AGENCY

An agent is a person who has the power to alter the legal position of another person, known as the
principal. Generally, an agent has the power to make contracts on the principal’s behalf. Once the
contract has been made, it is the principal and not the agent who will be bound by it. In latin, it is
expressed as qui facit per alium, facit per se… meaning he who acts through another, acts for
himself. An agency agreement does not necessarily arise under contract. The agency can be
gratuitous. For example, in Chaudhry v Prabhakar, a woman had just passed her driving test. She
wanted to buy a secondhand car and asked her friend to find one for her. She told her friend that
the car must not have been the subject of an accident. Her friend found a car offered for sale by a car
repairer. He noticed that the bonnet had been repaired but did not ask the repairer for information.
When her friend recommended her to buy the car, she asked if the car had been in an accident
before. He answered in the negative. After buying the car, the woman discovered that the car had
been involved in an accident and proved un- roadworthy. The woman sued her friend for breach of
his duty of care (the neighbour test). The Court of Appeal held that a gratuitous agent owes a duty
of care and there was a breach here.

Perhaps the most important and controversial part of the law of agency is the notion or concept of
AUTHORITY. This refers to the scope of the agent’s ability to affect the legal position. There are
three types of authority:

I. Expressed actual authority

II. Implied actual authority (usual, customary)
III. Apparent authority

Remember the agent must have some form of authority; otherwise the principal is not bound to the
contract with the third party. Once the principal is bound, the principal is generally liable for all the
agent’s failings, including his agent’s misrepresentations and fraud.

Express authority is the authority the principal expressly gives to his agent. As with any contract,
no particular formalities are required for an agency agreement to come into existence. The extent of
an agent’s express authority depends on the construction of words of appointment. If the
instructions are vague or ambiguous, the principal is bound if the agent in good faith interprets
them differently (Weigall v Runciman). Of course, in the modern world, if the principal’s
instructions are not clear, the agent would be expected to seek clarification from the principal. If it is
reasonable to expect the agent to seek clarification but he does not, the agent may not be able to rely
on his own mistaken interpretation of his instructions.

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The actual authority of an agency is granted by an agreement with the principal, which could be
classified either as implied or expressed authority. The distinction is neatly put by Lord Denning in
Hely- Hutchinson v Brayhead Ltd (1968):

It is express when it is given by words, such as when a board of directors passes a resolution which
authorises two of their members to sign cheques. It is implied when it is inferred from the conduct of the
parties and the circumstances of the case, such as when the board of directors appoints one of their own to
be managing director. They thereby impliedly authorise him to do all such things as fall within the usual scope
of his office.

In the case of Garnac Grain Co. v H.M.F Faure, Lord Pearson stated that:

The relationship of principal and agent can only be established by the consent of the principal and the agent.
They will be held to have consented if they have agreed to what amounts in law to such a relationship, even if
they do not recognise it themselves and even if they have professed to disclaim it.

On the other hand, apparent authority arises where a third party is induced to enter into a
transaction with a principal by a party who appears to have authority to act but who in fact lacks
such authority.

Apparent authority is often called agency by estoppel. As Lord Denning said in Central London
Properties v High Trees, where a person makes a promise, intending the promise to be relied on
and the promisee does rely, the promisor is estopped from going back on the promise. Thus, if a
principal puts his agent in a position where it is reasonable for a third party to assume the agent has
authority, the principal cannot go back on his representation of authority. What is clear is that
apparent authority can exceed actual authority. For example, suppose a company board of directors
appoints a managing director, and the managing director is expressly instructed not to purchase
goods worth more than £10,000 without the board’s prior approval. In this situation, the managing
director’s ‘actual’ authority is subject to the £10,000 limitation. However, the managing director’s
‘apparent’ authority includes all the usual authority of a managing director and the principal
company will be bound to third parties who are unaware of the restriction on the agent’s authority.
So, if the managing director agrees to purchase goods worth £20,000 and does so as managing
director for and on behalf of the company, the principal is bound because the third party is not
aware of the restriction. The point is that a third party hardly ever knows what the agent’s actual
authority is because that is invariably only known between the principal and his agent.

The case of Freeman & Lockyer v Buckhurst Park is instructive on this. In that case, the directors of
a company allowed K to act as if he were the managing director. He then engaged a firm of
architects on behalf of the company, whom the company refused to pay. The company was liable

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because the directors have given the impression that K was empowered to make contracts on the
company’s behalf. For apparent authority to operate, three criteria must be satisfied:

i. Representation by the principal

ii. Reliance on the part of the third party
iii. Unawareness on the part of the third party

Spiro v Lintern

The wife contracted to sell her husband’s house. She did not have actual authority and the third-
party buyer thought he was dealing with the wife as principal. After the contract had been entered
into, the husband said nothing to the third party and did nothing to discourage the third party from
incurring expenses trying to conclude the purchase of the house. The husband refused to sell and
the third party brought an action asking for specific performance. The Court of Appeal held that the
husband was estopped from denying that his wife had authority to sell the house on his behalf. The
husband was under a duty to inform the third party of the non-existence of authority.

Thus, whenever an agent acts within the scope of his apparent authority, the principal is bound as if
he actually authorised the transaction. This is true even if an agent’s agreement with his principal
has ended. In Summers v Solomon, the principal owned a jeweller’s shop. He employed a manager
to run it for him and regularly paid for jewellery ordered by the manager from a third party to sell
in the shop. The manager left the principal’s employment, ordered jewellery in the principal’s name
and absconded. The third party sued for the price of the unpaid jewellery. The court held that the
principal was liable to pay for the jewellery. The agent had no actual authority to purchase
jewellery from the third party once his employment had been terminated. However, because of the
previous course of dealings, the third party was entitled to rely on the apparent authority of the
manager and the third party was not given actual notice of the termination of the agency
agreement.

An important point of this case is that notice must actually reach the third party – constructive
notice will not be sufficient. Apparent authority cannot be created out of nothing. In Summers v
Solomon, there had been a previous course of dealings.

It is also important to mention at that estoppel may be used as a shield and not a sword, per Combe
v Combe. Apparent authority does not of itself allow a principal to enforce a contract against a third
party. The concept exists primarily to protect the third party. It does not create an agency
relationship between the principal and their agent. Thus the relationship does not create any rights
for the principal.

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Consequences of types of authority

We need to tell which type of authority an agent has because the different types of authority have
different consequences.

If an agent with actual authority makes a contract with a third party on behalf of a principal then
the consequences are as follows. The contract takes effect between the principal and the third party,
just as if the principal had made it personally, and either the principal or the third party can enforce
the contract against the other.

If an agent who has only apparent authority makes a contract with a third party then the
consequences are not the same. The third party can enforce the contract against the principal,
because the principal made a representation which he is estopped from denying. But the principal
cannot enforce the contract against the third party, because the third party did not make any
representation. Also, if the agent acts with apparent, but not actual, authority the agent will be
liable to the principal if this causes the principal to suffer a foreseeable loss.

Agency by Ratification
In most circumstances, an agent’s level of authority will be granted by the principal before the agent
acts. When this position is reversed, the agent’s authority is ratified. Ratification was defined by
Lord Tindal in Wilson v Tumman as follows:
That an act done for another, by another person, not assuming to act for himself, but for such other person,
though without any precedent authority whatever, becomes the act of the principal, if subsequently ratified by
him, is the known and well established rule of law. In that case, the principal is bound by the act, whether it be
for his detriment or his advantage, and whether it be founded on a tort or a contract, to the same extent as by,
and with all the consequences which follow from, the same act done by his previous authority.

Four conditions must be satisfied for a ratification to be effective:

(A) The agent must have acted as an agent, and the third party must have been able to figure
out who the principal was

In Keighley Maxted v Durant, it was held that the ratification was not effective, and so the
principal could refuse to accept delivery, because the agent made the contract in his own name
rather than in the principal’s name. The seller could not have worked out that the wheat was
intended to be bought for the principal.

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 (B) The principal must have had full contractual capacity to make the contract both when the
agent made the contract and when it was ratified

In Yonge v Toynbee, a solicitor was instructed to act for a defendant in a case. Because the client
then became insane, the solicitor’s authority to act was then in effect terminated. As a result of this,
all proceedings carried out by the solicitor after that date were struck out by the court and the
solicitor was obliged to pay the other party’s costs.

As long as the principal has the capacity to contract, the agent’s capacity is irrelevant. This is true
even if the agent cannot in his own right do it. For example, if the agent is a minor the minor can
bind his principal to a third party, whereas contracts with minors are generally void or voidable,
per Mercantile Union v Ball. If a minor is employed as an agent, the minor agent can bind the
principal to a third party.

(C) The principal must have been in existence when the contract was entered into

In Kelner v Baxter, before a hotel company was formed, the directors entered into contracts to
purchase wine on behalf of this not-yet-formed company. When the company was incorporated, the
company wanted to ratify the purchases. The court held that the company may not do so because it
was not yet in existence at the time the contracts were made on its behalf. It did not yet exist, so
nothing can be done on behalf of a non-existent company.

(D)A void contract cannot be ratified

Ratification must take place within a reasonable time, and will have backdated effect. It will not be
allowed where third parties have acquired property rights which would be adversely affected by
ratification. A principal can ratify expressly or by some emphatic act which shows that he is
confirming the contract. E.g in Watteau v Fenwick, a pub owner let M (the agent) run a pub. The
owner authorised M to buy only bottled drinks and expressly forbade him to buy tobacco on credit.
Acting against these instructions, M did buy tobacco on credit. The tobacco salesman had no idea
that M was an agent. He thought that M owned the pub because M used to own the pub and his
name was still above the door of the pub. The seller sued the owner, claiming that the owner was
liable on the contract. Held: the owner was found liable on the contract.

Note that M had no express or implied actual authority to buy cigars. Nor did M have apparent
authority because the principal never represented to the third party that the agent was an agent
with such authority. The decision in this case has been doubted in some other cases but it has never
been overruled. It is applicable when:

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 i. The third party did not think that the agent was an agent; and
ii. The agent made the contract which his position as an agent would usually give him
authority to make, but which he had been forbidden by the principal to make

However, the Watteau decision has been set aside by Canada in the case of Sign-O-Lite Plastics v
Metropolitan Life. Lord Woods brilliantly opined:

It is astonishing that after all these years, an authority of such doubtful origin, and of such unanimously
unfavoured reputation, should still be exhibiting signs of life and disturbing the peace of mind of trial judges.
It is surely time to end any uncertainty which may linger as to its proper place in the law of agency. I have no
difficulty in concluding that it is not part of the law of this province.

Agency by Necessity

In extreme circumstances, the law will either impose an agency relationship upon parties or extend
an existing relationship to include the following mutually inclusive conditions:

i. The agent must be in control of the principal’s property

ii. Obtaining the principal’s instructions would be impossible
iii. A real emergency exists
iv. The agent must act in good faith

Such agency of necessity is usually found in maritime emergencies. Old cases gave the captains of
ships the power to sell cargoes which were perishing. In Springer v Great Western Railway Co, a
strike at a dockyard delayed the delivery of a consignment of tomatoes. As they had started to
perish, the agent felt he had to sell them. Held: Because the agent could have contracted the principal for
instructions, this was not seen as an agency of necessity.

Occasionally, agencies of necessity can be found on dry land as well. For example, in Great
Northern Railway Co v Swaffield, a horse arrived at a railway station but nobody picked it up. The
railway company felt obliged to feed the horse and put it into a stable. When the owner collected
the horse, he refused to reimburse the railway company. Held: the owner had to pay for the feeding and
the stabling as there was an agency of necessity.

LIABILITY ON CONTRACTS MADE BY AGENTS

The rights of a third party to sue on a contract made by an agent differ, depending upon whether
the agency was disclosed or undisclosed.

Disclosed agency

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Agency is disclosed when the agent indicates that he is acting as an agent, whether or not the
principal for whom he is acting is actually identified. If an agent makes a contract for a disclosed
principal then generally the agent incurs no liability on the contract. By disclosing that he was
acting for a principal, the agent will be taken to have shown the third party that he did not intend to
become personally liable on the contract. However, an agent who intends to act for a disclosed
principal can incur personal liability if the circumstances do not make it clear to the third party that
the agent was acting as an agent, rather than for himself.

Money paid

If an undisclosed principal gives money to his agent to pay a third party but the agent fails to do so,
does the principal remain liable to the third party? According to Armstrong v Stokes, the answer is
no. This case involved agents who were brokers. They dealt sometimes on their own account and
sometimes they acted for principals. The third party dealt with these agents many times. They never
asked if the agents were acting for themselves or for principals. The agents bought shirts from the
third party on behalf of an undisclosed principal. The shirts were delivered to the agents on credit.
The principal paid the price of the shirts to the agent but the agent did not pay the third party.
When the third party discovered the existence of a principal, the third party sued the principal for
the unpaid shirts. The court held that the third party was not entitled to be paid. The principal had
already made payment via its agents.

This case has been severely criticised. The question here is whether a principal needs to pay twice to
discharge one debt. It sounds unfair that a principal has to pay twice, hence the Armstrong decision
that the principal does not have to pay again, but of course, this is unfair on the third party who
does not get paid at all (just because the undisclosed principal had passed monies to his agent).
However, it is not quite as unfair to the third party at first sight because, if the principal was
undisclosed at the time of the contract, the third party cannot rely on the principal’s
creditworthiness. The third party thought they were dealing with an agent as principal (who
subsequently turns out to be a rogue). Armstrong has been severely criticised and the Court of
Appeal in Irvine v Watson suggested that Armstrong will probably not be followed. In Irvine, a
principal employed an agent to buy oil. The agent bought from a third party on payment terms
‘cash on delivery’. The third party knew the agent was buying for a principal but the principal was
unnamed. The third party delivered the oil to the agent without asking for cash payment. The
principal was not aware that the agent had not yet paid the third party in accordance with the
contract terms, and the principal paid the agent. The agent did not pass on the monies to the third
party who now sued the principal for the price. The Court of Appeal held that the principal must
pay the third party. The principal can only avoid liability if the third party induced the principal to
settle with the agent. The principal in Irvine argued that the contract term stipulated for cash on

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delivery, and thus the third party induced the principal into thinking the agent had paid the third
party, and the principal was merely reimbursing the agent. Bramwell LJ disagreed. Just because a
third party did not insist on cash against delivery as they could have done under the contract is not
by itself sufficient to say that the third party induced the principal into thinking that the agent had
paid the third party. It was the custom of the market that such clauses were invariably written into
contracts but not always enforced.

Undisclosed agency

Agency is undisclosed if the third party did not know that the agent was acting for a principal. In
such cases the agent will initially be liable to the third party on the contract. If the agent had actual
authority to make the contract the principal is allowed to intervene and enforce the contract against
the third party, under the doctrine of the undisclosed principal. Once the principal has revealed
himself, the agent will no longer be able to enforce the contract against the third party. However,
both the agent and the principal will now be liable to the third party on the contract. Where such
joint liability arises, the third party can choose to sue either the agent or the principal on the
contract. However, having made an absolute decision to hold one or other liable on the contract, the
third party will not be able to change his mind and then sue the other.

If the agent did not have actual authority to make the contract, then the doctrine of the undisclosed
principal cannot take effect to allow the principal to enforce the contract against the third party. The
principal cannot even ratify the contract, because ratification is permissible only where the agent
purported to act as an agent. Nor will the doctrine make the principal liable on the contract.
However, the third party might be able to enforce the contract against the principal, if the unusual
conditions set out in Watteau v Fenwick are satisfied. There are four situations where an
undisclosed principal cannot sue on the contract, even if the agent did have actual authority to
make the contract. These situations are as follows:

(i) Where a term of the contract excluded agency

(ii) Where the third party would have refused to contract with the undisclosed principal and the
personality of either the principal or the agent was so important that it would be inappropriate to
allow the principal to intervene

(iii) Where the third party made the contract with the agent because he particularly wanted to
contract with the agent personally

(iv) Where the agent was asked whether he was acting for an undisclosed principal and told the
third party that he was not. If the principal does enforce the contract against the third party, the
third party can use against the principal any defences which he could have used against the agent

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The agent’s liability for breach of warranty of authority

An agent can be liable to a third party for breach of warranty of authority. This is quite different
from being liable on the contract made on the principal’s behalf. Liability for breach of warranty of
authority arises if:

(i) an agent makes a representation to a third party, warranting that he has authority to act
for a principal;
(ii) the agent does not in fact have such authority; and
(iii) The third party acts on this representation to his detriment

Usually, the third party will act upon the warranty by making the contract with the principal. An
agent can become liable for breach of warranty of authority where he has no authority at all, or
where he exceeds the authority which he does have. Liability can arise even if the agent could not
have known that his authority had been revoked.

If the principal ratifies the agent’s actions, then the agent will not be liable for breach of warranty of
authority, because the agent will have had the authority warranted. Nor will the agent be liable for
breach of warranty of authority if the third party knew, or should have known, that the agent did
not have the authority warranted. Damages for breach of warranty of authority are calculated by
reference to the two rules in Hadley v Baxendale (1854):

Rule 1 allows damages for a loss if the loss arose naturally from the breach of contract, in the usual
course of things.

Rule 2 allows damages for a loss if the loss can reasonably be supposed to have been within the
contemplation of the parties when they made the contract.

The application of these rules is portrayed in the case of Victoria Laundry v Newman Industries
[1949] in which the claimants agreed to buy a boiler from the defendants. The defendants knew that
the boiler was to be used immediately in the claimants’ laundry. They also knew that there was a
big demand for general laundry services at this time. The defendants delivered the boiler 20 weeks
late. Two claims for damages were made by the claimants. First, they claimed £16 a week, which
represented the extra profit they could have made by doing more general laundry work with the
new boiler. Second, they claimed £262 a week which had been lost on account of the claimants not
being able to use the boiler to fulfill a very profitable contract to dye army uniforms. Held The
claimants were entitled to the £16 a week, under the first rule in Hadley v Baxendale. The £262 was
not available under either rule. (It would have been available under the second rule in Hadley v
Baxendale if the claimants had told the defendants, at the time when the contract was made, that
such a very profitable contract would be lost if the boiler was not delivered on time.)

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The rules on remoteness of damage provide an important limit on the amount of contract damages.
A breach of contract can have many unforeseeable consequences. If there were no rules on
remoteness, the person in breach of contract would always be liable for these consequences. This
would make people unwilling to make contracts.

Who to sue?

Remember that, in an undisclosed principal situation, the initial contract is between the agent and
the third party, which is why Lord Lloyd in Siu Yin Kwan said that an agent can sue and be sued
on the contract. Once the undisclosed principal intervenes, the agent loses his rights of action
against the third party. The agent nevertheless remains liable to the third party until the third party
elects whether to hold the principal or the agent liable.

The third party cannot sue both, because the third party only makes one contract with one person,
that is, there is only one obligation. So, the right to sue the agent and the right to sue the principal
are in the alternative. The third party may lose his right to sue one of them if he has ‘elected’ to hold
the other liable. The third party cannot change his mind who to sue once he has elected.

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