Commercial Organisations

COMMERCIAL ORGANISATIONS

TOPIC 1: AGENCY

1. DEFINITION OF AGENCY

"Agency is the relationship that exists between two persons, when one, called the agent, is considered in law to represent the other, called the principal, in such a way as to be able to affect the principal's legal position in respect of strangers to the relationship by the making of contracts or the [sale or purchase] of property."

So, an agent is someone who represents another, called the principal, in dealings with third persons.

Agency is therefore an exception to the general rule of contract law that only the parties to a contract are bound by it.

Examples: a director for his company, a solicitor for his client

Distinguish from other situations where one party acts on behalf of another:

(i) Employment: Employment does not always create an agency role. It depends on their job description and the authority they have been given.

(ii) Mandate: Mandate is like agency but it is gratuitous, the agent acts voluntarily and is unpaid but he must still be careful and take reasonable care as he could still be held liable. The terms mandate and mandatory are used instead of principal and agent. Otherwise mandate creates the same legal relationships as proper agency.

A mandatory still has a duty to exercise reasonable care:

Copland v Brogan: Brogan volunteered to cash cheques but lost the money from them on the way home. It was held that he didn't exercise reasonable care and so he had to reimburse Copland with the value of the cheques.

Agency is a three sided (i.e. "triangular") relationship between the principal, the agent and the third party. The internal aspect of agency is the relationship between the principal and the agent; the external aspect is the relationship between the principal and the third party.

Example: Shop assistant = agent; Customer = 3rd party buyer, Company = Principal.

The principal can be a company, partnership or individual. The agent can be a director, a partner or an individual. The third party is usually a buyer or seller.

You enter into a contract of sale with the company but you do it through the agent. The agent incurs no personal liability on the transaction. An essential element in every case is the agent's express or implied authority.

There are two contracts:-

1. Contract of Agency Ð'- contract between the principal and the agent

2. Contract effected by the Agent Ð'- the contract between the agent and the third party

The agent has a contract of agency with the principal, which gives the agent authority to enter into contracts with third parties. If the agent acts on behalf of the principal and within the authority they have been given there is a valid contract of sale. The agent must have the authority! If he acts outwith his authority, the agreement is not valid.

Examples: client and solicitor, client and stockbroker, client and estate agent.

2. BECOMING AN AGENT

(1) Capacity

A contract of agency is no different to the law of contract and the same principals apply. The capacity of an agent and a principal is determined by the general law of contract: any adult aged 18 or over has full capacity, as does any properly constituted partnership, corporation, limited company etc.

Both the principal and agent must have legal authority. For example, someone under the age of 18 cannot employ someone over the age of 18 to act as his agent. The principal may be a registered company. A company is considered to be an artificial legal person. A company that is not yet registered has no legal capacity. The certificate of incorporation given on registration of the company is the equivalent of a birth certificate. If the principal has limited or no legal capacity (e.g. insane person or an unregistered limited company) then he cannot increase/create it by using a principal:

Tinnevelly Sugar Refining Co v Mirrlees, Watson and Yaryan Co Ltd 1894: In this case, Darley and Butler purporting to act on behalf of Tinnevelly, entered into a contract with a third party on 11 July. However, it was not until the 29 July that the company was registered. It was held that since the principal did not exist at the time, there could not be a contract of agency, where there is no principal, there can be no agent.

(2) Creation

Consitution (legal formalities): There is no requirement for any formal written agreement, consent is enough, but a written agreement is advantageous in case of disputes. No special form of document is required and can even be created by oral agreement. If it is created by oral agreement, there are no restrictions on the evidence needed to prove there was an agency relationship.

Pickin v Hawkes: In this case, oral agreement was used to agree a contract of agency. One party was allowed to use evidence from witnesses to prove that there was an agency relationship.

In practice, agency is often by formal written document.

The authority of an agent is either "actual" or "apparent"

(3) Scope

This is an important issue. An agent may only be given authority to do certain things. The general rule is that an agents authority is that specified in the agreement between the agent and the principal. If the agent affects a contract between the principal and the third party and it is within his authority, then it is valid, if it is outwith authority, it is not.

The scope of the agents authority varies:

Distinction between special and general agents:

General Agent: Has wide authority and a wide discretion to enter into a wide range of contracts e.g A Company Director.

Special Agent: Limited discretion to certain types of contract.

Morrison v Statter & Co: Statter was the principal. He told his agent to buy a 5 year old sheep but instead he bought a 2 year old sheep. It was held the agent was