Lecture Fundamentals of business law (7/e): Chapter 18 - M.L Barron

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PPTs to accompany Barron, Fundamentals of Business Law 7Rev

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Principal and agent
Chapter 18

Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev

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Learning objectives
At the end of this chapter you should understand:
• the definition of an agency relationship
• why contract law is relevant to the law of agency
• the methods by which agency can be created including
estoppel, necessity or ratification
• the different types of agent, their roles and function
• the difference between ‘actual authority’ and ‘apparent
authority’
• liability of an agent to the principal and third parties
• the rights of action that a third party has against an agent for
breach of warranty of authority

• the rights and powers of agents
• how an agency can be terminated.

Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev

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Introduction
Agency
• A relationship that exists between one
person (the principal) and another
person (the agent).
• The agent undertakes to do certain acts
on the principal’s behalf.
• The purpose is to bring a third party into
a contractual relationship with the
principal.
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev

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Creation of an agency
• Expressly created agency (written or
verbal)
• Impliedly created agency:
– Agency of necessity

– Cohabitation
– Agency by estoppel
– Agency by status
– Agency by ratification
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev

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Agency of necessity
• A person must be entrusted with
the property of another person.
• An immediate expense is required
to preserve the property.
• The owner of the property is
virtually impossible to contact.
• The person entrusted with the
property (agent) must act in the
best interests of the owner
(principal).
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev

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Agency by ratification
May occur when:
(1)A person acts on behalf of a principal and

enters a contract with a third party, despite
lacking authority to do so, then the
principal may ratify or affirm the
unauthorised action.
(2)An agent exceeds the authority given to
them by the principal, the principal may
ratify or affirm the excessive authority.
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev

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Conditions required for valid
ratification
• Agent when contracting must clearly be acting as an
agent, not for themselves, and the third party must
be aware of this.
• Principal must exist at the time the agent contracts.
• Principal must have the required capacity to contract
both at the time of the agent’s unauthorised conduct
and at the time of ratification.
• Principal must ratify the whole contract.
• Principal must have full knowledge of the details of
the transaction.

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PPTs to accompany Barron, Fundamentals of Business Law 7Rev

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Conditions required for
ratification (cont.)
• Can only be made by the principal for whom
the agent was acting or purporting to act
when the contract was made.
• Ratification must take place within a
reasonable time.

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PPTs to accompany Barron, Fundamentals of Business Law 7Rev

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Agency distinguished from other
relationships
• Agency is a fiduciary relationship—
exercising rights and powers, in good
faith, for the benefit of another.
• Employee is under control and
supervision of employer.
• Independent contractors decide how
their work is carried out.
• Trustee holds property on behalf of
another person.
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev

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Categories of agents
• Special—appointed for a particular
task
• General—appointed for all normal
matters
• Universal—appointed for all acts
principal can do, e.g. Power of
Attorney

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PPTs to accompany Barron, Fundamentals of Business Law 7Rev

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Authority of an agent
• Actual authority:
– Express (written/spoken)
– Implied (by action)

• Apparent authority (ostensible
authority):
– Authority agent has from the point of view
of the third party, with whom the agent is
dealing

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PPTs to accompany Barron, Fundamentals of Business Law 7Rev

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Duties of an agent
• To follow the principal’s instructions
• To act personally
• To exercise reasonable skill and diligence
• To act in principal’s best interest
• Not to make a secret profit
• Not to divulge confidential information
• To keep proper accounts
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev

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Rights of an agent
• To receive remuneration as specifically
agreed for work performed
• To be indemnified against all losses
and expenses incurred while carrying
out principal’s lawful instructions
• To a lien (i.e. a right to retain
possession of principal’s property) until
liabilities satisfied
• To stoppage of subject goods in transit
(before received by principal)

Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev

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Liability of agent to principal
• If agent:
– fails to follow instructions
– acts in a negligent matter.

• If a loss is incurred.

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PPTs to accompany Barron, Fundamentals of Business Law 7Rev

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Liability of agent to third party
• Name and/or existence of principal
disclosed:
– Acts outside authority (i.e. breach of warranty)
 Acts on behalf of someone who has not given
authority (unless ratified)
 Exceeds authority (unless ratified)

– Non-existent/unascertainable principal
– Agent agrees to be liable
– Usage/custom make agent liable

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PPTs to accompany Barron, Fundamentals of Business Law 7Rev

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Liability of agent to third party
(cont.)
• Existence of principal not disclosed:
– Agent bound

• Torts committed while acting within
actual or apparent authority
• Tort committed by an agent acting
outside the actual or apparent authority

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PPTs to accompany Barron, Fundamentals of Business Law 7Rev

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Doctrine of undisclosed principal
• If the agent acts as if he/she is the
owner (by not disclosing agency), then
the principal can later reveal the
agency agreement and sue to enforce
the contract.
• If third party discovers there was an
agency agreement, he/she can then

sue the principal (as well as the agent)
for breaches of the contract.

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PPTs to accompany Barron, Fundamentals of Business Law 7Rev

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Termination of agency
•

By the acts of the parties:
– By performance of the agency
– With frustration of the agency agreement
– By mutual agreement

•

By revoking the authority of the agent
(ineffective to third parties until advised)

•

By the operation of law:
– By death of either party
– By bankruptcy of principal
– By bankruptcy of agent
– By insanity of either party

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PPTs to accompany Barron, Fundamentals of Business Law 7Rev

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Types of agents (statute law)
• Factors/mercantile agents—goods in agent’s
possession to sell or use for borrowing
• Del Credere agent—guarantees payment for goods
sold (therefore higher commission)
• Partners—principals/agents for each other
• Broker—buys/sells goods without possession
• Real estate agent—sells/leases vendor’s land; finds
property for sale/lease
• Travel agent—sells principal’s products; receives
commission based on sales; organises principal’s
travel arrangements
• Company director—agent of company

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PPTs to accompany Barron, Fundamentals of Business Law 7Rev

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