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Agency 1

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

2.1 What is an agency? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

2.2 Types of agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

2.3 Creation of agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

2.4 Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

2.5 Actual authority of the agent . . . . . . . . . . . . . . . . . . . . . . . 26

2.6 Agency by estoppel and apparent authority . . . . . . . . . . . . . . . 28

2.7 Usual authority: Watteau v Fenwick . . . . . . . . . . . . . . . . . . . . 31

2.8 Ratification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

2.9 Agency of necessity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

2.10 Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38


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Introduction
The law of agency is an essential part of commercial law because companies can only
conduct business through agents. The function of the law of agency is to enable agents to
bring commercial parties into contractual relations in such a way as to render those parties
– and not the agents – liable on, and able to enforce, the contract.

The principal, on whose behalf the agent is bargaining, must be able to place complete
confidence in the agent. This has led the law of agency to make the agent a fiduciary, which
imposes strict obligations. However, there are interests other than the protection of the
principal against misuse of power by the agent: the protection of the third party with
whom the agent has dealt, the protection of the agent against any liability incurred on
behalf of the principal, and the rights an agent may have against the principal.

Since this course is centred on the sale of goods, the focus is on those aspects of the law of
agency that enable such transactions to occur. This means that the focus will be on princi-
pal-third party and third party-agent relations. There will only be a very brief consideration
of the rights and duties owed between the agent and the principal. This chapter deals with
the creation of an agency and the scope of the agent’s authority; Chapter 3 discusses the
rights of the various parties.

The main reading is Sealy and Hooley, but you might also consult Bradgate, pp.125–75.

Learning outcomes How to succeed with the London package


By the end of this chapter and the relevant read- There are a number of vital factors you need to consider.
ings you should be able to: Begin with learning outcomes.
 define the term ‘agent’ Learning outcomes – or objectives – have a particular role in
 explain how an agency is created distance learning. Traditional syllabuses talked only of the
content to be covered; lecturers/tutors talked of the dates
 discuss the scope of the agent’s authority.
on which topics would be covered. The role of learning out-
comes is to make clear what learners are expected to be able
to do and what they are expected to achieve.
In our materials you will be told the intended objectives, in a
set of outcomes at the beginning of each chapter.
You will meet these outcomes again on the ‘reflect and
review’ pages at the end of each chapter. There you can con-
sider whether you have attained the outcomes, and whether
you should revise the chapter, or proceed to the next one.
Commercial law 2 Agency 1 page 17

2.1 What is an agency?

Essential reading
¢ Sealy and Hooley, Chapter 3: ‘Introduction’ (To Part II: ‘The law of agency’) pp.97–105.

2.1.1 Introduction
Most people might agree with Lord Alverstone CJ when he defined an agent as ‘any person
who happens to act on behalf of another’ (The Queen v Kane [1901] 1 QB 472), but Sealy and
Hooley, p.97, caution that, ‘Any concise definition of the concept of agency must be treated
with care. Striving for brevity, the definition is likely to be flawed by errors and omissions
which may make it misleading.’

If P (the principal) instructs A (the agent) to act in the purchase of goods from T (the third
party seller) in the sale of those goods, the contract of sale that is made by A is enforceable
between P and T. In general, A has no liability to either P or T on that contract:
where a person contracts as agent for a principal the contract is the contract of the princi-
pal, and not that of the agent; and, prima facie, at common law the only person who may
sue is the principal, and the only person who can be sued is the principal. (Montgomerie
v United Kingdon Mutual Steamship Association [1891] 1 QB 370, Wright J; Sealy and Hooley,
pp.147–8.)

There are three parties: P, A and T, and three relationships †: Three relationships:
 the relationship between P and A
 the relationship between A and T
P
 the relationship between P and T.

The picture may be more complex than this because T is likely to use an agent and the
agents of P and T may be permitted to use sub-agents. Furthermore, one party may be A T
simultaneously agent and principal: in Aluminium Industrie Vaassen bv v Romalpa Aluminium
Ltd [1976] 1 WLR 676, under a contract of sale on credit, S (seller) reserved title in the goods
and required B (buyer) to account to S for the proceeds of any resale of those goods. This
meant that on resale B was an agent for S and under an obligation to account for the resale
proceeds, but B was also a principal in relation to the new buyer (on reservation of title see
Chapter 6 section 6.3 of this subject guide).

An agent who acts outside the authority † granted by the principal will be in breach of the †
We discuss the authority of the
contract (if there was one) by which the principal appointed the agent, but, in spite of this, agent to bind the principal in
the principal may be bound to the third party. This is because the authority with which the section 2.5.
agent has been clothed by the principal determines the relationship between the principal
and the third party. That is, the principal will be liable to the third party if the principal
represented that the agent was acting within their authority (apparent authority).

This means that the question of whether or not the principal is bound to a third party does
not depend on the actual authority granted by the principal to the agent. It depends on
the apparent authority of the agent (also known as the ostensible authority of the agent).
The apparent authority is that authority which the agent appears to possess because of
representations made by the principal to the third party.

If the third party knows the limits of the agent’s actual authority, there is no difficulty and
the apparent authority will be the same as the actual authority of the agent. However, the
third party will, usually, not know the terms of appointment of the agent and must rely on
the apparent authority.

We will revisit all of these issues in this chapter.


page 18 University of London External Programme

2.1.2 Theories
There are three main theories that seek to define and explain the role of the agent. Using your notebook or ring
binder You could make
Power-liability theory brief notes on power-liability
It has been suggested that an agency relationship exists when a person (the agent) theory, consent theory and
acquires the power to alter the principal’s legal relations with a third party in such a way qualified consent theory.
that it is only the principal who can sue, and be sued by, that third party. This focuses on
the external relationship with the third party and ignores the internal relationship between
the principal and the agent. It also excludes many who are commonly called agents. Estate
agents introduce buyers to sellers without, usually, having any power to bind either party;
nevertheless, they are subject to fiduciary duties (see section 3.3) in the same way as agents
narrowly defined and some of the key cases in agency law have concerned estate agents. It,
therefore, seems odd to exclude them from a definition.

Consent theory
According to the US Restatement (Third) of Agency (Tentative Draft No. 2) (2003), § 1.01:
Agency is the fiduciary relationship that arises when one person (a ‘principal’) manifests
assent to another person (an ‘agent’) that the agent shall act on the principal’s behalf and
subject to the principal’s control, and the agent manifests assent or otherwise consents
to act.

In focusing on the fiduciary duty that an agent owes a principal there is recognition that
agency exists only where someone is undertaking more than merely ministerial † functions †
Ministerial = where the agent
(see 2.4.1). In other words, the agent must have been invested with a degree of discretion merely follows the instructions
that shows the principal has placed trust and confidence in the agent. It is this which gives of the principal precisely and has
rise to a fiduciary duty. Yet, this definition has problems: no discretion, that is, no choice
 by placing attention on the internal relationship between principal and agent, the external over what course of action to
relationship with the third party is ignored take on the principal’s behalf.

 not all agency relationships require the assent of the parties: an agency of necessity is cre-
ated without the consent of the principal (see 2.9)
 consent or assent is only required in a special sense. Lord Pearson remarked:
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 (Garnac Grain Co Inc v H M F Faure & Fairclough Ltd
and Bunge Corpn [1968] AC 1130).

Whether or not the principal and agent consented to the creation of an agency is de-
termined by an objective standard. The law is not concerned with the principal’s or the
agent’s opinions, but takes an objective view of the words and actions of the parties: would
the reasonable person conclude that an agency existed?

An agency may exist where P represents to T by actions or words that A has authority to act
as an agent and T has acted on that representation (see section 2.6).

Qualified consent theory


This combines the consent theory with the protection of ‘misplaced reliance’ to account Go to your study pack
for actual and apparent authority (see sections 2.5, 2.6). Ratification (see section 2.8) and read ‘Philosophical
reflects commercial reality since ‘authorisation… may not always be neatly contemporane- foundations of the law of
ous with the initial transaction.’ (G. McMeel, see Sealy and Hooley, pp.100–102) agency’ by Gerard McMeel.

Activity 2.1
Distinguish between ‘power’ and ‘authority’ in the context of agency. (See Sealy and
Hooley, pp.98–102).
Commercial law 2 Agency 1 page 19

Speech
The ability to express yourself on legal topics in English is a vital part of this
course. It is an essential element of your Skills portfolio.
How to you become skilled at speaking in English? By doing it and practising.
There are four main elements to speaking successfully:
 the words
 the structure
 the arguments
 the delivery.

The words
 Make full use of your English legal vocabulary. Remember that the words need to
fit into meaningful sentences. You can find most of the words you will need in this
chapter.
 However, you must not simply repeat sections of the chapter. The aim is to
express yourself in your own words.

The structure
It will help you to formulate your arguments, and help your audience to under-
stand them, if you use a BME structure (beginning, middle and end).
 At the Beginning: explain what you are going to be talking about, and the main
points in your argument.
 In the Middle present the main elements of your argument
 At the End, describe your conclusions, and briefly summarise the reasons you
have given in your arguments.
The middle is always the major part of your presentation.

The arguments
You could begin by explaining:
 how and when the common law and civil law systems developed
 in which countries they have been adopted
 Then you need to:
 summarise the key characteristics of each system
 explain the different roles played by judges and lawyers
 suggest what might be the advantages of the two systems.

Delivery
The success of a spoken presentation depends greatly on the way in which you
deliver it.
 Do not speak too quickly.
 Check your pronunciation and fluency with phrases.
 Speak clearly and ‘project’ your voice so that everyone present will be able to
hear and understand you.
 Rehearse your presentation until you are comfortable with it.
If you speak to an audience, remember to get feedback on your performance.

2.1.3 Trustees, sellers, buyers, distributors and franchisees


It is worth distinguishing between an agent and a trustee, a seller or buyer, a distributor
and a franchisee.

Trustee Even if it can be said that a trustee exercises powers on behalf of the beneficiaries,
which is doubtful, a trustee does not bring the beneficiaries directly into legal relations
with third parties: it is the trustee who holds the legal interest in the trust property and
who enters into the transactions. The roles of agent and trustee may, however, be mixed:
an agent may hold the property of the principal or the third party on trust, and a trustee
may also be an agent.
page 20 University of London External Programme

Sale The distinction between an agent and a seller is sometimes difficult to establish. In
theory it is straightforward. If A sells to T on behalf of P, A is an agent. But if A buys from P
and resells to T, there are two different sale contracts: (i) P sells to A (ii) A sells to T. Was it
the intention of A and P that A act as agent or as buyer? This must often be determined by
the circumstances: e.g. was the relationship such that A was under an obligation to account
to P for any money received? Was A paid a fee or commission or did A retain the profit
from the sale to T? But none of these may be decisive. The use of the word ‘agent’ by the
parties will not mean that the person is an agent because this is a matter of law: ‘the test is
ultimately one of substance rather than form’ (Rix LJ in Sealy and Hooley, p. 104).

Distributorship and franchise It is commonplace to see a business advertising itself as


‘agent’ for a supplier, but often this does not amount to an agency in the legal meaning
of the word. Someone who has a distributorship or a franchise agreement with a supplier
may have agreed not to sell another supplier’s goods, but this does not in itself create an
agency. Normally, the distributor or franchisee is a principal who sells a particular brand of
product (e.g. Volkswagen cars) or runs a business developed by the franchiser. The consum-
er, who buys goods from either type of business, enters into a contract with the immediate
seller and not with the original supplier or franchiser. Whether someone is an agent or a
principal will depend on the particular circumstances: for example, was it the intention of
the parties that goods supplied would be resold by the recipient acting as principal, or that
the goods would be sold on behalf of the principal.

Activity 2.2† †
Feedback to activities is located
Jane, a shopkeeper, describes herself as ‘sole agent for Bloggs’ Televisions’. Does this mean in a separate section at the end
Bloggs is the principal in any sale by Jane? See WT Lamb & Sons v Goring Brick Co [1932] 1 KB of the subject guide.

710.

Summary Memorising
The key characteristics of an agency are: Generally, we discourage students from trying to
memorise large amount of material. We prefer
 the agent acts on behalf of another (the principal) so
understanding. If you understand the characteristics of
that the principal is bound and can sue or be sued by
agency, you will not need to memorise long definitions.
the third party on the contract made by the agent
You may want to memorise the two items in the sum-
 the agent is not liable on the contract between the mary, but this will work better if you present them as a
principal and the third party. small diagram.
Commercial law 2 Agency 1 page 21

2.2 Types of agent

Essential reading
¢ Sealy and Hooley, Chapter 1: ‘An introduction to commercial law’ pp.5–7 and Chapter 9:
‘Transfer of title’, pp.342–52.

2.2.1 General agent and special agent


A general agent acts for a principal in the ordinary course of that agent’s business; a special
agent has authority only for a particular purpose that is not part of the ordinary course of
business for such an agent. A solicitor would be a general agent if authorised to undertake
a range of legal work for a client, but a special agent if only authorised by the client to sell
a house.

2.2.2 Factor and mercantile agent


A factor is an agent who is entrusted with the possession of goods or documents of title
to goods and who is allowed to sell them in the factor’s own name as a principal (Baring v
Corrie [1818] 2 B & Ald 137) or in the principal’s name (Stevens v Biller [1883] 25 Ch D 31). The
factor has generally been superseded by the mercantile agent.

A mercantile agent is an agent who, in the customary course of business, has authority to
sell or to consign goods for sale, or to buy goods, or to raise money on the security of goods
(Factors Act 1889, s.1(1)). The general rule is that handing over goods or documents of title
to another does not give that person authority to sell, so that anyone buying the goods will
not acquire good title: handing over a car to a mechanic for repair does not constitute an
authority to sell the car. A disposition by a mercantile agent is an important exception to
this general rule.

Where a mercantile agent is in possession of goods or documents of title with the consent
of the owner (even if that consent is later revoked but the goods or documents are not
returned), and the agent, acting in the ordinary course of business as a mercantile agent,
sells or raises money on the security of those goods, that disposition will be valid ‘as if he
were expressly authorised by the owner of the goods to make the same’, as long as the
third party acts in good faith and without notice of a lack of authorisation (Factors Act 1889,
s.1 (1), 2(1), (2); Weiner v Harris [1910] 1 KB 285; Sealy and Hooley, p.343; Official Assignee of
Madras v Mercantile Bank of India Ltd [1935] AC 53; Jerome v Bentley & Co [1952] 2 All ER 114). Of
course, while the Factors Act provides the third party with rights in the goods so disposed,
it does not exempt the mercantile agent from liability to the owner of goods for any breach
of authority.

The status of mercantile agent arises from undertaking one or more dispositions and not by
virtue of pursuing a particular profession or occupation. A mercantile agent must conduct
a business of dealing in goods: a shop assistant sells goods in the course of the business
of another (the shop owner) and, therefore, is not a mercantile agent (Lowther v Harris
[1927] 1 KB 393; Sealy and Hooley, pp.343–5). The Factors Act does not expressly exclude the
possibility of someone acting as a mercantile agent in a one-off sale, although it does refer
to a mercantile agent as someone ‘having in the customary course of his business as such
agent’ authority to dispose of goods, which might suggest past – or the prospect of future
– such business.

2.2.3 Other agents


Broker A broker negotiates contracts between a buyer and a seller without having pos-
session of the goods or the documents of title (Baring v Corrie (1818) 2 B & Ald 137). Produce
brokers are key players in the commodity markets and exchanges. Some act for both buy-
ers and sellers by virtue of the custom of particular markets.

Commission agent A commission agent (or commission merchant) buys or sells goods on
behalf of the owner, but does not establish a contractual relationship between the owner
and the third party. The commission agent acts as principal in the contract with the third
party. Nevertheless, this agent owes to the owner all the duties of an agent to a principal.
page 22 University of London External Programme

In a sale the agent is liable to the third party (the buyer) for breach of the implied terms as
to quality. In a purchase of goods, the agent is liable to the third party (the seller) for the
price, but is not liable to the principal for the quality of the goods. Such agents are familiar
in civil law jurisdictions. But there has only been a limited acceptance of the idea in English
law (Ireland v Livingston (1872) LR 5 HL 395; Robinson v Mollett (1875) LR 7 HL 802) and, in spite
of the attractions of this type of agency, it cannot be regarded as part of English law (but
see Aluminium Industrie Vaassen bv v Romalpa Aluminium Ltd [1976] 1 WLR 676, section 2.1.1
above). The concept of someone who is simultaneously principal and agent does not fit
easily into English agency law because it does not conform to the idea of an agent as one
who is able to alter the legal relations between the principal and a third party. English law
has, instead, opted for the much less satisfactory idea of the undisclosed principal (see
section 3.2).

Confirming houses Confirming houses act for overseas buyers wishing to obtain goods
in English markets. The confirming house can operate in a number of different ways, ac-
cording to the wishes of the buyer. A confirming house may simply buy and sell without
any suggestion of agency, or it may act as an agent for the buyer, or it may act as agent for
the buyer and separately undertake to the seller that the buyer will perform (known as
confirmation) (see Sobell Industries Ltd v Cory Brothers & Co [1955] 2 Lloyd’s Rep 82).

Forwarding agent A forwarding agent undertakes the transmission of goods for the
principal and is personally liable for the freight charges, which are recoverable from the
principal. Such an agent must also exercise reasonable care in relation to the goods.

Del credere agent A del credere agent indemnifies the principal against loss incurred by the
third party’s breach of contract in respect of payment, although not in respect of any other
breach (Gabriel & Sons v Churchill & Sim [1914] 3 KB 1272). An exporter, who is uncertain about
the financial status of a foreign buyer, might find such a guarantee attractive, although the
modern tendency is to obtain a confirmation from a confirming house or to rely either on
a documentary credit, under which a bank pays the seller on the presentation of certain
documents (see Chapter 8), or on credit guarantees, which provide that in the event of the
buyer failing to pay the guarantor will be liable.

Activity 2.3 Practise speaking legal


english Make a short (not
In what ways does an estate agent not fit the legal category of ‘agent’?
more than two-minutes)
spoken presentation in
2.2.4 Commercial agent answer to Activity 2.3.

The meaning of this term is discussed at 3.3.

Activity 2.4
Read Budberg v Jerwood and Ward [1934] 78 Sol Jo 878, 51 TLR 99 (Sealy and Hooley, p.345).
Why was Dr Thadee de Wittchinsky not a mercantile agent and why was this finding
significant?
Commercial law 2 Agency 1 page 23

2.3 Creation of agency

Essential reading
¢ Sealy and Hooley, Chapter 4: ‘Creation of agency and the authority of the agent’
pp.112–13.

There is a distinction between the creation of the agency and the authority that an agent
has to act on behalf of the principal, although the two issues are necessarily tangled
together since the creation of an agency will involve conferment of authority.

An agency may be created:


 by express or implied agreement between the principal and agent
 where there is a representation by the principal to the third party that the agent has
authority (agency by estoppel)
 where the principal ratifies an act by someone who, without authorisation, purported to
undertake that act as an agent of the principal
 where there is an agency of necessity
 where the agency arises under statute, such as, when an unpaid seller exercises the right to
resell under Sale of Goods Act 1979, s 48(3) (RV Ward Ltd v Bignall [1967] 1 QB 534; Chapter 6).
page 24 University of London External Programme

2.4 Consent

Essential reading
¢ Sealy and Hooley, Chapter 4: ‘Creation of agency and the authority of the agent’
pp.112–13.

2.4.1 Consent
Typically, an agency is established by consent of both the principal and the agent (but not
always: see 2.1.2). Normally, it will take the form of a contract, although this is not neces-
sary: acting out of friendship and without payment does not preclude the existence of an
agency (Chaudhry v Prabhakar [1989] 1 WLR 29). The consent may also arise by virtue of the
principal’s ratification after the agent has entered into the transaction (see 2.8).

Where the agency is created by agreement between the principal and the agent no for-
malities are normally required.

The appointment may be made orally or inferred from conduct of the principal show-
ing consent to the agency. The agent’s acceptance can be express or may be inferred,
as where actions on behalf of the principal can only be explained by the existence of an
agency. Where a commercial agent (within the meaning of the Commercial Agents (Council
Directive) Regulations 1993: see 3.3) has been appointed, both agent and principal are
entitled to a signed statement of the terms, but there is no requirement that the contract
of appointment is written (reg. 13(1)).

Since, normally, no formalities are required for the creation of an agency, when determin-
ing whether an agency has come into existence and what authority the agent has, the
court will refer to the intention of the agent and the principal. That intention is discovered
objectively, that is, by considering the appearance created by their words and actions.

The degree of control exercised by one party (the alleged principal) over the other (the
alleged agent) may suggest the existence of an agency. However, with some agents the
principal’s control is limited because the way in which they undertake their activities
is dictated by the rules and custom of their business: for example, much of the work of
stockbrokers is determined by the rules of the exchange within which they operate. So an
alleged principal’s lack of total control does not necessarily indicate that there is no agency
relationship.

For an agency in the full sense of the word to exist the agent must have some degree of au-
tonomy, otherwise the agent performs merely ministerial functions, that is, the agent acts
almost mechanically and without any exercise of discretion. Although someone who acts
on behalf of another in a purely ministerial way is, in a general sense, an agent, the nature
of their obligations and the relationship with the principal is quite different from the sort of
agent with which we are concerned, that is, one with some autonomy and discretion.

That the parties did not intend to create an agency may be suggested by the fact that
the person carrying out the functions is paid through profit earned in trading rather than
through commission, or is entitled to fix the price of the goods being sold, or retains
money received from sales. Yet, such matters are not conclusive since a principal can con-
sent to an agent making a profit or entering into personal contracts with buyers. Even if the
principal is not aware that the agent is making a profit and so cannot have consented, this
alone cannot be determinative of the existence of the agency since that would enable the
agent to define the existence of the agency unilaterally: it would be the same as saying that
no agency exists if the alleged agent breaches what would otherwise constitute his or her
fiduciary duty (the obligation not to make a secret profit or to undertake other business
that conflicts with the interests of the principal).

If the parties do put their agreement into a contractual document, it is likely to be decisive
in forming a court’s view of the parties’ intention (AMB Imballaggi Plastici SRL v Pacflex Ltd
[1999] 2 All ER (Comm) 249; Mercantile International Group plc v Chuan Soon Huat Industrial
Group plc [2002] EWCA Civ 288).
Commercial law 2 Agency 1 page 25

2.4.2 Power of attorney


It is commonplace to appoint an agent by executing a power of attorney under the Power
of Attorney Act 1971, if only because this overcomes practical difficulties the agent might
have in establishing their authority to the satisfaction of third parties. The Enduring Powers
of Attorney Act 1985 permits a power of attorney that will continue in spite of the subse-
quent mental incapacity of the donor, although in that situation the attorney (that is, the
agent) must not act (subject to certain exceptions) until the power of attorney has been
registered by the court. Under the Act the attorney and third parties are entitled to protec-
tions in certain situations where the power of attorney proves to be invalid or is revoked
(s.9, Enduring Powers of Attorney Act 1985).

Summary
Normally, an agency will be established by consent of both parties. The parties can create
the agency by a written agreement (for example, power of attorney), but it is also possible
to imply the existence of the agency from the spoken words or the conduct of the parties.

Activity 2.5
Jake tells Anne that he owns a painting by Picasso, which he wishes to sell. Anne knows that
Pugwash, who is a wealthy collector, has always admired this painting. Pugwash is away
on business and cannot be contacted, but some time ago he expressed to Anne the wish to
own the painting and willingness to pay up to £1 million. Anne tells Jake that she is acting
for Pugwash and can offer £1 million. Jake accepts. Anne writes to Pugwash telling him of
the deal. Pugwash receives the letter, but does not reply. In fact, Pugwash no longer wants
the picture. Is Pugwash liable to pay for the painting?
page 26 University of London External Programme

2.5 Actual authority of the agent

Essential reading
¢ Sealy and Hooley, Chapter 4: ‘Creation of agency and the authority of the agent’
pp.112–18.

In 2.1.1 above, we discussed ‘authority’ when trying to understand and to define the nature
of agency. Here the word ‘authority’ is used in a different sense to mean the ability of the
agent to bind the principal.

We have seen already that the authority that an agent has to bind the principal is entan- Using your notebook or
gled with the creation of the agency. If the principal and agent agree to the creation of the ring binder You may like to
agency that agreement will embody the authority of the agent. In agency by estoppel, the note down the two different
representation of the principal establishes the authority of the agent to bind the principal meanings of ‘authority’.
and defines the scope of that authority (apparent or ostensible authority).

The principal is bound only by those acts of the agent that are within the scope of that
agent’s authority. In Jacobs v Morris [1902] 1 Ch 816, an agent had authority to make, draw,
sign, accept or indorse bills of exchange and sign cheques, but he represented to a third
party, who took him at his word, that he also had authority to borrow. It was held that the
principal was not liable. The rule that the principal will only be bound by those actions
within the agent’s authority raises the question of what is meant by ‘authority’. This will be
discussed in the next sections.

2.5.1 Definition of actual authority


The scope of an agent’s actual authority is important. Generally, it is only if an agent acts
within actual authority that they are able to claim an indemnity from the principal for any
expenses incurred or remuneration under the agency contract with the principal. Also, an
agent who acts outside their actual authority may be liable to the third party for breach of
the implied warranty of authority (see 3.1.6).

The actual authority of an agent is determined by the agreement between the principal
and the agent. It is, therefore, a matter of contract construction and consists of:
 express actual authority: the authority expressly given to the agent by the principal
 implied actual authority: the authority that can be implied into the agreement between
the agent and principal.

(See Diplock LJ in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB
480; Sealy and Hooley, pp.115, 118–21.)

2.5.2 Express actual authority


Express actual authority is the authority which the principal expressly gives to the agent:
for example, where the agent is instructed to sell a particular property for the principal. In
determining the express authority of an agent, the normal rules for construing contracts
apply. (For a recent discussion of express authority: SMC Electronics Ltd v Akhter Computers
Ltd [2001] 1 BCLC 433.)

Activity 2.6
Where the scope of the agent’s actual authority is unclear, what should the agent do?

2.5.3 Implied (or incidental) actual authority


In addition to express actual authority, the agent may have implied actual authority. It is
important to recognise that implied authority cannot contradict express actual authority.
Implied actual authority is a way of filling in the gaps in the agency agreement. It is not a
means of altering that agreement. However, some agents (e.g. those operating in the finan-
cial markets, such as stockbrokers and insurance brokers) are subject to terms imposed by
statute or the rules of a particular market and those terms may override the express terms
of the agreement.
Commercial law 2 Agency 1 page 27

The agent will have implied actual authority to do those things that are necessarily
incidental to the execution of the express actual authority. The question is, do the powers
expressly given by the principal to the agent enable the agent to carry out the specified
task, or can that task not be undertaken without implying the authority to do things in
addition to those that are expressly authorised? Such additional authority will not be easily
implied. Authorising an agent to enter into a contract to buy land carries implied actual au-
thority to sign the documents required under statute because otherwise the agent would
not be able to perform the task agreed (Rosenbaum v Belson [1900] 2 Ch 267). On the other
hand, in Bryant, Powis, and Bryant Ltd v Law Banque du Peuple [1891–94] All ER 1253, an agent,
who had express actual authority by power of attorney to buy or sell goods, charter vessels
and employ agents and servants, did not have implied actual authority to borrow money
because this was not necessary to the tasks expressly authorised.

The agent may have authority to undertake that which is implied from the particular cir-
cumstances of the relationship between this principal and this agent, such as where there
has been a previous course of dealings.

The agent may have the usual authority of someone in this agent’s position, trade, business
or profession. The test is, what authority would the reasonable person in the agent’s posi-
tion believe they possessed? It will be implied that someone appointed as managing direc-
tor of a company has the usual authority that managing directors possess (Hely-Hutchinson
v Brayhead Ltd [1968] 1 QB 549; Sealy and Hooley, pp.115–17). However, an estate agent will
not have authority to sell property since this is not what such agents usually have authority
to do, but they will have authority to make representations because this is what estate
agents usually have authority to do.

The agent will have such authority as is customarily enjoyed by someone dealing in the
particular market. To imply a custom, it must be uniform, certain, notorious (that is, gener-
ally known), recognised as binding and reasonable (Robinson v Mollett [1875] LR 7 HL 802). A
broker employed to transact business in a market is authorized to deal according to the us-
age of that market (Nickalls v Merry [1875] LR 7 HL 530). However, customary authority will
not be recognised where it contradicts either the express agreement between the agent
and the principal or the normal duties owed by the agent to the principal. In one case, even
though it was a custom of the London tallow market that brokers, who were employed
to buy goods, could sell their own goods to the principal, the court held that this was not
part of the agent’s customary authority because evidence ‘cannot be admitted to convert a
broker employed to buy for his employer, into a principal to sell to him’ (Robinson v Mollett
[1875] LR 7 HL 802, Mellor J).

Summary
The actual authority of an agent is determined by the express agreement between the
parties (express actual authority) and any appropriate implications from the surrounding
circumstances (implied actual authority) that do not contradict the express actual author-
ity, unless imposed by statute.
page 28 University of London External Programme

2.6 Agency by estoppel and apparent authority

2.6.1 Definitions
As Diplock LJ pointed out, ‘In ordinary business dealings the contractor at the time of enter-
ing into the contract can in the nature of things hardly ever rely on the “actual” authority of
the agent.’ (Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480; Sealy
and Hooley, pp.118–21.) This is simply because the third party will not have access to the
terms on which the agent has been appointed. The third party, therefore, relies on a per-
ception as to the authority of the agent, that is, the agent’s apparent authority. Apparent
(or ostensible) authority is ‘the authority of an agent as it appears to others.’ (Lord Denning
MR in Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549, Sealy and Hooley, pp.115–17.)

Apparent authority arises where: Reading cases For advice


 the principal (or someone acting with the actual authority of the principal) represents to on reading cases and making
the third party that the agent is authorised to undertake the transaction which the agent notes on them, see your
and the third party subsequently conclude Learning skills for law guide.

 the agent did not purport to make the agreement as principal


 the third party was induced to enter into the transaction in reliance upon that
representation
 the third party altered their position to their detriment.

It is unclear whether this last is an additional requirement (Rama Corpn Ltd v Proved Tin
and General Investment Ltd [1951] 2 QB 147, Sealy and Hooley, p.118), or whether it merely
reiterates the requirement that the third party enter the transaction in reliance upon the
representation (The Tatra [1990] 2 Lloyd’s Rep 51 at 59, Sealy and Hooley, p.127. But see Spiro
v Lintern [1973] 1 WLR 1002, discussed below).

Where there has been such a representation, the principal will be prevented from denying
the existence of the agency (agency by estoppel) and will be bound in so far as the agent’s
act came within the authority that the agent was represented by the principal as possess-
ing (the agent’s apparent authority). The result is that the principal may be bound to a
third party even though:
 the agent does not have actual authority, or
 the agency agreement has ceased, or
 the agent acts beyond the actual authority granted by the principal.

In other words, the agency here is based on estoppel and not the consent of the principal
(Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480; Sealy and
Hooley, pp.118–21). Nevertheless, the third party can enforce the contract against the princi-
pal even though the agent did not have actual authority.

Where someone has been represented by the principal as having authority to act as agent,
that person will possesses the usual authority of such agents in spite of any restrictions
imposed by the principal on the agent (Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549, Lord
Denning MR; Sealy and Hooley, pp.115–17). In Freeman & Lockyer v Buckhurst Park Properties
(Mangal) Ltd [1964] 2 QB 480 (Sealy and Hooley, pp.118–21), K and H formed a company to
buy and then sell some land. K, H and a nominee of each were appointed directors. The
articles of association contained a power to appoint a managing director but none was ap-
pointed. K instructed F, a firm of architects, to do work in connection with the land, which
they did. On an action by F for their fees, it was held that since K was not the managing di-
rector he had no actual authority to employ F, but he did have apparent authority because,
with the knowledge of the board of directors, he had acted throughout the transaction as
if he were managing director and his action in engaging the plaintiffs was within the usual
authority of a managing director.
Commercial law 2 Agency 1 page 29

2.6.2 Representation by the principal


In order to be bound by the apparent authority of the agent, the principal must have
represented to the third party that the agent had the necessary authority to conclude the
transaction on behalf of the principal and the third party must have a reasonable belief that
the agent had such authority. In general, if the representation as to authority comes from
the person purporting to be an agent, the principal will not be bound to the third party,
although the bogus agent may be liable to the third party for breach of the warranty of
authority (see 3.1.6).

The representation may be by words or by actions, including a course of dealings. Usually,


silence or inaction will not amount to a representation, unless there is a duty to say some-
thing, which will be rare. In Spiro v Lintern [1973] 1 WLR 1002, L said nothing after his wife
entered into a contract for the sale of his house. The buyers later incurred various expenses
in contemplation of completion. L was estopped by his silence from denying the authority
of his wife to sell.

This unusual case illustrates another point. To establish apparent authority the third party
must have relied on the representation of the principal. Normally, this will be evidenced
by the third party entering the contract. This was not the case in Spiro v Lintern where the
representation and reliance occurred after the contract. In this situation it would seem that
the third party would be required to have acted to their detriment.

2.6.3 Representation by the agent


Another difficulty is that, because a company must act through agents, representations
as to the authority of those agents must come from one of the company’s agents. If the
representation comes from the same agent as later makes the transaction, then, generally,
the principal is not bound. But there is nothing to prevent the principal from endowing
that agent with authority (actual or apparent) to make representations about the agent’s
own authority to act in the transaction for the principal (Freeman & Lockyer v Buckhurst Park
Properties (Mangal) Ltd [1964] 2 QB 480; Sealy and Hooley, pp.118–21; Egyptian International
Foreign Trade Co v Soplex Wholesale Supplies Ltd and PS Refson & Co Ltd [1985] 2 Lloyd’s Rep 36;
Sealy and Hooley, pp.123–24).

This issue arose in First Energy Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194.
FE wished to arrange credit facilities through the bank and dealt with J, who was senior
manager of the bank’s Manchester branch. FE knew that J was not authorised to grant
the credit facilities and that these could only be agreed to by head office. Incorrectly and
without authority, J wrote to FE saying that head office had approved the credit facility. The
Court of Appeal decided that as a manager J had apparent authority to write to FE informing
them of the decision made by head office, and, therefore, the bank was bound by J’s letter
indicating that head office had agreed to give the facilities.

This case distinguished Armagas Ltd v Mundogas SA [1986] AC 717, where the House of Lords
dismissed the argument that P had represented to T that A was authorised to make a
representation on behalf of P to the effect that A had actual authority to undertake the
transaction with T.

The third party cannot claim that the agent has apparent authority where the third party
knows, or ought to know, that the agent does not possess actual authority. In such a situ-
ation the third party has not relied on the representation by the principal. In Overbrooke
Estates Ltd v Glencombe Properties Ltd [1974] 1 WLR 1335, a term in an auction sale catalogue
said the auctioneer did not have the seller’s authority to make representations about
the property being sold. Shortly before the sale the auctioneer told a prospective buyer
that the local authority had no plans with respect to the property. The buyer bought the
property, and then discovered it was in an area that might be included in a slum clearance
programme. It was held that, even if the auctioneer had apparent authority to make such
representations (and the auctioneer might only have apparent authority to accept bids),
the buyer knew (or ought to have known) of the term and was, therefore, bound by it. The
Misrepresentation Act 1967, s.3, which limits the ability of parties to exclude or restrict
liability for misrepresentation, does not seem to restrict this ability of the principal to
exclude or limit the apparent authority of the agent to make representations as to the
subject-matter of the contract.
page 30 University of London External Programme

Summary
Where the principal (or an agent with actual authority) represents to the third party that
the agent is authorised to undertake the transaction, and the third party is induced to
enter into the transaction in reliance upon that representation, the principal will be bound.
The principal will not be bound where the representation on which the third party relied
came from the agent undertaking the transaction, unless it was reasonable in the circum-
stances for the third party to believe that this agent had authority to make representations
about their own authority on behalf of the principal.

Activity 2.7
How can the decisions in First Energy Ltd v Hungarian International Bank Ltd and Armagas Ltd
v Mundogas SA be distinguished?
Commercial law 2 Agency 1 page 31

2.7 Usual authority: Watteau v Fenwick

Essential reading
¢ Sealy and Hooley, Chapter 4: ‘Creation of agency and the authority of the agent’
pp.128–32.

The troublesome decision in Watteau v Fenwick [1893] 1 QB 346 must be discussed because
of the debate it has provoked and because it does not fit in with other cases on the scope of
the agent’s authority. F owned a hotel appointing H as manager, but H was expressly forbid-
den from buying any goods other than mineral water and bottles of beer. H had previously
owned the hotel and his name remained above the door as the licensee. H ordered cigars
from W, who believed he was the owner of the hotel. F was held liable for the price of the
cigars. (One might wonder whether F could have sued W if W had failed to deliver the cigars
or had delivered cigars that were defective.)

It might be argued that W did not think H was an agent; he believed H to be the principal,
so if W had not been allowed to enforce the contract against F, W would have lost nothing
because he was unaware of F’s existence. Against this it might be said that F’s action in
allowing his agent, H, to represent himself as the principal placed W in a weakened posi-
tion. W had every reason to suppose that H was the principal and this misconception was
facilitated by F.

The case does not fall within the normal understanding of the doctrine of apparent author-
ity because F made no representation to W that H was acting as F’s agent. Also, the decision
does not fit in with those cases where someone is appointed to a particular position and
the principal is bound by actions that fall within the usual authority of an agent in that posi-
tion (Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549; Sealy and Hooley, pp.115–17).

As will be seen, the doctrine of undisclosed principal will not assist because for that to
operate the agent must enter the transaction with the actual authority of the principal (see
3.2). Similarly, the principal cannot ratify the transaction because this would have required
H to have told W that he was an agent and this he did not do (see 2.8).

It has been suggested that this case is an example of estoppel by conduct, not estoppel by
agency. F had put H into a position that made it appear, not that H was an agent, but that
the owners of the hotel and H were not distinct parties. H might be seen as a principal with
respect to W and an agent with respect to F, and F was estopped from defending an action
by W because of the conduct. This would mean that the case is not concerned with agency
at all.

The case has been expressly overruled by one Canadian court (Sign-O-Lite Plastics Ltd v
Metropolitan Life Insurance Co [1990] 73DLR (4th) 541). In the English courts it has been
regarded as ‘puzzling’ (Rhodian River Shipping Co SA v Halla Maritime Corp [1984] 1 Lloyd’s
Rep 373, Bingham J), but not overruled. Yet, it is difficult to find cases in which it has been
applied and in similar circumstances the courts have tended to hold the contract to be
between the ‘agent’ personally and the third party (Kinahan & Co v Parry [1911] 1 KB 459).

Summary
The decision in Watteau v Fenwick [1893] 1 QB 346 is difficult to explain or defend. It does Go to your study pack
not fit into any of the well-defined categories of agency and the general disinclination of and read ‘Agents, business
the English courts to apply the decision or even to refer to it might suggest that it is to be owners and estoppel’ by
treated either as an anomaly or as wrong. Andrew Tettenborn.
page 32 University of London External Programme

Activity 2.8 The need for a critical approach


Is the decision in Watteau v Fenwick wrong? Activity 2.8 asks whether you think the court’s decisions was
wrong. In English law, judges’ decisions are always open to critical
assessment. To become an LLB graduate, you need to demonstrate
critical qualities.
Criticism is not about pointing out minor errors in a person’s
position – such as spelling mistake and inserting the wrong year
for a case. It is about demonstrating a unique personal position
on something. It is also about demonstrating your ability to use
your knowledge and understanding of law to make meaningfully
comments. As Anne Thompson says in her book Critical reasoning: a
practical introduction (London: Routledge, 1996, ISBN 0415132045):
‘Critical reasoning is centrally concerned with giving reasons for
one’s beliefs and actions, analysing and evaluating one’s own
and other people’s reasoning, devising and constructing better
reasoning. Common to these activities are certain distinct skills,
for example, recognising reasons and conclusions, recognising
unstated assumptions, drawing conclusions, appraising evi-
dence and evaluating statements, judging whether conclusions
are warranted; and underlying all of these skills is the ability to
use language with clarity and discrimination.’
Your ability to deploy critical reasoning is vitally important for
your learning Portfolio. Make sure you note what you have done
– and your reflections on what you have done – in your Portfolio or
learning journal,
See also the section in the critical approach in your Learning skills
for law guide.
Commercial law 2 Agency 1 page 33

2.8 Ratification

Essential reading
¢ Sealy and Hooley, Chapter 4: ‘Creation of agency and the authority of the agent’
pp.138–46.

2.8.1 Requirements for ratification


The principal may be bound where they ratify a transaction entered into by someone who
purported to act as their agent. This is not apparent authority because the agent cannot
represent their own authority. If the third party decides to go ahead with the transaction,
they take a risk that the purported agent has authority or that the principal will ratify the
transaction, because unless there is actual authority or ratification the principal will not be
liable on the contract made by the purported agent.

There are various reasons why a principal might ratify such a transaction: the principal may
be happy with the deal, or may be unhappy with the transaction but decide to ratify it to
maintain commercial reputation or to preserve the reputation of the agent. However, in
determining if there has been ratification, the motive of the principal is irrelevant.

There are a number of requirements for valid ratification.

At the time of the relevant act, the agent must have intended to act on behalf of the princi-
pal. Such intention is gathered from the terms of any contract and surrounding circum-
stances (National Oilwell (UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582).

The purported agency must be revealed to the third party at the time of the transaction.
There can be no ratification where A makes the contract as principal (Keighley, Maxsted & Co
v Durant [1901] AC 240; Sealy and Hooley, pp.139–40). The identity of the principal need not
be disclosed, ‘but there must be such a description of him as shall amount to a reasonable
designation of the person intended to be bound by the contract.’ (Watson v Swann [1862] 11
CBNS 756, Willes J; Sealy and Hooley, p.141). It will be sufficient if the agent stated that they
were acting for a class of persons to which the principal belonged (National Oilwell (UK)
Ltd v Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582. Contrast that decision with Southern Water
Authority v Carey [1985] 2 All ER 1077). The justification for this requirement of identification
is, according to Lord Macnaghten in Keighley, Maxsted & Co v Durant [1901] AC 240 (Sealy
and Hooley, pp.139–40), that ‘civil obligations are not to be created by, or founded upon,
undisclosed intentions’ (but see section 3.2).

The third party must believe that the person with whom they are dealing has authority
to act for another. Where the agent states that the ‘contract’ is subject to ratification, this
does not fall within the doctrine of ratification because it amounts to saying there will be
no contract until the principal has given approval.

The principal must be competent to enter the contract at the time it was made. For
instance, did the company have authority under its constitution to do this act?

The principal must be competent at the time of ratification: for example, if P is an enemy
alien they cannot ratify, even if at the time of the contract P was not an enemy alien. Since
ratification relates back to the moment of the original act (see 2.8.2), there is an argument
for looking solely at whether the principal was competent at that time, but, of course, a
principal who lacks competence (such as a company that has been wound up or a person
who has lost mental capacity) would not be able to signify ratification.

Ratification must occur within a reasonable time after the action of the purported agent
(The Managers of the Metropolitan Asylums Board v Kingham [1890] 6 TLR 217). What consti-
tutes a reasonable time will depend on the circumstances, but ratification may still occur
even after the contract has commenced: e.g. an insurance policy may be ratified even after
loss has occurred (Williams v North China Insurance Co [1876] 1 CPD 757). Ratification may be
implied from the failure to act within a reasonable period of time, although it is likely to be
difficult to show that inaction indicated a clear intention to ratify.
page 34 University of London External Programme

No formalities need be observed for a valid ratification. The principal will only be held to
have ratified if they did so with full knowledge of the facts, although there will be ratifica-
tion if it is clear that the principal is willing to adopt the act whatever the circumstances
(Marsh v Joseph [1897] 1 Ch 213). Ratification can be express or implied from conduct as
long as the intention to ratify is clear and unequivocal: e.g. where the principal sues the
third party on the contract. An authorised agent can ratify (Suncorp Insurance and Finance
v Milano Assicurazioni SpA [1993] 2 Lloyd’s Rep 225) and there seems no reason why a pur-
ported ratification by an agent, who had no authority to ratify, cannot itself be ratified.

Activity 2.9
Why was the attempt to ratify ineffective in Boston Deep Sea Fishing and Ice Co Ltd v Farnham
(Inspector of Taxes) [1957] 1 WLR 1051?

2.8.2 Effect of ratification


Ratification puts the parties into the position they would have been in had the act been
authorised from the outset: ‘ratification when it exists is equivalent to a previous authority’
(Lord Lindley in Keighley, Maxsted & Co v Durant [1901] AC 240; Sealy and Hooley, pp.139–40).

The principal can sue or be sued by the third party.

The agent will not be liable to the principal for excess of authority nor to the third party for
breach of warranty of authority.

The agent may be entitled to be indemnified by the principal for any liability incurred. In
Suncorp Insurance and Finance v Milano Assicurazioni SpA [1993] 2 Lloyd’s Rep 225, Waller J
suggested that, while ratification normally relieves the agent from personal liability to the
principal, the principal might be able to ratify without waiver of the breach of duty by the
agent.

Since ratification puts the parties into the same position as if the act had been authorised
from the outset, then logically it relates back to the moment of the original contract. The
unusual consequence of this was illustrated by Bolton Partners v Lambert (1889) 41 Ch D
295 (Sealy and Hooley, pp.142–4). S accepted an offer from L on behalf of B but without B’s
authority. L later withdrew the offer and only then did B ratify. It was held that the contract
was binding on L. No real reasoning was provided for this other than that ratification meant
‘the agent is put in the same position as if he had had authority to do the act at the time the
act was done by him.’ (Cotton LJ). This rule allows the principal to choose whether or not
to ratify, but such a choice is not available to the third party. On the other hand, the third
party believed themselves to be bound by the contract and, if the principal fails to ratify, an
action for breach of warranty of authority will lie against the agent.

There are limits to the rule in Bolton Partners v Lambert. In addition, to the requirements
already discussed (2.8.1), ratification is not likely to be effective:
 if the interests of someone other than a party to the original contract are unfairly affected,
or if the unauthorised act was void as a nullity. In Brown v Bird [1850] 19 LJ Ex 154, without
authority the seller’s agent stopped goods in transit (see 6.2.5). Before the seller ratified
this action the goods had reached the trustee in bankruptcy of the buyer. The ratification
was held to be ineffective. On the other hand, in Presentaciones Musicales SA v Secunda [1994]
Ch 271), without authority solicitors issued a writ; this action was later ratified, but that
ratification came outside the statutory time limits for issuing the writ. It was held that the
ratification was effective. The majority in the Court of Appeal did not regard the solici-
tors’ action as a nullity and contrasted this with the situation in Brown. Roch LJ, however,
thought that the cases showed ratification could not occur where a third party would be
deprived of their property rights (see also, Brook v Hook [1871] LR 6 Exch 89; Owners of the
ship ‘Borvigilant’ v Owners of the ship ‘Romina G’ [2003] EWCA Civ 935; Sealy and Hooley,
pp.145–6), or
 if the agent and the third party rescind the agreement before ratification (Walter v James
[1871] LR 6 Exch 124).

An attempt to ratify only part of a contract and repudiate the rest will operate as ratifica-
tion of the whole (Suncorp Insurance and Finance v Milano Assicurazioni SpA [1993] 2 Lloyd’s
Rep 225. But see, Marsh v Joseph [1897] 1 Ch 213).
Commercial law 2 Agency 1 page 35

Summary Go to your study pack and


read ‘The principle in Bird
Where someone purports to act as agent but does so without authority, the person on
v Brown revisited’ by Tan
whose behalf they purport to act is not bound. The unauthorised act may, however, be
Cheng-Han.
subsequently ratified by the principal. In general, ratification puts the principal, agent and
third party in the same position as if the act had been undertaken with authority.

Activity 2.10
J forges H’s signature on a promissory note. The forgery is discovered. H wants to protect J
from prosecution, can H ratify the promissory note?
Read Brook v Hook (1871) LR 6 Exch 89. (A promissory note is an unconditional promise to
pay made by one person to another and signed by the maker: Sealy and Hooley, pp.770–73.)
page 36 University of London External Programme

2.9 Agency of necessity

Essential reading
¢ Sealy and Hooley, Chapter 4: ‘Creation of agency and the authority of the agent’
pp.138–46.

In a restricted range of emergencies, an agency may arise as a matter of law so the agent
is authorised to bind the principal to the extent required by that emergency without prior
authority from, or ratification by, the principal. Agency of necessity can bind a principal to
a third party, or allow an agent to claim reimbursement for expenses incurred, or provide a
defence to a claim (e.g. in the tort of conversion). The courts are reluctant to find an agency
of necessity exists because it imposes obligations on someone who has not given consent
(China-Pacific Sa v Food Corporation of India, ‘The Winson’ [1982] AC 939; Sealy and Hooley,
pp.133–6. But see also The Choko Star [1990] 1 Lloyd’s Rep 516; Reynolds [1992] JBL 505). This
means that there are very few situations in which an agency of necessity will arise.

The agency of necessity may arise where certain conditions are fulfilled:
 P’s property must be in A’s possession as the result of an existing legal relationship, such as
a contract of bailment. This excludes claims by strangers, such as someone who finds the
goods
 A is unable to obtain instructions from the owner
 an emergency threatens the property; it is not sufficient for A to show that P’s property is
causing A hardship or inconvenience (Sachs v Miklos [1948] 2 KB 23)
 A takes action in good faith and that action is commercially reasonable, proportionate and
in the interests of P (Prager v Blatspiel, Stamp and Heacock Ltd [1924] 1 KB 566).

Since it is a characteristic of an agent that they can affect the legal relations of the principal,
it might be argued that those ‘agents’ who only have the right to claim expenses or to
defend an action are not true agents of necessity and that the only true agency of necessity
is the master of a ship who acts to save the ship or its cargo in an emergency. It has been
said that this agency of necessity derives from the peculiar position of the master of a ship
and ‘affords no analogy to the case of an ordinary agent’ (Hawtayne v Bourne [1841] 7 M & W
595 at 599, Parke B).

Certainly, the area is confused because many situations, which are treated as agency
of necessity, seem to be examples of the implied actual authority of the agent, or of an
implied term of a contract, or of the application of the law of restitution (Sealy and Hooley,
pp.136–38). For example, the requirement that P’s property is in A’s possession as the result
of an existing legal relationship may mean that the obligation to reimburse expenses
arises from an implied term in that contract rather than from the agency of necessity. In
The Great Northern Railway Company v Swaffield (1874) LR 9 Exch 132, a carrier conveyed a
horse to its destination and, when the owner failed to collect it, incurred expenses for feed,
stabling, etc. The carrier successfully defended an action for conversion and recovered the
expenses incurred. Some of the judges did talk of this as a case of expenses being necessar-
ily incurred, but the test they applied was the same as would be used to imply a term. The
obligation to pay the expenses is better explained as a term of the contract of carriage or
of the contract of bailment, both of which contracts require the carrier to take reasonable
care of the horse.

Useful further reading


¢ Brown, I. ‘Authority and necessity in the law of agency’ (1992) 55 MLR 414.

Activity 2.11
M owned a house and rented out rooms. In 1940 she agreed to store in her house furniture
belonging to her friend, S. M did not charge S and agreed to keep it until such time as S
wished to collect it. M and S stayed in contact for another year, but after that M heard
nothing from S, who appeared to have moved. In 1943 the house suffered damage, and, as a
result, the room in which the furniture was stored was required for letting. M tried to trace
S, but without success. In 1944, M sold the furniture. Two years later S sued M in the tort of
conversion. Could M argue that the circumstances gave rise to an agency of necessity?
Commercial law 2 Agency 1 page 37

2.10 Capacity

2.10.1 Capacity of the principal


The general rule is that whatever a principal is competent to do personally may be delegat-
ed to an agent. The other side of this rule is that a principal cannot authorise an agent to do
an act which the principal is not competent to undertake: e.g. an alien enemy (the national
of a country with which this country is at war) cannot authorise an agent to undertake an
act (Boston Deep Sea Fishing and Ice Co Ltd v Farnham (Inspector of Taxes) [1957] 1 WLR 1051).

Where the principal’s ability to enter into a contract is qualified by age, the agent’s capacity
is also qualified. The principal on acquiring the necessary capacity can avoid a contract
made by the agent. The agent’s capacity is terminated by the death of the principal or,
where the principal is a company, the liquidation or winding-up of the company.

2.10.2 Capacity of the agent


Since the agent is acting for the principal, the capacity of the agent to enter the particular
transaction on the agent’s own behalf is, generally, irrelevant: e.g. a minor (someone below
the age of legal capacity), who is a partner of a firm, can bind the partnership even if, had
the minor entered into the contract on his or her own behalf, it would not have been bind-
ing. Similarly, the fact that the agent would have the capacity to undertake a transaction on
their own behalf will not supply the deficiency of the principal: an enemy alien wishing to
sell goods in England does not remedy their own contractual incapacity by employing an
English agent. Finally, it is important to note that some agents, such as solicitors and insur-
ance brokers, are required by statute to have particular qualifications before they can act
for a principal in respect of certain transactions.

Summary
Anyone can appoint an agent, but the agent’s competence to engage in transactions is
restricted by the competence of the principal. The reverse is, generally, not true: an agent
can undertake transactions on behalf of the principal that would be outside the agent’s
personal capacity.

Reminder of learning outcomes


By this stage you should be able to:
 define the term ‘agent’
 explain how an agency is created
 explain and discuss the scope of the agent’s authority.

Sample examination question


‘Actual authority and apparent authority are quite independent of one another. Generally
they co-exist and coincide, but either may exist without the other and their respective
scopes may be different.’ Discuss.

Advice on answering the question


This quote is taken from the judgment of Diplock LJ in Freeman & Lockyer v Buckhurst Park
Properties (Mangal) Ltd [1964] 2 QB 480 (Sealy and Hooley, pp.118–21). A good answer would
outline what is meant by actual authority and apparent authority, and then highlight
the distinction between them. Actual authority is based on the consensual agreement
between the principal and the agent, while apparent authority is about the agent’s ability
to bind the principal to third parties, even though the agent lacks actual authority, and is
concerned with the appearance of authority. While it is common for the apparent author-
ity of an agent to coincide with their actual authority, the third party’s knowledge of the
agent’s authority will almost always depend upon a representation by the principal. The
relationship between the agent and principal will be governed by actual authority (see
Sealy and Hooley, p.114) and be governed by apparent authority, which may or may not
coincide with actual authority.
page 38 University of London External Programme

Reflect and review


Look through the points listed below. Are you ready to move on to the next Reflection
chapter? We live in an age of reflection
Ready to move on = I am satisfied that I have sufficient understanding of the which simply means thinking
principles outlined in this chapter to enable me to go on to the next chapter. about, or contemplating, what
we are doing in order to help
Need to revise first = There are one or two areas I am unsure about and need to ourselves do it better.
revise before I go on to the next chapter.
For more guidance on this, see
Need to study again = I found many or all of the principles outlined in this the section on reflection in your
chapter very difficult and need to go over them again before I move on. Learning skills for Law guide.

Tick a box for each topic.


Ready to Need to Need to
move on revise first study again

I can define the term ‘agent’. ¢ ¢ ¢

I can explain how an agency is created. ¢ ¢ ¢

I can discuss and explain the scope of the agent’s


authority. ¢ ¢ ¢

If you ticked ‘need to revise first’, which sections of the chapter are you going to revise?

Must Revision
revise done

2.1 What is an agency? ¢ ¢

2.2 Types of agent ¢ ¢

2.3 Creation of agency ¢ ¢

2.4 Consent ¢ ¢

2.5 Actual authority of the agent ¢ ¢

2.6 Agency by estoppel and apparent authority ¢ ¢

2.7 Usual authority: Watteau v Fenwick ¢ ¢

2.8 Ratification ¢ ¢

2.9 Agency of necessity ¢ ¢

2.10 Capacity ¢ ¢