In an increasingly interconnected and fast moving commercial world, companies and businesses must rely on the competency of others to ensure their business will be capably and efficiently carried out. In particular, parties can delegate their authority to conclude and carry out business contracts to agents – authorised representatives of their interests that can make decisions that will legally bind the principal. When delegating authority to an agent or engaging in negotiations with someone who may be an agent, it is important to fully understand just what an agent is. This article outlines the role of agents in commercial law and what expectations parties can rightfully have when utilising them.
A. How is Someone Made an Agent?
An agent is an individual granted authority by another (known as the principal) to act on their behalf; for example, a realtor. The principal must have legal capacity to perform the tasks they are assigning to the agent (in other words, they must be of sound enough mind to understand and consent to the action). The person selected to act as agent must also consent to this nomination.
B. Actual Authority
There are a number of ways through which a relationship of agency may be found to arise. These ways can be split into actual and ostensible authority. Most commonly, the agent will hold actual authority on behalf of the principal. Actual authority can be express or implied. An agent acts with actual express authority where the principal has conveyed this to them either orally or in writing. Actual implied authority occurs where actual authority can be inferred from the circumstances, chiefly consent from both the principal and agent (for example, where a company regularly allows an officer to conclude contracts without consulting the board).
C. Ostensible Authority
Ostensible authority is more concerned with the image that is conveyed to third parties rather than the specific relationship between the alleged principal and agent. Where a principal holds out to a third party that the agent is empowered to perform some task and the third party suffers as a result, courts usually determine that the agent was indeed an agent for that purpose, even if the ostensible authority exceeded the actual authority granted to the agent. In this way dishonest representations are discouraged and the public is better able to rely on representations as to agency.
D. What Duties do Agents Hold?
Agents hold fiduciary duties to their principals and are liable for severe penalties if these are broken. Agents must act bona fide on behalf of their principal and should avoid conflicts of interest between themselves and their principal. Further, agents must act in line with the agreement giving rise to the agency relationship (i.e. contractual terms). Agents are also obliged to act with due care and skill. Agents can also be liable to third parties where they contract in their own names rather than in the name of their principal. A breach of contract would allow the third party to take action against the party named in the contract, as courts are extremely reluctant to take into account external material when the parties have a written contract.
Agents play an important role in carrying out a range of activities on behalf of their principals. Agents can be appointed in a variety of different ways and indeed, in many circumstances do not require formal appointment in order to operate as an agent. However, agents must be aware of the strict fiduciary duties imposed on them on behalf of their principal. Third parties dealing with agents should also be aware of their rights in contracting with agents and be aware of whether a breach would give rise to action against the agent or the principal.
This article was authorised by Warwick Heeson.