What is an agency relationship?
The legal relationship between a principal and their agent is referred to as an agency relationship. When we hear the word “agency”, many people may automatically think of specific types of agencies only, such as a real-estate agency or travel agency. However, an agency can be any type of company or organisation that has the primary purpose of providing a specific service on behalf of another company or organisation. The term “agency” incorporates all relationships involving a principal providing legal authority to an agent to act on the principal’s behalf in dealings with a third party.
It is important to note that the law of agency governs all different aspects of the principal/agent relationship, particularly in relation to circumstances where the principal is automatically bound by the acts of the agent. Furthermore, the agency relationship is also considered a fiduciary relationship, which means that both parties owe important duties and responsibilities to each other.
Definition of agency in legal terms
In legal terms, an agent is a person who is authorised, expressly or implicitly, to act on behalf of a principal so as to create or affect legal relations between the principal and a third party.
In the case of International Harvester Co of Australia Pty Ltd v Carrigan’s Hazeldene Pastoral Co (1958), the High Court stated that although, in the business world, the word “agency” is not restricted:
“[a]gency is a word used in the law to connote an authority or capacity in one person to create legal relations between a person occupying the position of principal and third parties”.
The principal is bound in law by acts of his or her agent as a result of, and commonly to the extent of, the authority given to the agent.
This is a complex concept with real-world ramifications. In some circumstances, it might even be difficult at first glance to determine on whose behalf an agent is acting. For instance, in the course of an asset-lending transaction, a mortgage broker will conduct themselves in a way that, hopefully, benefits both the borrower and the lender. Does that make the mortgage broker an agent of both parties? In that particular situation, the answer is that the courts will generally consider a broker to be the agent of the borrower.
Creation of an agency
A relationship of agency between a principal and an agent may arise:
- by operation of law;
- by form of an agreement;
- retrospectively by the principal’s ratification of acts done; and
- by estoppel under the doctrine of apparent or ostensible authority.
The most common way that a relationship of agency is created is by form of an agreement. Agency by express agreement is created where the principal, or some person authorised to act on behalf of the principal, expressly appoints the agent, either orally or in writing.
Agency by implied agreement arises from the conduct of the parties towards each other where it is reasonable to infer consent to a relationship of agency. In establishing agency through implied agreement, particular emphasis is placed on what was said and done at the time that the alleged agency relationship was created.
A third party is entitled to assume that a relationship of agency exists where there is reason for them to make such an inference. For example, if somebody issues a letter under the letterhead of a business, or if they give out a business card for that business, the recipient is entitled to assume the person is authorised to represent that business.
Capacity to appoint agent to act for a principal
The general rule for appointing an agent is that what a person may do themselves, they may do through an agent. There are, however, two exceptions to this general rule:
- Where a statute prescribes that the act or instrument in question is to be done or executed by the principal in person; or
- Where the principal’s competency to do the act arises by virtue of some power, authority or duty of a personal nature.
Apart from these exceptions, there are categories of people who only have a limited capacity to contract, including:
- minors;
- intoxicated people;
- mentally incompetent people; and
- alien enemies.
If the agent acting on behalf of a person listed above knew or should have known of that principal’s incapacity, they will lack authority to act on the principal’s behalf.
Capacity to act as an agent
All persons of sound mind are competent to act as agents. A person’s capacity to act as an agent is not limited to his or her capacity to act for themselves.
Types of agents
Special agents
These types of agents are authorised to conduct either a specified series of transactions only, or a single transaction over a limited period of time.
General agents
These types of agents hold the authority to conduct a series of transactions over a continuous period of time and have the authority to bind the principal in all matters.
Universal agents
These types of agents may be appointed under a power of attorney and hold wide authority to act on behalf of a principal, including the right to transact with third parties.
Authority of an agent
An agent who acts within the scope of authority conferred by his or her principal binds the principal in the obligations he or she creates with third parties. The different types of agency authority recognised by law in Australia include actual authority, express authority, implied authority and apparent authority.
Actual authority
Actual authority can arise either through the principal expressly conferring authority on the agent or the principal doing so implicitly, either from the conduct of the parties or deriving from the particular circumstances of the case. Actual authority may confer both broad and limited special power, depending on the particular circumstances of each individual matter.
Express authority
Express authority means that an agent has been expressly told that he or she may act on behalf of a principal. The actual authority can be expressed by words, whether written or oral, for the agent to engage in a particular form of conduct.
Implied authority
Authority may be implied in an agency relationship through the conduct of the parties. This is often the case where authority exists for the agent to undertake a complex matter on behalf of the principal and where that matter requires that they also attend to matters incidental to the primary task. The agent’s authority to do those things is implied through the broader agency relationship.
Apparent authority
Apparent authority may exist in situations where a third party assumes that another party is an authorised agent acting on behalf of the principal, even though there is no actual authority in place. This commonly arises in situations where a person is purporting to act on behalf of a company.
The concept of apparent authority was summarised by McLure JA in the case of Durban Roodepoort Deep Ltd v Newshore Nominees Pty Ltd:
“Apparent authority… is a legal relationship between the principal and the third party created by representation, made by the principal to the third party, intended to be acted upon by the third party, that the agent has authority to enter on behalf of the principal into a contract of the kind within the scope of the apparent authority, so as to render the principal liable under the contract. The representation which creates apparent authority may take a variety of forms of which the commonest is representation by conduct, that is, by permitting the agent to act in some way in the conduct of the principal’s business with third persons.”
A third party may enforce an agreement against a company in the absence of actual authority where:
- A representation was made by the apparent agent that they had the authority to enter into a contract on behalf of the company, and the type of contract to the representation related to is the same type that the third party is seeking to enforce;
- The representation was made by a person who had the authority to manage the business of the company, either generally or in respect of those matters to which the contract relates;
- A third party was induced by a particular representation made by the apparent agent to enter into the contract; and
- The company’s constitution did not deprive it of the capacity to enter into a contract of the kind sought to be enforced, or to delegate its authority to enter into such a contract.
Duties of agents
The fiduciary nature of the agency relationship creates obligations on agents to conduct themselves in a certain way, and according to certain standards. These include:
1. Duty of loyalty
An agent owes a general duty of loyalty to the principal. This means that the agent must subordinate their interests to those of the principal if the interests fall within the agency relationship.
2. Duty to act in accordance with the express and implied terms of a contract
An agent owes a general duty to act in accordance with the express and or implied terms of a contract that grants them their agency responsibilities. For example, if the contract states that the agent, a marketer, can call only 10 customers on behalf of the principal, then the marketer has a duty to only make those 10 phone calls – no more (and in some cases, no less).
3. Duty of care, competence, and diligence
An agent owes a general duty of care, competence and diligence. This duty is contextual, and the specific requirements of care and diligence will depend highly on the specific circumstances of the agency relationship.
4. Duty to comply with the principal’s lawful instructions
An agent owes a general duty to comply with the principal’s lawful instructions.
5. Duty of good conduct
An agent owes a general duty of good conduct. This means that the agent is required to act in a way that does not injure the principal’s endeavour. The agent must make reasonable efforts to provide the principal with relevant facts and information.
If an agent has conducted themselves dutifully and not breached any of their obligations, he or she is unlikely to be liable for loss that the principal incurs in connection with the agent’s performance of his or her duties.
Duties of principals
Principals also owe duties to their agents, and accordingly, principals will be required to conduct themselves to a certain standard in relation to the agency relationship. These duties include:
1. Duty to indemnify the agent
A principal owes a general duty to indemnify the agent for liability incurred in the performance of his or her duties.
2. Duty to deal fairly
A principal owes a general duty to deal fairly with the agent.
3. Duty to deal in good faith with the agent
A principal owes a general duty to deal in good faith with the agent by exercising their powers reasonably and not for irrelevant purposes.
4. Duty to act in accordance with the express and implied terms of a contract
Both parties to a contract must fulfil their obligations under that contract. A principal owes a general duty to act in accordance with the express and implied terms of a contract in which they appoint or authorise an agent.
Similar to the protection afforded to agents who exercise their duties and responsibilities dutifully, principals who abide by their duties and standards in the agency relationship are unlikely to be held liable for loss or damage incurred by the agent.
How can an agency relationship be terminated?
In Australia, there is no statutory requirement in terms of a particular notice period to be given to either a principal or an agent in order to terminate an agency relationship, nor is there a statutory requirement regarding the form of which the notice of termination should take. Commonly, the termination of an agency arrangement will be determined according to the terms of the relevant agency contract. As a result, any damages that may flow from the termination of the agency relationship will be determined according to common law principles.
An agency relationship can be terminated in several ways, including:
- following a set period of time in which the relationship will automatically be terminated at the end of the period;
- where the principal gives notice to the agent of the termination, thereby effectively revoking the agent’s authority to represent them; or
- where the agent notifies the principal that they forfeit their authority and no longer agree to carry out the directed duties or otherwise act on behalf of the principal. An agent forfeiting their authority does not invalidate any contracts or obligations that they created or entered into on behalf of the principal prior to the termination of the agency relationship.
For when you need help
Identifying whether or not you have a legal relationship of agency can be tricky. At Gibbs Wright Litigation Lawyers, our team of dedicated and experienced solicitors are here to assist you with any aspect of your agency matter.
Contact Gibbs Wright Litigation Lawyers today about your agency issue for a confidential initial consultation to explore your legal rights and options.
