Member Perspectives | The Common Law of Agency

Introduction

This article highlights the main elements of common law in relation to: (a) how agency arises formally and informally; and (b) the types of authority that an agent/intermediary could have or be deemed to have.

The common law rules, which are derived mainly from historical court cases, are much wider in terms of applicability than the rules under the Commercial Agents (Council Directive) Regulations 1993, which only apply to commercial agents selling goods on behalf of a principal (see my previous article: https://www.orrlitchfield.com/The_Commercial_Agents_Regulations_-_how_they_apply_to_agency_agreements)

Common law agencies can apply to the sale of services as well as goods, for example in relation to the travel industry or internet providers.

Establishing agency

Formal agency agreements are written contractual agency agreements with which business lawyers working with commercial law are familiar. These include referral agreements (or introduction agreements), sales agency agreements and marketing agreements.

Informal agency agreements can arise by verbal agreement and conduct. Therefore, even without a formal written agreement, an agency can be established. However, the relationship of agency can only be established by the consent of the principal and agent – as confirmed by the Appeal Court in a case dating back to 1967.

Essentially, a common law agent is an intermediary that has the authority to change the legal position of its principal. The common law of agency extends to any situation where it is agreed that (a) one person should do something on behalf of another and (b) it results in a legal commitment.

Examples of situations where the common law of agency applies

• Auction house: concludes sales between the seller and buyer and can be the agent for both if necessary;
• Car motor dealer: concludes sales between the purchaser and the car manufacturer;
• Solicitor acting for a seller in a house purchase: can receive the purchase monies on behalf of the seller but has no authority to conclude the sale.

Point to note: even where a contract is concluded, if the intermediary (for example, an insurance broker), is guilty of misrepresentation, this can render the final contract void.

Further point to note: the common law of agency does not apply to representatives, estate agents or recruitment agents because the intermediary has no power to enter into a legal commitment on behalf of the principal.

How is agency implied?

• Conduct of the parties: if an agent claims that it has implied authority, it must be reasonable in forming that impression, for example, when the board of directors appoint one of their number to be managing director. More recently, in 2020, the High Court confirmed that silence from a principal cannot be construed as acceptance of an agent’s authority to act on the principal’s behalf.
• Necessity: normally arises if the principal’s products are at risk and the agent needs to take urgent action but has no time to obtain express authority from the principal prior to taking action. For example, a warehouse acting as agent for the principal who urgently needs to sell the principal’s products which would otherwise perish (as confirmed by a 1982 Appeal Court case).
• Ratification of appointment: approval after the event, i.e. where an agent acts on behalf of the principal without authority but later the principal accepts and adopts such act as its own.

What are the types of authority and how is an agent’s authority established?

• Actual authority: can be either express, i.e. via a written agreement, or implied, the latter inferred from the conduct of the parties and the circumstances of the case. An example of implied actual authority would arise where a principal appoints the agent as chief executive of its company because it is generally understood that a chief executive has authority to enter into transactions on behalf of the principal, the company.
• Apparent or ostensible authority: created by representation and applies where a principal has not authorised the agent to act but a third party is entitled to assume that it has, whether or not the agent had actual authority to enter into the contract. The doctrine of apparent authority was established by the High Court in 1964 and protects third parties, for example, a contractor entering into a contract with a principal can only know what the agent tells him, which may or may not be true. The contractor’s information as to the authority must derive from either the principal or the agent or both.
• Usual authority: generally refers to the authority that a person (as agent) has to enter into transactions of a type that are ordinarily entered into by a person appointed to a particular position, for example a managing director. So usual authority is both a type of implied actual authority and apparent authority.
• Authority implied from a custom of the trade: a type of usual authority derived from trade usages or customs where such trade usages must be more than patterns of consistent behaviour; they must be accepted in the trade as binding. An agency agreement should include any such binding practices.

Need to talk about the terms of your agency agreements? 

If you are a principal or an agent who is considering entering into a commercial agency contract or think you may already be acting under an agency relationship, you should put in place a formal written contract and seek legal advice prior to executing the contract. Your legal advisor can help you to effectively manage your commercial agency relationships and avoid or reduce the risk of potential disputes.

Contact Orr Litchfield to discuss agency or other commercial contracts

If you would like more information about any aspect of agency or commercial contract law or would like to discuss a potential or existing agency contract or commercial contract law matter, please email us at [email protected], complete an Enquiry Form or call us.