, how ever, controversv, not to say confusion, has arisen over the way m common law, 'the only person riho can sue 1s the prmclpal and the only person who
wl¾hch the level of compensaton provided for m reg 17 should be calculated. As has cani be sued is the principal' In other words, the agent has no further responsibility
been stated, the regulation ìtself simply provides that, in the event of a principal This general rule Is, how 'ever,subject to the following particular exceptions, ¾ l-hch in
termmnating a reiatìonshbp with a commercial agent, the latter1s enttled to tum tend to depend upon '.'hether or not the agent has actually disclosed the existence
compensation The Regulations do not, however, state precìsely how such of the principal
compensation should be calculated, and it thìs lack of detall that has led to the
confusion, as follows
of 11.6.1 Where the principal's existence is disclosed
e In Douglas Klng v T Twiínock Ltd (2000), the Inner House of the Scottish Court
French law.', it would be
Session determrned that, as the EC Directive was based on Although the actual identity of the principal need not be mentioned, where the agent
appropriate to operate the system for the calculation of compensation on the same indicates that he is actmg as an agent, the general rule 1s as stated above, onlv the
basis asw as adopted by the French courts On thatbasis, the Inner House held that principal and the third party have rìghts and obhgations under the contract
the agent should receive compensation equal to the gross conmission paid during
Excepthonall,, ho'.ever, the agent may be held liable as a party to the contract flus
the prevoous tw-o vears of the agency Alternatiely, the court held that a multiple
of twice the average commission earned during the last threeyears could be used can occur in the follo'.ming ways'
In Barett McKenzze & Co Ltd v Escada (UK) Ltd (2001), the Higgh Court reached a * At tl1i d party ìnisìstence
e
different conclusion as to the way in which compensation should be calculated It *Where the agent has expressly accepted liability ¾wìth the principal m oider to
did so on the basis that the alm of the original Directive was simply to establish a induce the third party to enter the contract, he or she will attract liabdiitv
generai right to an entitlement and that the particular method or assessing the | By ìmplícatolil i.
value of that entitlement was to be left to the mdividual Member States to decide Nhere
W the agent has signed the contractual agreement m bis or her o'.vn name,
upon The Court, therefore, thought it inappropriate simply to folloe'' the method ¾ ìthout clearly stating that he or she is merely acting as
a representative of the
of calculation operated by the French courts Following DtCfe' V FRA Bo SpA, the principal, he or she vdll most lhkel' be liable on it.
 272 Busmess Law
Chapter 11 Agency 273

* In relation to bilIs of exchange

* Paymnent by the principalto the agent to pass on to the third party
As in the previous situation, xxwhere an agent signs a bill of exchange without
In this situation, the general rule 1s that if the agent does not pay the thnrd parti,
sufficiently ndìcating that be or she 1s merely acting as the agent of a named
the primicipal remains lable TIus remams the case wxth an undrisclosed principal
principal, he or she wiil1 become personally liable on ilt
(see Irvmìe &Co v iatson &Sons (1880)).
e In relation to the execution of a deed
Where the agent signs the deed other than under a powx'er of attormev, he or she 11.6.4 Breach of warrant of authority
xwiii be personally bable on it
* iYhere the agent actsfor a non-exìstent príncipa! As has been stated above (11 4 3), where an agent purports to act for a prircipal
In such circumstances, the other party to the agreement cari take action agamst the wthout actually havimg the necessary authornt,, the agent is sald to have breached his
|x
purported agent or her warrant of authority In such circumstances, the third partv may take achion
agamist the purported agent
11.6.2 Where the principal's existence is not disclosed
11.6.5 Liability in tort
Even in the case of an undisclosed principal, xxwhere the agent has authornty but has
failed to disclose that he or she ls acting for a principal, the general rule 1s stili that a An agent is liable to be sued in tort for any damages thus caused However, the agent's
contract exrsts between the principal and the thurd partv, which can be enforced by right teo indemnuti extends to tortious acts done n the performance of his or her actual
either of them The fotloxxnrig, hox -ever, are some modifications to this general rule authonty In addítion, the principal may have actxon taken agamst hbm or her directly,
on the basrs of vicarious liability
• The third party is entitIed to enforce the contract agamst the agent and, ir turn, the
agent can enforce the contract against the tIerd party In both cases, the principal
canr irterene to enforce or defend the acthon on his or her orrn behalf
11 7 TERMINATION OF AGENCY
* As stated prevxously, ari undisclosed prircipal cannot ratrfy any contract made
outside of the agent's actual authornty The prmcipal/agent relatronslsp can come to end mi tio dstirnct ways either by the
• WAhere the tbxrd party had a special reason to contract with the agent, the princpai acts of the parties themselves, eìther joritl or unlaterally, or as an effect of the
may be excluded from the contract This will certainiy apply in relation to personai operation of law
contracts, such as contracts of employment and, possibly, on the authoriti of Gree-
v Downs Supply Co (1927), where the third partxy has a rnght to set off debts agamst
11.7.1 Termination by the parties
the agent.
* Authority exists m Said v Butt (1920), xxhere a theatre critic emploved someone to There are a numrber of wais in which the parties can brmg an agency agreement to an
get hrm a ticket for a performance he would not have been allowed imto, for end, as follows
ciaim-g that ari undisclosed principal xvill not be pernutted to enforce a contract
IBy inutual
ì atiet
eent
xxhere particular reasons exìst as to why the third party would not xxish to deal
Where the agencv agreement ls a continuimg one, the parthes may simply agree to
with him or her This decision appears to run contrari to normal commerciai
bring the agency relationshbp to an end on such terms as they wish rs here the
practhce and 1s of doubtful merit
agency was established for a particular purpose, then it wxiill automatically come to
It is certam, however, that where the agent actually nusrepresents the identity of the a end wben that purpose has been achieved Equally, where the agency was onlr
prmncípal, knowmg that the tbird party xxould not otherwise enter into the contract, the mtended to last for a defunte pernod of time, then the end of that period rli brmng
principai xiii not be permitted to enforce the contract (see Archeì v Stone (1898)) the agencx to an end =:

iiBy the nlzater,al actoe, of cee of the pOi ties g

11.6.3 Payment by means of an agent Because of the essenhtally consensual nature of the Pruìcrpalagencv relationsìlp,
Payrment bx means of an agent can take two forms.
ìt is possible for either of the partes to brmg it to an end sampiv by gpvimg notice of
termination of the agreement Although the agency relationshìp xill be ended by
o Paygiient by the thzrd paity t o the agent to pass on to the principal such urlùateral action, mi situateons where the principal has formed a contractual ir

1à,
In this situation, rf the principalis undisclosed, then the third parti has discharged relationship wxth the agent, such undlateral termination mai le ave the prilcipal
liabliitv on the contract and 1s not responsible if the agent absconds wxth the open to an action for damages in breach of contract
,,
money However, x f the principal 1S disclosed, then any payment to the aaent oniy fevocable
e ?g eeinents
discharges the thIrd party's responsibiiity if it can be shoxrn that the agent had In some circumstances, ìt 1s not possible to revoke an agencv agreement Thbs
_a
authorìty, either express or ìmplied, to receive monex situation arises where the agent has authority coupied xxith an mterest Such an
ii
-L--
274 Busmness Law SUMMAIRY OF CHAPTER 11

irrevocable agency might anse where a prmicipai owes money to the agent and the AGENCY
payment of the debt wxas the reason for the formation of the agency relationship
For example, vvhere, in order to raise the money to pay off his debt, the principal
appomts his creditor as his agent to sell some particular piece of property, the
principal may not be at lhberty to brmg the agency to an end unmt2 the sale has
taken place and the debt has been pald off Definition
An agent is a person who is empowered to represent another legal party, called the
11.7.2 Termination by operation of law principal, and brmgs the prmcipal into a legai relatonship with a third party
Agency agreements may be either contractual or gratuitous
flms refers to the fact that an agency relationship xwill be brought to an end by anv of
the followmng. Commerciai agents are specifically covered by the Commercial Agents (Council
* Frustratioa Directive) Regulations 1993
Contracts of agency are subject to discharge by frustration m the same way that
ordmnary contracts are (see above, 8 4, for the general operation of the doctrme of Creation of agency
frustration)
Agency may anse
e The death of either party
* expresslv,
Death of the agent clearlx brmgs the agreement to an end, as does the death of the
principal The latter situation mav, however, give rise to problems xxwhere the agent
* by ratification,
ls unaware of the death and continues to act in the capacity of agent In such * bi implication,
circumstances, the agent will be in breach of hrs or her xxwarrant of authorntv and * bx necessitv, or
wll be personally liable to thlrd parties * by estoppel
• Iuìsarzity of elther party
As in the previous situation, the msamity of either partx wll brnxg the agency to an Nature of agent's authority
end, similarly, agents wll have to be careful not to breach their warrant of
authority by continuing to act after the principal has become msane (see Yionge v Actual authornty may be divided mito.
Toynibee (1910), above, 11 4 3) e express actual authornt, and
e Bankrziptcy
| *mplhed actual authonrty
Generally, the bankruptcv of the principal will end the agency agreement, but the Apparent authority 1s based on estoppel and operates in such a way as to make the
bankruptcy of the agent xxill only bring it to an end where it renders him or her
principal responsible for their acthon or maction as regards someone wxho claims to be
unfit to continue to act as an agent
their agent

Warrant of authority
If an agent contracts vxith a tiurd partv on behalf of a principal, the agent imphedly
guarantees that the princ-P>al exists and has contractual capacity and that he or she has
that person's authonty to act as his or her aaent If thIs 1s not the case, the agent iS
personally liable to tlurd parties for breach of warrant of authoritx

The duties of agent to principal

The dutes of the agent to the principal are
e to perform the undertakmg according to urstructions,
* to exercise due care and skill,
o to carry out instructions pDersonally,
e to accoiunt,
 277
Chapter 11 Agency
2/O Busmness Law

* not to perimt a confhct of mterest to arnse, Payrnent by means of an agent

o not to make a secret profit or mususe confidential information, and * If the agent does not pay the tbird party, the prmcipal remains liable
* not to take a bribe. * If the agenit absconds with nimoney paid by the thrrd party, then, if the prircipal 1S
undisclosed, he or she sustains the loss If, how; ever, the primclpal is disclosed, the
The rights of an agent agent must have had authority to accept money, or else the thurd party lS ale

The rnghts of an agent are Termination of agency

• to clalm remuneration for sen7ices performed;
* to claim mdemmuty for all expenses legitimately mcurred m the performarnce of Agreements may end

I
services, arnd * bv mutual agreement,
* to exercise a ben over property owned by the prmcipal * by the umlateral acthon of one of the parties,
* through frustraton, or
Commercial Agents (Council Directive) Regulations 1993 * due to the death, msanmty or barIkruptcy of either party
* Regulathons 3-5 set out the rights and obligatons as betw,een commercial agents
and thenr prmcìpals
* Regulations 6-12 dea! with remuneration
* Regulahons 13-16 deal with the conclusion and termmaton of the agency contract
* Regulations 17-19 contair prov;sions relating to the mdernnmty or compensation
payable to a commercial agent on ternmration of los agency contract
• Regulation 20 relates to the vahdity of restramt of trade clauses

Relations with third parties

\liThere the agent ind±cates that he or she is acting as an agent, the general rule is that
only the prmcipal and the thlrd party have rights and obligations under the contract
There are exceptions to thls
* at the misstence of the thurd party,
* by implication;
G m relation to bulls of exchange, and
e m relation to deeds
Wlhere the prmcipal's existence is not disclosed
* the agent can enforce the contract agamst the third party,
* the prmcipai can enforce the contract agamst the thlrd party
* the thìrd party can choose to enforce the contract agamst the agent or the prmcipalt
or
* an undisclosed prmcipal canmot ratifv any contract made outside of the agent's
actual authoritv
Where the thìrd party had a specal reason to contract with the agent, the prmcipal
ma; be excluded from the contract
Imq-ere the agent musrepresents the identity of the principal, the thircd party mav
not be bourid bL the contract