The law of agency is a fundamental legal concept that governs the relationship between two parties: a principal and an agent. It essentially establishes the rules under which one person (the agent) can act on behalf of another (the principal) and bind them in legal transactions
Imagine you hire a real estate agent to sell your house. The agent acts on your behalf, showing the house to potential buyers and negotiating offers. The law of agency sets the rules for how the agent must act and how their actions affect you.
Agency is a legal relationship in which one person (the agent) is authorized to act on behalf of another person (the principal).
The purpose is to allow principals to conduct business and enter transactions through agents, expanding their capacity to act.
This is extremely important in business, as it allows companies to conduct business in many locations, without the principle needing to be physically present.
Agency can be created in several ways:
These different forms allow for agency to be created in many different situations.
These different types of agents, allow for very specialized agency relationships.
These duties are very important, because they protect the principle from unscrupulous agents.
These rights protect the agent and ensure that they are not taken advantage of.
The principal is liable for the agent's actions within the scope of their authority.
The principal may also be liable for the agent's torts (civil wrongs) committed within the scope of their employment.
The principle is the one that is bound by the agents’ actions.
Agency can be terminated by:
These ways of termination, allow for agency relationships to end cleanly.
When an agent acts within their authority, they bind the principal in contracts with third parties.
The third party can generally hold the principal liable for the agent's actions.
This is the core concept of agency law.
Imagine someone acting on your behalf. They can do this because you explicitly told them to, because it is understood they would, because the law says so, or because you approved their actions later. Here is a look at the different ways this happens.
This is the clearest form of agency. It arises when the principal directly and explicitly grants authority to the agent, either orally or in writing.
For example, a written power of attorney explicitly grants an agent the authority to handle specific financial transactions. Or, a simple verbal agreement, such as “go buy groceries for me”, creates an express agency. The principal directly states what the agent is authorized to do, leaving no room for ambiguity. This form of agency is preferred because it clearly outlines the parameters of the agency relationship.
Implied authority arises when the principal's actions or the nature of the agent's role suggest that the agent has the authority to act, even if it has not been explicitly stated.
For example, if you hire a store manager, it is implied that they have the authority to make sales, order inventory, and hire staff, even if those specific actions are not listed in their job description. The implied authority is what is necessary to carry out the express authority. It is what is reasonably necessary to perform the job.
In certain emergency situations, the law may imply an agency relationship to protect the principal's interests. This usually occurs when it is impossible to obtain the principal's express consent.
For example, if a ship captain must make emergency repairs to save the ship, they may be considered an agent of necessity, even if they have not been explicitly authorized to do so. This type of agency is very rare, and only occurs in extreme circumstances.
This arises when the principal's conduct leads a third party to reasonably believe that the agent has authority, even if they do not. The principal is then "estopped" (prevented) from denying the agent's authority.
For example, if you allow someone to act as your representative in a business meeting, and a third party reasonably believes they have authority, you may be bound by their actions, even if you did not explicitly authorize them. The focus is on the third party’s perception of authority.
Ratification occurs when an agent acts without authority, but the principal later approves or adopts the agent's actions.
For example, if an unauthorized person enters a contract on your behalf, you can later ratify the contract, making it legally binding. This means that even if the agent acted without authority, the principle could choose to accept the actions as if they had.
This is a legal concept where a contract is made between two parties, but a third-party benefit from it. While not strictly agency, it shares similarities.
For example, life insurance policies where a beneficiary receives benefits upon the policyholder's death. This is often used in situations where a contract is designed to benefit someone who is not a party to the contract.
This occurs when someone voluntarily manages another person's affairs without their knowledge or consent, typically in an emergency.
For example, if you take care of your neighbour’s property during a flood while they are away, you may be considered a maggotorium gestor. This is like agency of necessity but is broader in scope. This is also a situation that is used in emergency like situations.
Agents are individuals or entities authorized to act on behalf of a principal. The nature of their authority and the scope of their actions vary, leading to different classifications.
A general agent is authorized to conduct a broad range of transactions on behalf of the principal. They have a continuous and ongoing relationship with the principal.
For example, a business manager authorized to handle day-to-day operations is a general agent. They can enter contracts, manage employees, and make decisions within the scope of their authority.
This type of agent has a large amount of authority.
A special agent is authorized to conduct a specific transaction or task on behalf of the principal. Their authority is limited to that task.
For example, a real estate agent hired to sell a specific property is a special agent. Their authority ends once the property is sold.
This type of agent has a very limited amount of authority.
A factor is an agent who is entrusted with goods to sell on behalf of the principal. They typically have possession of the goods and are authorized to sell them in their own name.
For example, a consignment agent who sells goods on behalf of a manufacturer is a factor.
This type of agent deals with tangible goods.
A broker is an agent who brings parties together for a transaction. They typically do not have possession of the goods or property involved.
For example, a stockbroker who facilitates the buying and selling of securities is a broker.
This type of agent facilitates deals between parties.
An auctioneer is an agent who conducts auctions on behalf of the principal. They are authorized to sell goods or property to the highest bidder.
They are agents for the seller and are authorised to conduct the auction.
This type of agent is specialized in auction sales.
An estate agent is a special type of agent who facilitates the buying, selling, or renting of real property.
They act on behalf of the principal (buyer or seller) and are authorized to negotiate terms and complete transactions.
This type of agent is specialized in real property sales.
This is a unique situation where someone (the gestor) voluntarily manages another person's (the principal) affairs without their knowledge or consent, typically in an emergency.
For example, if you take care of your neighbour’s property during a flood while they are away, you may be considered a maggotorium gestor.
This is a situation that is usually only applied in emergency situations.
Imagine you hire someone to do a job for you. They have certain rights, like getting paid, and certain duties, like doing the job properly. You, as the person who hired them, also have rights and duties. Here is a breakdown.
The agent must act solely in the principal's best interests, avoiding any conflicts of interest. This means they cannot prioritize their own interests or those of a third party over the principal's.
For example, a real estate agent must disclose any personal relationship they have with a potential buyer and cannot secretly accept a commission from both the buyer and seller. This duty is the most important duty, as it prevents the agent from abusing the agency relationship.
The agent must follow the principal's lawful instructions and act within the scope of their authority. They cannot deviate from these instructions without the principal's consent.
If a principal instructs an agent to sell a product at a specific price, the agent must adhere to that price. They cannot sell it at a lower price without permission. This duty is important because it allows the principle to control the agents’ actions.
The agent must act with reasonable care, skill, and diligence. They must perform their duties competently and avoid negligence.
For example, an investment agent must conduct thorough research before making investment recommendations to their client. They cannot make reckless decisions that could harm the principal's financial interests. This duty requires the agent to act as a reasonable person would in the same situation.
The agent must keep accurate records of all transactions made on behalf of the principal and provide a full accounting of all funds and property received or disbursed.
This ensures transparency and prevents misappropriation of funds. For example, a sales agent must provide regular reports on sales transactions and expenses.
The agent must disclose to the principal all relevant information that may affect the principal's interests. This includes any conflicts of interest or material facts that could influence the principal's decisions.
This includes disclosing any information that the agent knows that the principle would want to know.
The agent holds an inherent right to receive agreed-upon compensation for the services they provide. This compensation is typically stipulated in the agency agreement and can take various forms, including a fixed salary, a commission based on completed transactions, or a combination of both. The entitlement to compensation is contingent upon the agent fulfilling their duties as outlined in the agreement. Moreover, the agent may also be entitled to compensation for services rendered even if the principal ultimately does not benefit from the agent’s work, provided the agent acted within their authority and fulfilled their obligations in good faith. This right is fundamental, serving as a primary incentive for the agent to act diligently and effectively on behalf of the principal. Furthermore, it ensures that the agent is not left without recourse for their time and effort expended in the principal's service. The specifics of compensation, such as the amount, method, and timing of payment, should be clearly defined in the agency agreement to avoid disputes.
The agent is entitled to reimbursement for all reasonable expenses incurred while acting within the scope of their authority on behalf of the principal. This right ensures that the agent is not burdened with out-of-pocket costs associated with carrying out their duties. Reasonable expenses typically include travel costs, accommodation, communication expenses, and any other expenditures that are necessary for the agent to effectively perform their tasks. The agent must provide detailed documentation of these expenses to the principal, demonstrating that they were incurred during the agency relationship. The principal, in turn, is obligated to promptly reimburse the agent upon presentation of valid expense reports.
The agent has the right to be indemnified by the principal for any losses, liabilities, or damages incurred while acting within the scope of their authority. This right protects the agent from financial or legal repercussions arising from actions taken on behalf of the principal, provided the agent acted in good faith and without negligence. Indemnification extends to legal costs, settlements, and judgments arising from lawsuits or claims related to the agent's actions. For example, if an agent is sued for breach of contract while acting on the principal's instructions, the principal is obligated to cover the agent's legal expenses and any resulting damages. This right ensures that agents are not deterred from acting decisively on behalf of their principals due to fear of personal liability, thereby fostering a more robust and effective agency relationship.
The principal must pay the agent the agreed-upon compensation for their services.
This is the principal’s primary duty.
The principal must reimburse the agent for reasonable expenses incurred while acting on their behalf.
This ensures the agent is not out of pocket for expenses.
The principal must indemnify the agent for any losses or liabilities incurred while acting within the scope of their authority.
This protects the agent when they are acting correctly.
The principal must cooperate with the agent, and not hinder the agent’s ability to complete their task.
The principal holds the fundamental right to direct and oversee the agent's actions, ensuring they align with the agreed-upon terms of the agency agreement. This control extends to providing specific instructions, setting parameters for decision-making, and dictating the methods by which the agent carries out their duties. The principal's ability to exert control is not absolute, however, and must be exercised within the bounds of the law and the agency agreement. For instance, the principal cannot demand that the agent perform illegal or unethical acts. The extent of control may vary based on the nature of the agency relationship, with more control typically exerted in situations where the agent is acting on behalf of a business, as opposed to a personal matter. This control ensures that the agents’ actions are in line with the principals’ goals.
The principal is entitled to expect that the agent will execute their duties with a level of skill, care, and diligence that is considered reasonable within the context of the agency relationship. This right extends to expecting the agent to adhere to professional standards and to act in a manner that prevents foreseeable harm or loss to the principal. The principal can also expect that the agent will fulfil their obligations in a timely manner and with a commitment to achieving the desired outcome. This right is vital because it forms the basis of the principals’ expectations.
The principal has the undeniable right to be fully informed of all matters that pertain to the agency relationship. This includes access to all relevant documents, records, and communications. The agent is obligated to provide transparent and accurate information, keeping the principal apprised of any developments that could affect their interests. This right ensures that the principal can make informed decisions and that the agent is acting in a transparent and accountable manner.
Just like any agreement, an agency contract can end for various reasons. It might finish when the agreed time is up, when the job is done, if both parties agree, if the job becomes impossible, or if either the agent or the principal decides to end it.
If the agency contract specifies a specific duration, it automatically terminates when that time expires.
For example, if you hire an agent for six months, the agency relationship ends after those six months, unless you agree to extend it. This is a very clear and simple way to end an agency relationship.
If the agency contract is for a specific task or purpose, it terminates when that task or purpose is completed.
For example, if you hire a real estate agent to sell your house, the agency relationship ends when the house is sold. This is also a very common way that agency contracts end.
Both the principal and the agent can agree to terminate the agency contract at any time, even if it has not expired or the task has not been completed.
This requires both parties to willingly agree to end the agreement. This is a very flexible way to end an agency relationship and is used when the parties no longer wish to continue the relationship.
If the task or purpose of the agency contract becomes impossible to perform due to unforeseen circumstances, the contract is terminated.
For example, if the property being sold is destroyed in a fire, the agency contract to sell that property is terminated. This is a situation where neither party is at fault.
The agent has the right to terminate the agency contract by renouncing their authority. However, they may be liable for breach of contract if they do so without a valid reason.
The agent must give proper notice to the principal.
For example, if an agent becomes ill and cannot perform their duties, they can renounce the agency.
The principal has the right to terminate the agency contract by revoking the agent's authority. However, they may be liable for breach of contract if they do so without a valid reason.
The principal must give proper notice to the agent.
For example, if the principal is dissatisfied with the agent's performance, they can revoke the agency.