Law of agency

In legal terminology, the law of agency refers to a concordant relationship constituted by statute or by contract where one party permits another party to act on their behalf. The party who grants permission for another to act on their behalf is called the principal, while the one who is given authority to act on another’s behalf is called the agent. The agent engages in interaction with a third party under the direction of the principal. The relationship between the principal and the agent is a fiduciary one, and the words and actions of the agent as he or she interacts with the third party are binding on the principal.

A person cannot unknowingly or accidentally become another person’s agent as an agency relationship can only be established when there is consent from both the principal and the agent. While written contracts are commonly used, they are not a required component of an agency relationship as long as it is evident that the agent and the principal are both willing to remain in their respective roles as agent and principal. Where there is no written contract, the desire of both parties to enter into an agency relationship can be implied or inferred from their words or actions.

Types of agency relationships

Agency relationships may be classified according to the scope of the agent’s authority. Courts acknowledge these as the types of agency:

Universal agency

An agent has the capacity to act on behalf of the principal in most or all occasions. A universal agent may be one who acts on behalf of an indisposed family member.

General agency

A general agent has the capacity to act on behalf of the principal in various ways, but within a limited timeframe or in many cases, only on a single undertaking.

Special agency

A special agent has the capacity to carry out a particular task on behalf of the principal but is not permitted to perform any tasks other than the one specified unless the principal gives his or consent.

In business, agency relationships may be classified according to who the agent acts for.

Buyer’s agency

Here, the agent acts on behalf of the buyer in a transaction, hence, the buyer is the client.

Seller’s agency

Here, the agent, called the listing agent, acts on behalf of the seller in a transaction. Hence, the seller is the client. In this type of agency relationship, a listing agreement is used to establish the principal-agent relationship.

Dual agency

In buyer’s and seller’s agencies, the agent has fiduciary duties to either the buyer or the seller as the case may be, but in a dual agency relationship, fiduciary duty is carried to both parties. The problem with this kind of arrangement is it becomes impossible for either the buyer or the seller to make the other culpable for any mistakes committed by the agent as both are principals. Both principals must be aware and voluntarily consent to the arrangement for the dual agency to be possible.

The concept of control in agency

A principal may grant an agent authority to carry out a variety of assignments. Likewise, he or she may prevent the agent from performing certain tasks. However, whatever the degree or scope of authority granted to the agent, he or she is under the control of the principal. On the other hand, the principal is disposed to suffer the consequences of whatever actions they have instructed the agent to perform.

A principal may intentionally or unintentionally grant an agent authority or lead others to suppose the agent has been granted authority to execute certain tasks when in fact such authority is non-existent. Such a situation is referred to as apparent authority. In a case where others believe in good faith that the agent’s authority is authentic, the principal will continue to be subject to the consequences of the agent’s actions and will not be able to uphold the defence that there was no true authority established in the first place.

The extent of the legal responsibility which an agent bears is largely determined by the scope of his or authority as specified by the principal. As long as an agent acts within his or her scope of authority as specified by the principal, he or she cannot be held to ransom by a third party. However, if the agent exceeds the limits of his or her authority by entering into an unauthorised contract or dealings with a third party, then the agent would be financially accountable to the principal due to his or her failure to sustain the fiduciary duty.

How an agency relationship is created

There are different means by which an agency relationship can be created:

Operation of law

An agency relationship may be created by virtue of law, for instance, every partner bound by a partnership act is an agent of the company.

Express agreement

The agent and the principal explicitly agree to enter into an agent-principal relationship by signing a written contract, expressing agreement orally, or through an attorney.

Ratification

The agent acts on the principal’s behalf without his or her consent, however, the principal rejects the agent’s acts. In some cases, ratification is expressed, and in other cases, it is implied.

Implied authority

This kind of agency relationship comes into being by the conduct of both parties or due to the nature of the relationship between the agent and the principal. Agency relationships that come into being this way are classified into:

Necessity: the agent and the principal do not have an agreement. However, the agent must act in order to prevent harm from reaching people or property.

Estoppel: the third party involved presumes that the agent and the principal have an agreement when in fact, they don’t. For instance, a party who is supposedly the agent may deliberately act a certain way or say something to mislead the third party into concluding there is an agent-principal relationship with the supposed principal who doesn’t dispute the assertion either.