Law of Agency-CIMA


1.the relationship of principal and agent is usually created by mutual consent. The consent (with one exception – see below) need not be formal-nor expressed in a written document It is usually an express agreement even if informal.

For example, P may ask A to take P's shoes to be repaired. P and A thereby expressly agree that A is to be P's agent in making a contract between P and the shoe repairer.

2.If the agent is to make a contract for his principal in the form of a deed, the agent must be formally appointed by a document called a 'Power of Attorney'.

3. Agency may be created by.

(a) consent

–          express

–          implied

–          retrospective (ratification);

(b) operation of law;

(c) estoppel.

Each is considered below.

Implied agency

4.Two persons may by their relationship or their conduct to each other imply an agreement between them that one u the agent of the other. , for example , an employee's duties include making contracts for his employer, say by ordering goods on his account, the employee is, by implied agreement, the agent of the employer for this purpose.

5.when husband and wife live together it is usual for the wife to obtain household necessaries such as food or clothing for herself and any children. In such matters it i, implied that the husband has agreed that his wife is his agent with authority to order goods on credit – tile liability to pay for them rests on him. This implied agency is limited as follows.

(a)It only applies when a husband and wife are living together. Since cohabitation is the legal basis, a man's mistress. or housekeeper may also be his agent in this fashion.

(b) The agency is restricted to pledging the husband's credit for 'necessaries'. The wife is not the husband's agent for purchase of expensive luxuries inappropriate to the lifestyle of the spouses nor for items which, although. perhaps necessary, e.g. a motor car, are not usually under the wife's control as manager of the household.

(c)The husband may rebut the presumption that he has agreed that his wife is to be his agent.

6. The presumption (where it applies) that the wife is the husband's agent may be rebutted:

(a)if the husband warns tradesmen not to supply goods on his account to the wife's order;

(b) if he forbids his wife to pledge his credit in this way; or

(c)if the goods are not necessaries and not needed by the wife (or need not be bought on credit) either because she is well supplied already, or the quantity is excessive, or because she has been provided (by a housekeeping allowance or joint bank account) with the means to pay without pledging the husband's credit.

7.The agency of the wife implied from domestic responsibility as household manager should be distinguished from a quite different agency principle which may also apply to husband and wife. If, in the past, the wife has pledged the husband's credit for goods of any kind and he has paid the bills, he thereby gives her 'apparent authority' (explained later in the chapter) as his agent to make further purchases of the same kind from the suppliers whom he has paid. He can then only terminate her authority (which does not depend on continued cohabitation) by giving notice to the suppliers that he accepts no further liability for goods supplied to his wife.

Agency by ratification

8.If A makes a contract on behalf of P at a time when A has no authority from P, the contract may later be ratified by P and then has retrospective effect to the time when A made the contract. The principle of retrospective effect imposes the following conditions on agency by ratification.

(a)P must exist and have capacity to enter into contract when it is made. For this reason a company cannot ratify a contract made ~n its behalf before the company is formed.

case: Kelner v Baxter 1866

The promoters of a company to be formed to carry on an hotel business obtained stock in trade (wines etc) for the company from the plaintiff. The company which. was formed three weeks later took over and sold the stock but failed to pay for it. The plaintiff sued the promoters who argued that they were merely agents of the company which had ratified the contract.

Held: the company could not by ratification bind itself retrospectively to a contract made before it existed. The promoters were liable for breach of warranty or authority and must pay (breach of warranty,o f authority is explained later in that chapter,).

b)In making the contract, the agent must act as agent for a principle who is named or  otherwise identified as a party to the contract

case: Keighley Maxsted & Co ant 1900

An agent was authorised to buy wheat at 45/3d per quarter from D. D would not sell for less than 45/6d and the agent bought at that price without disclosing that he was buying for a principal, i.e. KM.KM however later purported to ratify the contract but failed to pay the agreed price. D sued them on the contract.

Held: where there is no immediate contract because the agent lacks authority, an undisclosed principal cannot adopt and ratify the contract. The principal must be `capable of being ascertained at the time when the act was done' (Watson v Swann 1862) if he is to be allowed to ratify the act afterwards.

(c)If the other party makes an offer which the agent accepts on behalf of his principal (without reservation on either side to the effect that this is `subject to ratification' by the principal) the principal need not ratify the contract but if he does it has retrospective effect. Hence the other party may withdraw his offer in the interval between its acceptance by the agent and the ratification by the principal.

The principal may only ratify if:

(a)he does so within a reasonable time after the agent has made the contract for him; (b) he ratifies the whole contract and not merely parts of it;

(c)he communicates a sufficiently clear intention of ratifying, either by express words or by conduct such as refusing to return goods purchased for him by an agent who lacked authority (mere passive inactivity does not amount to ratification);

(d)he is either fully informed of the terms of the contract or is prepared to ratify whatever the agent may have agreed to on his behalf.

10.It is not possible to ratify an act which is void or illegal. For that reason the members of a company cannot by passing a resolution in general meeting ratify a contract vires the company when made.

11.Ratification relieves the agent of any liability for breach of warranty of authority and entitles him to claim from the principal any agreed remuneration for making the contract.

Agency by operation of law

12.By operation of law a principal may be bound by a contract made on his behalf but without his consent. This rule is of very restricted application and is generally confined to carriers by sea or land, of goods. The principle applies when:

(a) P entrusts goods to A for some purpose such as transporting them to a distant destination , and

(b) while the goods are in .A's possession some emergency arises in which action must be taken to protect the goods; and

(c) it is not possible for A to communicate with P to obtain his instructions within the time available; and

(d) A takes action which is reasonable to protect P's interests and not merely for the convenience of A.

13.When these conditions are satisfied, P is bound by any liability which A undertakes on his behalf, since an agency of necessity has arisen. Note that there must be an existing contractual relationship – a person cannot become the agent of necessity of another by taking charge of his proper uninvited: Jebara v Ottoman Bank 1927.

Case: great Northern Railway r Swafield 1874

delivered a horse to a railway for transport to another station but failed to collect it on arrival as agreed. The railway claimed from S the cost of feeding and stabling the horse arguing that if it had delivered the horse to a stable that would have been a contract made under agency of necessity and S would be bound to pay.

Held: the railway claim would be upheld for the reasons given.

Case:Sachs v miklos 1948

M agreed to store furniture which belonged to S. After a considerable time had elapsed M needed the storage space for his own use. He tried to contact S to get the furniture removed but was unable to trace S. M then sold the furniture. S sued M for conversion. and M pleaded agency of necessity in making the sale.

Held: there was no agency of necessity since no emergency had arisen and 1`1 had sold the furniture for his own convenience- If A1's house had been destroyed by fire and the furniture left in the open ht would then have been justified in selling it.

14.It is convenient to mention here statutory rules which treat A as the agent of P without the latter's consent. But these are not vases of agency of necessity – they are entirely statutory

(a)A repairer of goods which the owner fails to collect after due notice has been given ma: sell them: Disposal of Uncollected Goods Act 1952.

(b)If A agrees to supply goods to X and A first transfers the goods to P, so that P may let them to X under a hire purchase agreement, then A is the agent of P if the hire purchase agreement falls under the Consumer Credit Act 1974.

Agency by estoppel

15.If P leads X to believe that A is P's agent, and X deals with A on. that basis.. P is bound by the contract with X which A has made on his behalf. This situation may arise:

(a)when A, who dealt with X as P's authorised agent, continues to do so after his authority as agent of P has been terminated but X is unaware of it;

(b)when A, to P's knowledge, enters into transactions with X as if A were P's agent and fail to inform X that A is not P's agent.

case: Freeman 0 Lockyer v Buckhurst Park Properties ( mangal) Ltd 1964

K and H carried on business as property developers through a company which they owned in equal shares. Each appointed another director, making four in all, but H lived abroad and the business of the company was left entirely under the control of K. As a director K had no actual or apparent authority to enter into contracts as agent of the company but he did make contracts as if he were a managing director without authority to do so. The other directors were aware of these activities but had not authorised them. The plaintiffs sued the company for work done on K's instructions.

Held: there had been a representation by the company through its board of directors that K was the authorised agent of the company. The board had authority to mike such contracts and also had power to delegate authority to K by appointing him to be Managing Director although there had been no actual delegation to K, the company had by its mere acquiescence led the plaintiffs to believe that A was an authorised agent and the plaintiffs had relied on it. The company was bound by the contract made by K under the principle of 'holding out' (or estoppel). The company was estopped from denying (i.e. not permitted to deny) that K was its agent although  Khad no actual authority from the company.

16.Agency does not arise by estoppel if it is the 'agent' who holds himself out as agent, not the 'principal': Armagas v Mundogas. The Ocean Frost 1986.


1.when an agent agrees to perform services for his principal for reward there is a contract between them. But even if the agent undertakes his duties without reward he has obligations to his principal. The agent's duties are listed below,

(a)Performance -the agent who agrees to act as agent for reward has a contractual obligation to perform his agreed task.

Case : Turpin v Bilton 1843         .

A broker agreed to arrange insurance of his principal's ships but failed to do so. A ship was lost at sea.

Held: the broker was liable to make good the loss. But an unpaid agent is not bound to carry out, his agreed duties (there is no consideration). Any agent may refuse to perform an illegal act.

(b)Skill – a paid agent undertakes to maintain the standard of skill and care to be expected of a person in his profession. For example, an accountant has a duty to his client to show the skill and care of a competent accountant. An unpaid agent if he acts as agent (which he need not do)must show the skill and care which people ordinarily use in managing their own affairs.

(c)Personal performance – the agent is presumably  selected because of his personal qualities and owes a duty to perform his task himself and not to dele ag te it to another. But he may delegate in a few special circumstances, if delegation is necessary, such as a solicitor acting for a client would be obliged to instruct a stockbroker to buy or sell listed securities on the Stock Exchange.

(d) Accountability – an agent must both provide full information to his principal of his agency, transactions and account to him for all moneys etc arising from them.

(e)No conflict of interest – the agent owes to his principal a duty not to put himself in a situation where his own interests conflict with those of the principal; for example, he must not sell his own property to the principal (even if the sale is at a fair price). case: Armstrong; r Jackson 1917

A 'client instructed his stockbroker to buy for him 600 shares of a Ltd. The broker sold to r' his client 500 shares which he himself owned.

Held: the sale was made in breach of the. broker's, duty and would be set aside.

(f)Any benefit must t be handed over the principal unless he agrees that the agent may retain it.

2. Although an agent is entitled to his agreed remuneration, he must account to the principal for any other benefits. If he accepts from the other party any commission or reward as an inducement to make the contract with him, that is a bribe and the contract is fraudulent. The agent may be dismissed.

Case: Boston Deep Sea Fishing & Ice Co v Ansell 1888

A, who was managing director of the plaintiff company, accepted commissions from suppliers on orders which he placed with them for goods supplied to the company. He was dismissed and the company sued to recover from him the commissions.

Held: the company was justified in dismissing A and he must account to it for the commissions. The principal who discovers that his agent has accepted a bribe may:

(a)dismiss the agent, recover the amount of the bribe from him (as in Ansell's Case) and refuse to pay him his agreed remuneration;

(b)repudiate the contract &sue the  third party who paid the bribe to recover damages for any loss.

Case: Salford Corporation v Lever 1891

The plaintiff corporation invited tenders for the supply of coat. L offered to pay the corporation's manager one shilling per ton if his tender was accepted (as it was). On discovering these facts the corporation sued L

Held: the corporation was entitled to recover damages of one shilling per ton on the assumption that L's tendered price would have been a shilling per ton less if L had not paid the bribe. No allowance should be made for the corporation having already recovered the bribe from its manager.Both the agent and the third party who pays the bribe to him may be prosecuted under tilt – Prevention of Corruption Act 1916.



1.The agent is entitled to be repaid his expenses and to be indemnified b: his principal against losses and liabilities (Hichens. Harrison, woolston & Co v  Jackson & Sons 1943). These rights are limited to acts of the agent done properly within the limits of his authority. If he acts in an unauthorised manner or negligently he lose- his entitlement. He may recover expenses properly paid even if he was not legally bound to pay, for example, a solicitor who pays counsel's fees (which the counsel cannot recover at law) may reclaim this expense from his client.

2.The agent is also entitled to be paid any agreed remuneration for his services by his principal. The amount may have been expressly agreed or be implied, for example by trade or professional practice. If it is agreed that the agent is to be remunerated but the amount has not been fixed, the agent – entitled to a reasonable way r Latilla 1937.An agent undertook to provide information on ‘gold mines in West Africa. No remuneration had been agreed.

Held: in the circumstances agreement that there should be remuneration was inferred and L 5,000 ,was a reasonable sum to award. (N.B it does not follow that every agent is entitled to reward: it must be implied if it is not expressed).

3. There is a considerable body of case law on the claims of estate agents for their agreed remuneration although the property has not been sold or has been sold to a purchaser not introduced by the agent. Unless the contract states very clearly a contrary intention, the courts are inclined to hold that the parties intended commission to be paid only out of-the proceeds of an actual sale to a purchaser introduced y t e -agent. The following matters in particular have been considered.

(a)The principal is entitled to withdraw from the transaction – there is no implied term that he will not prevent the agent from earning his commission.

case: Luxor (east bourne) v Cooper 1941 .

L employed C to find a purchaser for four cinemas at a price of £ 185.000.C introduced :r purchaser who offered £ 185,000 for the cinemas 'subject to contract'. L withdrew from the negotiations and C sued for his agreed fee of £ 10,000.

held: the claim must fail. The House of Lords held that there was no implied term (see above) such as C asserted.

(b) The principal may agree to pay a fee to the agent if he is able 'to find a purchaser' or 'find a person willing and able to purchase'. If a purchaser introduced by the agent then enters into a binding contract to purchase, the agent has earned his fee. If however, the purchaser whom he introduces merely makes a conditional offer to purchase e.g. `subject to contract' or 'subject to survey' etc, the agent has not found a purchaser in the strict sense. It is doubtful whether even an unconditional offer makes the offeror a purchaser or a person willing and able to purchase. But if he does not withdraw his offer it may suffice.

Case: Christie. Owen and Davies v Rapacio!i 1974

The purchaser made an offer and' later paid a deposit and signed his copy of the contract. e vendors then withdrew. The agent claimed his fee for having introduced 'a person ready  able and willing to purchase'.

Held: on these facts the agent had earned his fee. (1\8 there was more than an unconditional offer here).


1.the  contract made by the agent is binding on the principal and the other party only if the agent was acting within the limits of his authority from his principal. In analyzing the limits of an agent's authority it is necessary to distinguish actual from apparent authority.

2.The actual authority of an agent is the authority to make contracts which the principal agrees he shall have. It is a matter between principal and agent. The actual authority may be either:

(a)           express e.g. authority explicitly given to make a particular contract, or

(b)           implied from the nature of the agent's activities, from what is usual in the circumstances etc.

3.The basis of implied authority is that the principal, by appointing an agent to act in a particular capacity, gives him authority to make those contracts which are a necessary or normal incident of the agent's activities. The principal may agree with the agent that his actual authority    less than would be implied, but any such restriction is only effective if it is communicated to the person with whom the agent

case: watteau v Fenwick 1893

The owner of a hotel (F) employed the previous owner H to manage it. F forbade H to buy cigars n credit but H did buy cigars from W. W sued F who argued that he was not bound by the contract, since H had no actual authority to make it, and that W believed that H still owned the hotel.

Held: it was within the usual authority of a manager of a hotel to buy cigars on credit and F was bound by the contract (although W did not even know that H was the agent of F) since his restriction of usual authority had not been communicated.

4.The principle of implied usual authority often raises questions of trade or professional custom.

case: Howard v sheward 1866

A estate agent warranted to a purchaser that a house was structurally sound.

Held: the vendor was bound by his agent's statement since it was normal practice (and therefore within the agent's implied authority) for an estate agent to give an assurance.

case: Panorama Developments (Guild ford) Ltd r Fidelis Furnishing Fabrics Lid 1971 :

A company secretary ordered the hire of cars ostensibly for his company. In fact they were for his personal use. The company wanted to escape paying for the cars.

Held: the hire of cars was within the usual administrative tasks of a company secretary. He therefore had the usual authority of an agent to bind the company in this way even though the authority was abused. The company had to pay for the cars.

5.The apparent authority of an agent is that which his principal represents to other persons (with whom the agent deals) that he has given to the agent.

Apparent authority and implied authority overlap and will often coincide exactly. If, for example, a principal employ a stockbroker to sea shares it is an implied term of the arrangement between them that the broker shall (unless otherwise agreed) have actual authority to do what is usual in practice for a broker selling shares for a client (but no more than that). Any person who deals with the broker is or. his side entitled to assume (unless informed to the contrary) that the broker has, as his apparent and actual authority. the usual authority of a broker by his client. Thus far the two forms of authority are co-extensive.

6, Apparent authority (unlike implied authority) is not however ,restricted to what is usual. The principal may expressly or by inference from his conduct confer on the agent any amount of exceptional authority. The agent appears to have apparent authority because a representation has been made that he has: Waugh r Clifford 1951.

7.For example a partner has considerable rut limited implied authority merely by virtue of being a partner. If, however, the other partners allow him to exercise a greater authority than is implied, they represent that he has it and they are bound by the contracts which he makes within the limits of this apparent authority. The term ostensible authority is also used as an alternative for apparent authority. Consider the following example.

if  P entrusts property to A with express authority to sell a! not less than a specified minimum price, then P i_ obviously bound by any sale made by A within his actual authority, at or above the price fixed by P. If A sells for less than the minimum price fixed by P, the sale is usually void since A has no actual authority to sell on these terms and P has not (merely by giving him possession of the goods) I conferred on A any apparent authority greater than his actual authority.

But the law of sale of goods recognises some exceptional cases where P is bound. This is discussed in Chapter 18 (factors and mercantile agents).

8.An agent who exceeds his apparent authority will generally have no liability to his principal, since the latter will not be bound by the unauthorised contract made for him. But the agent will be liable, in such a case to the third party for breach of warranty of authority. The principal will be liable even though his agent committed a fraud for his (the agent's) own benefit within his apparent authority. However, the principal is only ever liable if the third party was unaware of the agent's lack of actual autheritv.

Breach of warranty of authority

9.If A purports to enter into a contract with X on behalf of P, A warrants, or guarantees, to X that P exists and has capacity to eater into the contract, and that A has authority from P to make the contract for him. If any of these implied statements proves to, be untrue, then (unless P ratifies the contract) X may claim damages from A for his loss, provided that X was unaware that A had no authority to make the contract. A is liable ever. though he was himself unaware that he lacked authority, e.g. because P had died. In kelner v Baxter 1866 the promoters of a company were liable since they made a contract for a non-existent principal.


1. In normal circumstances the agent discloses to the other party that he (the agent) is acting to a principal whose identity is also disclosed. The contract, when made, is between the principal and the other party. The agent has no liability under the contract and no right to enforce if An agent may, however, be liable under the contract in some cases.

(a)If the agent executes a deed in his own name he should, for example, to escape the risk sign 'J Smith by his attorney HJones' (Smith being the principal).

(b)If the agent signs a negotiable instrument without indicating that he does so in a representative character on behalf of a principal. For instance, if a director signs .a company cheque 'H Black, Director XYZ Ltd' he merely describes his positron as director. To avoid liability, he should sign 'for and on behalf of  XYZ Ltd.the same rules may apply  to other written contract signed or an agent

(c) Where by trade custom the agent is liable, e.g. advertising agents are liable to the media for contracts made on behalf of their clients.

(d) Where the principal is fictitious or non-existent, the agent contracts for himself and so is liable as the true principal.

If, in making the contract, the agent discloses that he acts for an unnamed principal position is also as described above.


1.IF a person enters into a contract apparently on his own account as principal but in, fact as agent on behalf of a principal, the doctrine of the undisclosed principal determines the position of the parties.

2.If the contract is not performed as agreed the third party may, on discovering the true facts:

(a)hold the agent personally bound by the contract (as the agent appeared to be contracting on his own account); or

(b) elect to treat the principal as the other party to the contract.

But he must elect for one or the other within a reasonable time of discovering the facts, and cannot sue both principal and agent: Chestertons v Barone 1987. It appears that the third party who commences legal proceedings against either agent or principal may withdraw (before judgement is given) in order tu sue the other. Clarkson Booker Ltd v And jel 1964. If, however, he obtains judgement on the breach of contract he cannot sue the other even if the judgement is unsatisfied.

3. The undisclosed principal will usually intervene and enforce the contract on his own behalf against the ether party since it is really his contract, not the agent's. Until such time as the principal takes this action, the agent himself may sue the third party (since he is treated as the other party to the contract).

4.The undisclosed principal's right to intervene in a contract made by his agent is limited to those contracts which the agent was authorised to make as agent – he cannot ratify an unauthorised act or seek to take over the agent's contract without the third party's consent: Keighley, maxsted Co r Durant 1900.

5.The undisclosed principal is also prevented from  taking over a contract in the following circumstances.

(a)where the agent  when making the contract, expressly denied that a principal was involved (this is misrepresentation)

(b) where  the contract terms are such that agency is implicitly denied:

case: humble &hunter 1848

The principal (P) authorised his agent (A) to charter out his ship. A contracted with a third party for the charter of the vessel, describing himself as 'owner' of it.

Held: the  principal could not enforce the contract against the third party because the agent had implied that he was the owner and hence the principal. P's ownership contradicted the contracts  terms.

Where the identify of the parties  of the parties is material to the third party – that is, where the third party wanted to contract with the agent and would pot have contracted at all if he had known of the identity of the principal.


Agency is terminated by act of the parties in any of the following ways

(a)if an agent  is employed for a particular transaction, such as sale of a house, he ceases to be agent when the transaction is completed.In the same -ay, agency, for a fixed period ends with the expiry of the period.

(b)Either party may give notice to the other or they may mutually agree to terminate the agency. But certain types of agency are irrevocable:

(i)where the agent has 'authority coupled with an interest' and the agency has been created to protect his interests; for instance, where a debtor appoints his creditor as agent to sell the debtor's property and recover the debt: from the proceeds, he cannot withdraw his authority;

(ii) where the agent has begun to perform his duties and has incurred liability;

(iii)where statute declares the agency to be irrevocable, as when it is a power of attorney for a limited period expressed to be irrevocable, or when it is formed under the Enduring Powers of Attorney Act 1985.

2. Agency is terminated by o2~ration of law (with some exceptions for irrevocable agencies) in any of the following circumstances:

(a)death of principal or agent;

(b)insanity of principal or agent

(c)bankruptcy of the principal, and also bankruptcy of the agent ;f- as is likely, it renders him incapable of performing his duties;

(d)frustration, eg by the agency becoming unlawful because the principal has become an enemy alien.

3.The termination of agency only affects the principal and agent at first, as it brings the actual authority of the agent to an end. Third parties who knew of the agency are entitled to enforce any later contracts made by the former agent against the principal until they are actually or constructively informed that the agency has been terminated.

For example, when a partner retires from – firm, he remains an apparent member and   liable on contracts of the firm made after his retirement with persons who knew him to be a partner, when he was one, until notice of his retirement has been given to those persons. Therefore, a retiring partner should advertise his retirement generally and ensure that existing suppliers and customers are actually informed of his retirement. General advertisement ensures that persons who dealt with the firm for the first time after the partner's retirement cannot claim that the partner was still apparently a member.

4.Termination of agency by insanity of the principal has produced two conflicting decisions and the law is obscure.

case: Drew v Nunn 1879

a husband when sane represented that his wife had authority to buy goods on credit as his agent. e became insane but the wife continued to buy goods from the same supplier. On recovering his sanity the husband refused to pay for the goods on the grounds that his insanity (although unknown to the supplier) had terminated the wife's authority as agent.

Held: insanity had terminated the agency as between husband and wife, but the husband was estopped from denying that his representation (that the wife was his agent) was true and must pay for the goods.

Case: Yonge v Toynbee 19]0 .

Solicitors were instructed to defend an action on behalf of a client who later, unknown to the solicitors, became insane.

Held: the solicitors were liable to the plaintiff for breach of warranty of authority (the client was not bound by what they had done – yet in nunns Case he continued to be liable).

5.The Enduring Powers of Attorney Act 1985 provides that a .formal power of attorney in tire prescribed form may continue in force even though the principal becomes insane. But this procedure does not alter the law on informal agency arrangements as described above.


1. A factor (also called a 'mercantile agent')is a person whose ordinary business is to sell goods, or consign them for sale, or to buy goods, or to raise money on the security of goods: Factors Act 1889. His principal gives him implied authority to enter into such transactions and usually gives him possession of the goods. A simple example is a motor dealer to whom the owner of a vehicle delivers the vehicle (and registration book) with authority to sell it.

2.A factor when in possession. of goods has wider authority than an ordinary agent. When an / `ordinary agent has possession of goods for sale etc, his apparent authority is no greater than the actual authority given to him by the principal. But a factor or mercantile agent w possession of goods, or documents of title to goods, with the consent of the owner, may sell, pledge or otherwise dispose of them so as to bind the owner (in excess of the actual authority given by him) provided that:

(a) the factor acts in the ordinary course of his business; and

(b) the other party acts in good faith and is unaware that the agent is exceeding his authority: Factors Act 1989 s2.

Case: Folkes v King 1923

F delivered his car to H, a motor dealer, with instructions to sell it at a price not        wall f 575. The dealer sold to K (in circumstances as described above) for £ 340.

Held: although the dealer had no actual authority to sell below £ 575 F was bound by the contract.

3.The purpose of the rule is to protect persons who deal with mercantile agents in ignorance. of their lack of actual authority. However, the rule only applies when the goods (or documents of title) are voluntarily delivered to the factor for some purpose incidental to his business (of sale, purchase or pledging). The principal is bound even though the factor then sells or pledges without authority.

Case: Lloyds Bank Lid v Bank of America National Trust 1938

A mercantile agent deposited commercial documents with a bank as a pledge. -after the bank allowed him to recover the documents under a 'trust receipt' – he was authorised to deal with the documents but undertook to hold the proceeds in trust for the bank. He then fraudulently pledged them to another bank. The two banks both claimed the documents.

Held: for the purpose of applying the rule, the first bank must be regarded as the 'Owner'. It had given the factor possession with a view to a sale – a disposition in the course e; his business. The second bank (which had been unaware of the fraud) therefore had good title.

4An auctioneer is an agent who is authorised to sell property at auction, usually in a room or ,place to which the public has access. He is the agent of the vendor. But when the sale has been completed he is also the agent of the buyer for the purpose of making a written record of the sale. This serves to provide the written evidence (against both parties) which is required to make enforceable a contract. for the sale of land (although obviously auctioneers are involved if, many other sales than just those of land).'

5, An auctioneer should sell only for cash (though he may accept payment by cheque). He may receive a deposit in part payment but may only pay it over to the vendor if the purchaser consents or if he defaults on the contract.

6. An auctioneer warrants that he has authority to sell to the highest bidder unless he announces that the seller has set a `reserve price' (will withdraw the property if that price at least is not bid). He does not of course disclose what that price is. If the seller has set a reserve price and the auctioneer fails to say so, then the property must be knocked down to the highest bidder (and the vendor as principal will recover the deficiency from the auctioneer).

7.An auctioneer is liable in conversion to the true owner if he sells property on behalf of a principal who has no right to sell.


1 The basic idea of agency is that –

an intermediary (the agent) negotiates a contract between the person whom he represents (the principal) and another person (the third party), thereby creating a bilateral relationship between them in which the agent is not personally involved.

However, the tripartite situation (principal – agent – third party) creates some special legal problems.

2 In practice the most important aspect of the law of agency is the extent of the agent's authority to commit ! a principal to a transaction. It often happens that the principal does not know of the contract until it is made.

3 The principal may be an individual, a partnership or a company. In the case of a partnership or a company there are some special considerations to be kept in view:

(a) in partnership transactions each partner acting alone has a wide apparent authority to commit the firm to contracts which he makes on its behalf;

(b) a company has only limited capacity to enter into contracts, broadly being those transactions which are incidental to the company's objects as defined in its memorandum of association.