Agency

Contents

What is an agency?..........................................................................................

Creation of agency.......................................................................................

The actual authority of the agent................................................................

Apparent authority......................................................................................

Ratification...................................................................................................

Undisclosed agency......................................................................................

Learning
outcomes
By the end of this chapter and the relevant readings you should be able to:

 Define the term ‘agent’

 Explain how an agency is created
 Discuss the scope of the agent’s authority
What is an agency?

Introduction

Lord Alverstone CJ once defined an agent as ‘any person who happens to act
on behalf of another’ (The Queen v Kane [1901] 1 QB 472). While this gives a
sense of what an agent does, as a statement of the meaning given to the term
‘agent’ by the law of agency it is far too broad and imprecise: ‘
If P (the principal) instructs A (the agent) to act in the purchase or sale of
goods from or to T (the third party seller), the contract of sale that arises is
enforceable between P and T. In general, A has no liability to either P or T on
that contract:

Where a person contracts as agent for a principal the contract is the contract of
the principal, and not that of the agent; and at law the only person who may
sue is the principal, and the only person who can be sued is the principal.
(Montgomerie v United Kingdom Mutual Steamship Association [1891] 1 QB 370,
Wright J

There are three parties, P, A and T, and three relationships:

P
 the relationship between P and A

 the relationship A T
between A and T

 the relationship between

P and T
 Creation of agency

An agency may be created:

a.by express or implied agreement between the principal and agent

b.where there is a representation by the principal to the third party that the agent has
authority (agency by estoppel)

c.where the principal ratifies an act by someone who, without authorization, purported to
undertake that act as an agent of the principal

Express actual authority

Express actual authority is the authority which the principal expressly gives to the agent: for
example, where the agent is instructed to sell a particular property for the principal. This
authority may be contained in documents and/or conversations
between the parties (e.g Aviva Life & Pensions UK Ltd v Strand Street Properties Ltd [2010]
EWCA Civ 444 at 54). In determining the express authority of an agent, the normal rules for
construing contracts apply. (For a discussion of express authority, see SMC Electronics Ltd v
Akhter Computers Ltd [2001] 1 BCLC 433.)
What if the instructions from the principal to the agent are ambiguous? In Ireland v Livingston
(1872) above and Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147, it was held that an
agent who adopts a reasonable interpretation will not be in breach of its mandate. But in
European Asian Bank AG v Punjab & Sind Bank (No 2) [1983]. Similarly, in Patel v Standard
Chartered Bank [2001] All ER (D) 66 at [35]-[36] having referred to these authorities, Toulson J
observed:

Obviously it cannot be open to every contracting party to act upon a bona fide, but mistaken,
interpretation of a contractual document prepared by the other, and to hold the other to that
interpretation… If the instructions are given to an agent, it is understandable that he should
expect to act on those instructions without more; but if, for example, the ambiguity is patent
on the face of the document, it may well be right (especially with the facilities of modern
communications available to him) to have his instructions clarified by his principal, if time
permits, before acting upon them. In other words the critical question is not limited to whether
the agent’s interpretation was reasonable; it is whether he behaved reasonably in acting upon
that interpretation.
Implied (or incidental) actual authority
In addition to express actual authority, the agent may have implied actual authority. It is
important to recognise that implied authority cannot contradict express actual authority.
Implied actual authority is a way of filling in the gaps in order to make sense of the agency
agreement. It is not a means of altering that agreement or of making it in some sense fairer.

The agent will have implied actual authority to do those things that are necessarily incidental
to the execution of the express actual authority. The question is, do the powers expressly given
by the principal to the agent enable the agent to carry out the specified task, or can that task
only be undertaken by implying the authority to do things in addition to those that are
expressly authorised? Authorising an agent to enter into a contract to buy land carries implied
actual authority to sign the documents required under statute because the requirement for
writing in such transactions means that without such authority the agent would not be able to
perform the task agreed (Rosenbaum v Belson [1900] 2 Ch 267). On the other hand, in Bryant,
Powis, and Bryant Ltd v Law Banque du Peuple [1891-94] All ER 1253, an agent, who had
express actual authority by power of attorney to buy or sell goods, charter vessels and employ
agents and servants, did not have implied actual authority to borrow money because this was
not necessary to carry through the tasks that had been expressly authorised.

Apparent Authority

Typically, a third party dealing with an agent will not have knowledge of the terms of the
contract between the agent and principal and so will not know the scope of the agent’s actual
authority: ‘In ordinary business dealings the contractor at the time of entering into the contract
can in the nature of things hardly ever rely on the “actual” authority of the agent.’ (Freeman &
Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] above, Diplock LJ. The third party,
therefore, relies on a perception of the authority of the agent as represented by the principal.
The representation creates an agency by estoppel – in other words, the principal is prevented
or estopped from denying the existence of the agency. The representation will also establish
the scope of the agent’s apparent authority. As Lord Denning expressed it, apparent authority is
‘the authority of an agent as it appears to others.’

An agency by estoppel arises where:

 the principal (or someone acting with the actual authority of the principal) represents to
the third party that the agent is authorised to undertake the transaction which the
agent and the third party subsequently conclude
  the agent does not purport to make the agreement as principal

As a result the principal may be bound to a third party even though:

 the agent does not have actual authority, or

 the agency agreement has ceased, or

 the agent acts beyond the actual authority granted by the principal.

This is because the agency is based on estoppel and not the consent of the principal, who may
not have intended to create an agency (Freeman & Lockyer v Buckhurst Park Properties)

Where someone is represented by the principal as having authority to act as agent, that person
will possess the usual authority of such agents in spite of any restrictions imposed by the
principal on the agent (Hely-Hutchinson v Brayhead Ltd [1968]. In Freeman & Lockyer v
Buckhurst Park Properties (Mangal) Ltd, K and H formed a company to buy and then sell some
land. The articles of association contained a power to appoint a managing director but none
was appointed. K instructed F, a firm of architects, to do work in connection with the land,
which they did. On an action by F for their fees, it was held that since K was not the managing
director he had no actual authority to employ F, but he did have apparent authority because,
with the knowledge of the board of directors, he had acted throughout the transaction as if he
were managing director and his action in engaging F was within the usual authority of a
managing director.

Representation by the principal

In order to be bound by the apparent authority of the agent, the principal must have
represented to the third party that the agent had the necessary authority to conclude the
transaction on behalf of the principal and the third party must have a reasonable belief that the
agent had such authority. In general, if the representation as to authority comes from the
person purporting to be an agent (Nayyar & Others v Sapte & Anor [2009] the principal will not
be bound to the third party, although the bogus agent may be liable to the third party for
breach of an implied warranty of authority.

The representation may be by words or by actions. Usually, silence or inaction will not amount
to a representation unless there is a duty to say something, which will be rare. However, it
arose in Spiro v Lintern above: L said nothing when his wife (who had no authority to do so)
entered into a contract for the sale of L’s house, and, as a result, the buyers incurred various
expenses in contemplation of completion of the sale; L’s silence amounted to a representation
that his wife had authority to sell the house.

Armagas v Mundogas
For apparent authority to exist the representation must come from the Principal that A has
such authority, it cannot come from the agent. An agent cannot be said to have authority solely
on the basis that he has held himself out as having it. Unless the agent would usually have
authority to do the act in question, it will be very difficult for a T to rely on a specific
representation of the agent's authority to act, as the T would normally have been put on
enquiry as to the actual limitation on the agent's authority. An agent will not have apparent
authority to make such a representation where the third party knows, or ought to know, that
the agent does not possess authority. A third party's knowledge of the agent's actual authority
cannot be overridden by claims as to apparent authority. The reason is that in such a situation
the T has not relied on the representation by the principal. The T knew that the agent had no
authority to do the specific act, which A held himself out as having the authority to do. Armagas
was therefore treated as a case where the third party has been put on notice.

The Vice president, A, had actual authority to agree to a sale of a ship but not to agree to a
three year charter-back of the ship. The TP knew that a person in A's position did not have the
usual authority to deal with the transaction. However, the TP was told falsely by someone not
within the company that A obtained specific authority for it. Held: there had been no
representation by the company that A had such authority and therefore he was not ostensibly
authorised. And A was held not to be in a position that would lead the third party to reasonably
believe that A had authority to undertake the transaction.

What is Apparent Authority?

Apparent authority/ostensible authority is often called the agency by estoppel. This authority
arises without the consent or agreement of the Principal (P) and the Agent (A). It arises merely,
where the Principal puts his agent in a position where it is reasonable for a Third Party (TP) to
assume/believe that the agent has authority as a result of the representation made by the
Principal to the Third Party. When the Third Party has this impression of authority and acts in
reliance of it then the Principal is estopped from denying that the agent has this authority and
therefore will be bound by the agent's act. As per Lord Denning in Hely-Hutchinson v Brayhead
apparent authority is the authority as it appears to others.
The requirement are embodied in Lord Diplock’s statement in Freeman & Lockyer v Buckhurst
Park Properties
 Representation
 Reliance

Ratification

The purported agency must be revealed to the third party before the transaction is concluded.
There can be no ratification where A makes the contract as principal (Keighley, Maxsted & Co v
Durant [1901]. It will be sufficient if the agent states that they are acting for a class of persons
to which the principal belongs (National Oilwell (UK) Ltd v Davy Offshore Ltd above.

The third party must believe that the person with whom they are dealing has authority to act
for another. If, for example, the agent tells the third party that the agreement is subject to
ratification, any action by the principal will not bring it within the doctrine of ratification
because, in effect, the agent is saying there will be no contract until the principal has approved
it. In such circumstances the principal’s ‘approval/ratification’ may, however, amount to an
acceptance of the third party’s offer so that the contract comes into existence at that point and
does not date back to the time of the original agreement, as is the case where there is effective
ratification.

Effect of ratification

Ratification puts the parties into the position they would have been in had the act been
authorised from the outset: ‘Ratification when it exists is equivalent to a previous authority’
(Lord Lindley in Keighley, Maxsted & Co v Durant [1901]. This means the principal can sue or be
sued by the third party.
The agent will not be liable to the principal for excess of authority, nor to the third party for
breach of the implied warranty of authority. The agent may be entitled to be indemnified by
the principal for any liability incurred.

Since ratification puts the parties into the same position as if the act had been authorised from
the outset, then logically it relates back to the moment of the original contract. The unusual
consequence of this was illustrated by Bolton Partners v Lambert (1889) 41 Ch D 295 (Sealy and
Hooley, pp.142-44). S accepted an offer from L on behalf of B but without B’s authority. L later
withdrew the offer and only then did B ratify. It was held that the contract was binding on L. No
real reasoning was provided for this other than that ratification meant ‘the agent is put in the
same position as if he had had authority to do the act at the time the act was done by him’
(Cotton LJ). This rule may seem unfair since it allows the principal – but not the third party – to
choose whether or not to ratify. Yet, it can be argued that the third party who believed
themselves to be bound by the contract and so to hold the principal, who declines to ratify,
liable would be even more unfair. If the principal fails to ratify, the third party may be able to
bring an action for breach of warranty of authority against the agent.

The undisclosed principal

There is no legal requirement that the agency be disclosed. T may not be aware that they are
dealing with an agent. This is known as undisclosed principal or undisclosed agency. Up to this
point, the law of agency in respect of third parties seems relatively consistent in that it involves
representations made by the principal to the third party, but on entering the realm of
undisclosed principals this consistency vanishes. Here the existence of the agency is not
disclosed: T may have given no thought to whether or not A is acting for someone else, or T
may believe that A is the principal. Here A and T are the contracting parties, until T discovers
that there is a principal standing behind A, in which case T can elect to sue P rather than A, if
there is a breach; or before that occurs, P may intervene to enforce the contract. It is important
to emphasize that the contract is between the agent and a third party. The undisclosed
principal, therefore, intervenes in an existing contract.

The doctrine is difficult to reconcile with the idea that contract rests on agreement between the
parties for here the third party enters a contract only to discover that the other contractor is
merely an agent and that the contract is with someone entirely different. The reason for this,
according to Lord Lindley, is that, ‘in the great mass of contracts it is a matter of indifference to
either party whether there is an undisclosed principal or not.’ Keighley, Maxsted & Co v Durant

Lord Lloyd (Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199 (Sealy and Hooley, pp.179-
80)) summarised the law:

(1) An undisclosed principal may sue and be sued on a contract made by an agent on his behalf,
acting within the scope of his actual authority. (2) In entering into the contract, the agent
must intend to act on the principal’s behalf. (3) The agent of an undisclosed principal may also
sue and be sued on the contract. (4) Any defence which the third party may have against the
agent is available against his principal. (5) The terms of the contract may, expressly or by
implication, exclude the principal’s right to sue, and his liability to be sued. The contract itself, or
the circumstances surrounding the contract, may show that the agent is the true and only
principal.

Where the agent acts without authority the principal cannot sue or be sued on the contract.
Ratification by the principal is not possible because the principal is not identified to the third
party at the time of the act by the agent.

Excluding the application of the doctrine

The doctrine of undisclosed principal will not apply if:

 The terms of the contract exclude the right of P to intervene. In Humble v Hunter [1848]
12 QB 310, the description in a contract of one party as ‘owner’ of a ship excluded the
possibility of admitting evidence to show he was merely the agent for the true owner.

 A does not intend to act as agent in the contract

 T makes it clear that they wish to contract only with A and with no one.

P and A agree that A will not contract on behalf of P, but that A will act as principal in certain
transactions. However, the courts are more likely than not to construe a contract so as to allow
an undisclosed principal to intervene for the reasons put forward by Lord Lindley (Siu Yin Kwan
v Eastern Insurance Co Ltd).

In practice, the courts have made it relatively difficult for the third party by requiring them to
prove a negative. It is assumed that commercial parties are willing to contract with anyone,
unless an expression of unwillingness can be proved (Teheran-Europe Co Ltd v ST Belton
(Tractors) Ltd [1968], Diplock LJ). The difficulty of proving this negative can be seen in Siu Yin
Kwan v Eastern Insurance Co Ltd. An insurance policy included a term to the effect that benefits
under the policy could not be assigned (that is, they could not be transferred to another party).
Nevertheless, the Privy Council did not think that this prevented the intervention of an
undisclosed principal.

Nevertheless, it may be the clear intention of T to deal only with A and not with any other
party, for example, where A possesses certain skills or where personal relationships had been
developed in the course of earlier work upon which the present transaction builds (Rolls-Royce
Power Engineering. In such cases, the contract is between T and A.

Difficulty has been caused by cases in which the objection of the third party is to the personality
of the undisclosed principal. In Dyster v Randall & Sons [1926] Ch 932 is more satisfactory. Here
a developer, knowing that a landowner would not sell to him, bought through an agent. In the
course of his judgment Lawrence J agreed with much of what had been said by McCardie J,
nevertheless, he ordered specific performance. He remarked that, ‘mere non-disclosure as to
the person actually entitled to the benefit of a contract…does not amount to
misrepresentation, even though the contracting party knows that, if the disclosure were made,
the other party would not enter into the contract’. It would seem that the courts favour this
approach, particularly where commercial parties are involved. In Nash v Dix [1898] 78 LT 445, it
was concluded that the third party had contracted with someone acting as principal and not as
agent. In that case, T did not wish to sell a chapel to a Roman Catholic Committee. X purchased
the chapel and resold it to the committee. It was held that X had acted as the principal in the
purchase from T, indeed the evidence revealed that he made a profit on the trade.