What is the relation of agent to the principle? Discuss in terms of duties, responsibilities and power as provided in the law of agency.

Introduction

There are three parties to a business transaction. One being the owner of the business organization who is referred to as a ‘Principle’ in legal term; another one is the employee or employees in general who are working for the Principle and who are called in legal term ‘Agent’. There is also a third party involved without whom a business transaction is incomplete and in this case it is none other than the customer or the client.

Whenever such transaction comes into effect, the ‘Law of Agency’ comes into limelight. In simplest term, the law of agency includes the above mentioned three parties related in a business transaction. The principle authorizes the agents to perform an action or activity with a third party and in doing so creates liability for the principle. In other words, despite the fact that the principle has not dealt directly with the client, the principle’s agent has done so. In doing so, the agent has created a relationship of the third party with the principle. If the agent, through this activity, has committed some type of wrong-doing, the principle would be directly responsible.

One of most essential parts of the commercial law is the law of agency. The main reason behind this is that it is impossible for the companies to conduct business without agents. In brief, the function that the law of agency has is that it let agents to bring commercial agents into contractual relations.[1]

Relationships

As discussed earlier, there are three parties to a business transaction and hence there are three relationships attached. This relationship can be further illustrated by defining three parties as P (Principle), A (Agent) and T (Third party). P instructs A to act in the purchase of goods from T in the sale of those goods; the contract of sale that is made by A is enforceable between P and T.[2] Thus the relationships are: between P and A; between A and T and also between P and T. These relationships can be much more complex because T may use an agent and in other hands, P and A may be permitted to use sub-agents.[3]

Duties and Responsibilities

The role of the agent and the principle can be described by the three main theories: Power-liability theory, Consent theory and Qualified consent theory. Each of these theories is described in brief along with explanations below:

1)      Power-liability theory: When the agent gets the authority to alter the principle’s legal relations with a third party, it is then when an agency relationship exists. The agent does this in a manner so that the agent himself is excluded from being sued and sues the third party. It is only the principal who can be sued and also sue the third party. Therefore, in this case, the external relationship is emphasized and the internal relationship between the principal and the agent is ignored.[4]

2)      Consent theory: In terms of the fiduciary duty that an agent owes a principal, agency exists only when someone is undertaking more than just ministerial functions. Here, by the term ‘Ministerial functions’ it can be meant that a situation where the agent just follows the instructions of the principal as told. The agent has no discretion or no choice over what course of action to take on the principle’s behalf. If the relationship between the principle and the agent needs to exist, consent of both the principle and the agent must be present.[5]

3)      Qualified consent theory: This particular theory is basically the consent theory with the protection of ‘misplaced reliance’ to account for actual and apparent authority.[6]

For approaching to further discussion, mentioning the difference in roles between an agent and a trustee, a seller or a buyer, a distributor and a franchisee is important which is given below:

1)      Difference in roles between an agent and a trustee: The agent and the trustee may possess mixed roles. A trustee exercises powers on behalf of the beneficiaries. However, it does not bring the beneficiaries directly into legal relations with third parties. The trustee possesses the legal interest in the trust property and enters into the transactions. An agent may hold the property of the principal or the third party on trust, and a trustee may also be an agent.[7]

2)      Difference in roles between an agent and a seller: Considering a situation where the agent, also called A, sells to the third party, hereinafter referred to as T on behalf of the principle, also called P. This might be the other way round. In another case, if A buys from P and resells to T, two different sale contracts are formed: (i) one being the P selling to A; and (ii) another one being A selling to T. However, it was not the intention of the agent and the principle that the agent acts as the buyer. Though not a decisive judgement, it might be concluded that the agent might be under an obligation to account to P for any money received. There might also be such that the agent was paid a fee or A retained the profit from the sale to the third party.

3)      Difference in roles between distributorship and franchise: Many businesses have a distributorship or a franchise agreement with a supplier. They do not sell another supplier’s goods, but this does not create an agency relationship. Here, the distributor or franchisee is a principle. The consumer, on the other hand, buys goods from one of these types of business. Thus entering into a contract with the immediate seller, not with the original supplier. In order to better distinguish between the role someone plays as an agent or a principle, it is imperative to consider particular circumstances.

In order to understand the implicit roles of agents, it is imperative to understand first the types of agents which exist. There are nine types of agent which are discussed below in brief:

1)      General agent: A general agent is someone who acts for a principal. For example, a solicitor authorized to undertake legal works for his client may be called a general agent.

2)      Special agent: A special agent is someone who possesses authority only for a specific purpose which is beyond the ordinary course of the business. For example, if a land owner appoints an agent to sell his house.

3)      Factor agent: A factor is also an agent. He is entrusted with the possession of goods. He can sell those in his own name as a principle or in the principle’s own name.

4)      Mercantile agent: This type of agent has the authority to sell or consign goods for sale, or buy goods, raise money on the security of goods. The mercantile agent is in possession of goods with the consent of the owner.

5)      Broker: A broker is someone who negotiates contracts between a buyer and a seller but does not hold possession of the goods.

6)      Commission agent: This type of agent engages in buying or selling goods on behalf of the owner. However, he does not enter into building a contractual relationship between the owner and the third party. He acts as principle when he enters into the contract with the third party. It is also worth mentioning that this type of agent owes to the owner all the duties of an agent to a principal. When a sale occurs, this type of agent is liable to the buyer for breach of the implied terms as to quality. In other way, when a purchase occurs, the agent is liable to the seller for the price. The agent is then not liable to the principle for the quality of the goods.

7)      Confirming houses: Confirming houses operate on behalf of the overseas buyers. They operate according to the buyer’s wants.  This type of agency may engage in simple buying and selling without the suggestion of an agency. It may also act as an agent for the buyer.

8)      Forwarding agent: The role of a forwarding agent is such that it carries out the responsibility of transmitting the goods on behalf of the principle. This type of agent is liable for the freight charges; later on, which is recoverable from the principle.

9)      Del credere agent: This type of agent indemnifies the principal against loss incurred by the third party’s breach of contract in respect of payment. The role of this type of agent is important when the exporter is not aware of the financial status of the foreign buyer.

Power

The actual authority of the agent is the ability to bind the principle. For this to occur, first of all, there must be an agency relationship between the two. From the moment the principle and the agent agree to the creation of the agency, the authority of the agent comes into effect. However, only those acts of the agent make the principle bound which are within the parameters of the agent’s authority. If an agent exercises authority beyond his capacity, he may be liable to the third party for the breach of the implied warranty of authority.

The agreement between the principle and the agent defines the authority that an agent actually has. There are two types of such authority: (i) Express actual authority: The type of authority that has been expressly given by the principle to the agent; and (ii) Implied actual authority: The authority that covers the terms of the agreement between the agent and the principle. An example of the ‘Express actual authority’ is when a principle appoints an agent to sell his property on his behalf. The term ‘Implied actual authority’ is also called ‘Incidental actual authority’ because the agent will have the authority to do things that are incidental to the execution of the ‘Express actual authority’.

The next important authority that needs to be discussed is the ‘Apparent authority’. This is important because the third party is unaware of the terms upon which the agent has been appointed. Therefore, the third party relies on this apparent authority based on perception. There are two types of representations necessary for the apparent authority to come into effect: (i) Representation by the principle; and (ii) Representation by the agent.

The principle must make the third party understand that the agent has the legitimate authority to carry out a business transaction on behalf of the principle. On the other hand, the third party also should have developed a belief that the agent has such authority. The format of representation may vary. It may be through words or by actions and must include a course of dealings. Silence is not a mode of representation.

References

University of London External Programme n.d., Agency 1. Retrieved November 12,

2011, from

http://www.londoninternational.ac.uk/current_students/programme_resources/laws/subject_guides/commercial/commercial_ch2.pdf

E-How n.d., What is Agency Law. Retrieved November 12, 2011, from www.ehow.com/video_4981789_what-agency-law.html