Part 1 Chapter 2

The Authority of an Agent

Contents

1â	Introduction	14
2â The authority of an agent		14
3â	Agency by ratification	21
4â	Agency of necessity	25
5â	Conclusion	26
6â	Recommended reading	26

1â Introduction

The purpose of Part 1 Chapter 2 is to provide a detailed commentary on the different types of authority that relate to an agency agreement, including actual authority.

2â The authority of an agent

Chapter 1 highlighted the problems associated with defining the terms ‘agent’ and ‘agency’. Somewhat unsurprisingly, the same problem arises with respect to the different categories of authority. Bradgate pointed out that ‘one of the great difficulties of the law of agency is that terminology is not used consistently’.1 For the purposes of this chapter, we will look at actual authority (both express and implied), apparent authority and usual authority.

(a)â Actual authority

The actual authority of an agency is granted by an agreement with the principal, which could be classified either as ‘implied’ or ‘express’ authority. This was a point famously referred to by Lord Denning MR in Hely-Hutchinson v.

Brayhead Ltd:

1 R. Bradgate, Commercial Law (Oxford University Press, Oxford, 2005) 140.

15	2â The authority of an agent

actual authority may be express or implied. It is express when it is given by words, such as when a board of directors pass a resolution which authorises two of their number to sign cheques. It is implied when it is inferred from the conduct of the parties and the circumstances of the case, such as when the board of directors appoint one of their number to be managing director. They thereby impliedly authorise him to do all such things as fall within the usual scope of his office.2

Several commentators have offered very similar definitions of actual authority. For example, Munday stated that ‘actual authority refers to authority the agent possesses either because the principal has expressly conferred that authority upon him (express actual authority) or because the law regards the authority as having been conferred upon the agent by necessary implication (implied actual authority)’.3 Writing in 1992, Markesinis and Munday took the view that ‘actual authority is the authority the agent actually has pursuant to the consensual agreement which has been reached between himself and his principal. It is, in other words, real authority.’4 More recently, Dobson and Stokes described this as follows:

certainly the most straightforward situation is that where the agency relationship is created by express agreement. In such a case, the agreement will, to some extent at least, dictate the scope of the agent’s authority. This is called ‘actual authority’: the agent can properly do anything detailed within the agreement.5

Actual authority may be ‘express’ or ‘implied’, and has also been referred to as ‘usual’ and even ‘customary’ authority.6 Indeed, Stone went so far as to argue that there were six different phrases that could be used:

an agent’s ability to bind his principal exceeds his actual authority, viz. ‘implied authority’, ‘usual authority’, ‘customary authority’, ‘ostensible authority’, ‘apparent authority’, and ‘agency by estoppel’. Very roughly, the first three are used to describe the situation where the agent’s authority arises from the nature of the job or position which he holds. The last three apply where the principal has made some representation of the agent’s authority, which he is then not allowed to retract.7

The English and Welsh courts have on several occasions attempted to define actual authority. One of the most famous attempts was made by Diplock LJ in

Freeman & Lockyer (a firm) v. Buckhurst Park Properties (Mangal) Ltd:

An ‘actual’ authority is a legal relationship between principal and agent created by a consensual agreement to which they alone are parties. Its scope is to be

2[1968] 1 QB 549, 583.

3R. Munday, Agency: Law and Principles (Oxford University Press, Oxford, 2010) 41.

4B. Markesinis and R. Munday, An outline of the Law of Agency (Butterworths, London, 1992) 21.

5P. Dobson and R. Stokes, Commercial Law (7th edn, Sweet and Maxwell, London, 2008) 429.

6See Bradgate, above n. 1, at 140.

7R. Stone, ‘Usual and ostensible authority: one concept or two?’ (1993) Journal of Business Law (Jul.) 325.

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ascertained by applying ordinary principles of construction of contracts, including any proper implications from the express words used, the usages of the trade, or the course of business between the parties. To this agreement the contractor is a stranger; he may be totally ignorant of the existence of any authority on the part of the agent. Nevertheless, if the agent does enter into a contract pursuant to the ‘actual’ authority, it does create contractual rights and liabilities between the principal and the contractor. It may be that this rule relating to ‘undisclosed principals’, which is peculiar to English law, can be rationalized as avoiding circuity of action, for the principal could in equity compel the agent to lend his name in an action to enforce the contract against the contractor, and would at common law be liable to indemnify the agent in respect of the performance of the obligations assumed by the agent under the contract.8

However, it is important to note that the degree of authority granted to the agency is heavily dependent on the terms of the agreement.9

(b)â Implied actual authority

Implied authority can be created by implication, and it will be governed by the general law of contract.10 For example, in the famous case of Hely-Hutchinson v. Brayhead Ltd, a company’s directors permitted its chairman to act as if he was its managing director. Here, the Court of Appeal determined that the chairman had implied actual authority to act in the capacity of the company’s managing director.11 In Garnac Grain Co. Inc. v. H. M. F. Faure and Fairclough Ltd, Lord Pearson stated that:

The relationship of principal and agent can only be established by the consent of the principal and the agent. They will be held to have consented if they have agreed to what amounts in law to such a relationship, even if they do not recognise it themselves and even if they have professed to disclaim it.12

Furthermore, actual authority could be implied by the conduct of the parties, the conditions of the case, trade or custom.13 However, it has been argued that the relationship between the agent and principal does not have to be contractual.14 Indeed, Bradgate noted that ‘as a general rule no formalities are required for the appointment of an agent … [therefore] the agreement … may be express or implied, and if express, may be made orally, in writing, or by deed’.15 Nonetheless, if the agency accord is governed by the Commercial Agents (Council Directive) Regulations 1993,16 the principal and agent are permitted to request a written statement outlining the rights and obligations of the

â 8	[1964]	2 QB 480, 502.
â 9	Dobson and Stokes, above n. 5, at 430.â 10â Ibid.
11	[1967]	3 All ER 98.â 12â [1967] 2 All ER 353, 358, HL.
13	Munday, above n. 3, at 1.â 14â See Bradgate, above n. 1, at 141.

15â Ibid.â 16â SI 1993/3053.

17	2â The authority of an agent

signatories,17 the remuneration18 and the conclusion and termination of the contract.19 Sasse and Whittaker stated that:

the Commercial Agents (Council Directive) Regulations 1993 came into force on 1 January 1994 and implement European Council Directive 86/653 of 18 December 1986 designed to harmonise the laws of the Member States relating to commercial agents. The Regulations have retrospective effect and will mean that agents appointed under new or existing contracts will automatically have much better legal protection.20

They added:

Before the Regulations came into force it had long been a tradition of UK law that, although certain terms were implied into agency arrangements by common law, agents and principals were to a large extent free to agree whatever terms they wished. The effect of the Regulations will be to impose a statutory framework on many types of commercial agency agreements where an agent performs duties on behalf of his principal anywhere in the United Kingdom, a point clarified in the final text. Many of the Regulations are mandatory and, as a result, even if the agreement is silent on a particular point or if the parties wish to agree terms to the contrary, the provisions of the Regulations will still apply and may override the wishes of the parties.21

Importantly, the 1993 Regulations require the principal and agent to undertake certain obligations. For example, a principal is required to act in good faith and provide agents with all of the relevant paperwork. Furthermore, the principal is required to notify the agent of any acceptance or rejection of any order agreed by the agent.22 Amongst the most controversial aspects of the 1993 Regulations were its provisions that related to the compensation or indemnity of agents.23 Connal stated that:

article 17 provides for a potential payment to an agent on his … agency coming to an end. The agent is either to be ‘indemnified’, a concept said to be derived from provisions in German law, or ‘compensated for damage’, a provision said to be derived from provisions of French law. The Directive allowed Member States the freedom to adopt either approach. In implementing the Directive the UK determined that the choice of option would in turn be left to parties to a contract. In the absence of specific contractual provision– which might of course arise if parties did not turn their attention to this particular matter or indeed did not know

17 Ibid. reg. 3–5.â 18â Ibid. regs. 13–20.â 19â Ibid. regs. 21–23.

20S. Sasse and J. Whittaker, ‘An assessment of the impact of the UK Commercial Agents (Council Directive) Regulations 1993’ (1994) 5(3) International Company and Commercial Law

Review 100.

21 Ibid.â 22â Sasse and Whittaker, above n. 20.

23SI 1993/3053, reg. 17. For a detailed illustration of these measures see Accentuate Ltd v. Asigra Inc. [2010] 2 All ER (Comm) 738 as cited in H. Dundas, ‘Case comment: EU law versus New York Convention– who wins? Accentuate Ltd v Asigra Inc’ (2010) 76(1) Arbitration 159.

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that their contract was a regulated commercial agency– the default position was to be compensation.24

(c)â Express actual authority

Express actual authority is traditionally granted by the principal to the agent via an agency agreement. Bradgate noted that as there are no formal requirements for the appointment of an agent, the agreement could be express, implied, in writing, made orally or by deed.25 In the case of Heard v. Pilley, the court determined that a contract entered into for the purchase of land by the agent could be enforced even though the agent was not appointed in writing.26 In cases where the agent is appointed by deed, the customary strict rules for the execution of deeds apply.27

Q1 What is actual authority?

(d)â Apparent or ostensible authority

Apparent authority is also referred to as ostensible authority, and it ‘arises where a third party is induced to enter into a transaction with a principal by a party who appears to have authority to act but who in fact lacks such authority’.28 Apparent authority is the authority granted to an agent via estoppel. Bradgate stated that ‘a principal is bound by the authorised acts of his agents because he has consented to them and to be bound. A person may also be bound by acts done by another on his behalf without his consent, or even in breach of an express prohibition, if his words or actions give the impression that he has authorised them.’29 Apparent authority was famously defined by Doplock LJ in Freeman & Lockyer (a firm) v. Buckhurst Park Properties (Mangal) Ltd as follows:

An ‘apparent’ or ‘ostensible’ authority, on the other hand, is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the ‘apparent’ authority, so as to render the principal liable to perform any obligations imposed upon him by such contract. To the relationship so created the agent is a stranger. He need not be (although he generally is) aware of the existence of the representation but he must not purport to make the agreement as principal himself. The representation, when acted upon

24R. Connal, ‘Compensation under the Commercial Agents (Council Directive) Regulations 1993’ (2007) 28 Scots Law Times 211.

25See Bradgate, above n. 1, at 141.

26(1868–69) LR 4 Ch. App. 548. The decision in Heard v. Pilley was subsequently applied in McLaughlin v. Duffill [2008] EWCA Civ 1627; [2010] Ch. 1.

27Markesinis and Munday, above n. 4.

28Munday, above n. 3, at 59.â 29â See Bradgate, above n. 1, at 144.

19	2â The authority of an agent

by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract.30

In ING Re (UK) Ltd v. R & V Versicherung AG, Toulson J took the view that:

The doctrine of apparent or ostensible authority is based on estoppel by representation. Where a principal (P) represents or causes it to be represented to a third party (T) that an agent (A) has authority to act on P’s behalf, and T deals with A as P’s agent on the faith of that representation, P is bound by A’s acts to the same extent as if A had the authority which he was represented as having.31

Ostensible authority refers to the authority of an agent that he ‘seems’ to have. Byles J in Totterdell v. Fareham Blue Brick and Tile Co. Ltd stated that:

a principal is bound, not only by such acts of the agent as are within the scope of the agent’s actual authority, but by such acts as are within the larger margin of an apparent or ostensible authority derived from the representations, acts, or default of the principal.32

Similarly, Lord Keith of Kinkel in Armagas Ltd v. Mundogas SA stated:

ostensible authority comes about where the principal, by words or conduct, has represented that the agent has the requisite actual authority, and the party dealing with the agent had entered into a contract with him in reliance on that representation.33

Dobson and Stokes noted that ‘the first situation where an agency relationship can be formed despite there being no express agreement to that effect is that where estoppel is established’.34 In essence, this means that where the principal directs the third party to believe that the other person is acting as his agent ‘the courts can find that there is an agent-principal-third party agreement accordingly’.35 Reynolds took the view that:

The agent may also bind his principal under the doctrine of apparent authority. This doctrine, which may depend on estoppel but is probably better based on the same reasoning as that which holds contracting parties to the objective appearances of intention which they create, is said to depend on a manifestation (or ‘holding out’) by the principal to the third party that the agent has authority. The third party is normally entitled to assume that the agent had the authority

30[1964] 2 QB 480, 502. For a critical review of this case and the issue of apparent authority see I. Brown, ‘The significance of general and special authority in the development of the agent’s external authority in English law’ (2004) Journal of Business Law (Jul.) 391.

31[2006] 2 All ER (Comm) 870 at para. 99. This case dealt with the question of whether or not a reinsurer was bound by a quota share treaty that had not been approved by the reinsurer and had been entered into by an agent with no actual or ostensible authority. For a brief discussion of this case see A. Street, ‘Ostensible authority and ratification’ (2006) 119 Insurance and Reinsurance Law Briefing (Sept.) 1.

32	(1865–66) LR 1 CP 674, 677–8.â 33â [1986] AC 717.
34	Dobson and Stokes, above n. 5, at 432.â 35â Ibid.

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which would normally be implied under the circumstances, in accordance with the principles of implied authority summarised in the previous paragraph, unless he knows or is to be taken as knowing (another controversial point in the doctrine) that the authority has in fact been withheld.36

In Rama Corp. v. Proved Tin and General Investment Ltd, the court decided that a person who entered into a contract with a company, who had no knowledge of the company’s articles of association, could not rely on them as bestowing ostensible or apparent authority on the agent of the company.37 Here, Slade J said that ostensible authority was a kind of estoppel, and that, therefore, what was needed was ‘(i) a representation, (ii) a reliance on the representation, and (iii) an alteration of your position resulting from such reliance’.38 Diplock LJ in

Freeman & Lockyer (a firm) v. Buckhurst Park Properties (Mangal) Ltd stated that:

An ‘apparent’ or ‘ostensible’ authority, on the other hand, is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the ‘apparent’ authority, so as to render the principal liable to perform any obligations imposed upon him by such contract.39

This definition has attracted some criticism from several commentators. For example, Brown took the view that ‘it is arguable that this archetype of apparent authority is both inadequate and inapt when applied to the complexities of organisational behaviour in the late twentieth century where agents act on behalf of transnational, impersonal corporations’.40

Q2 What is apparent authority?

(e)â Usual authority

Usual authority can be classified as either actual authority or apparent authority. Dobson and Stokes took the view that ‘usual authority is primarily a sub-division of actual, implied authority and thus emanates from, and enlarges the scope of, the actual authority which exists in its own right as an independent category of authority’.41 However, ‘difficulty is caused by a small group of cases dating mainly from the nineteenth century, which do not fit easily into the framework of actual and apparent authority’.42 The leading case is Watteau v. Fenwick.43 This has been described by many commentators

36F. Reynolds, ‘Case comment: apparent authority’ (1994) Journal of Business Law (Mar.) 144.

37[1952] 2 QB 147. See C. Noonan and S. Watson, ‘Examining company directors through the lens of de facto directorship’ (2008) 7 Journal of Business Law 587 at 619–20.

38[1952] 2 QB 147.â 39â [1964] 2 QB 480, 502.

40	Brown, above n. 30, at 362.â 41â Dobson and Stokes, above n. 5, at 432.
42	See Bradgate, above n. 1, at 151.â 43â [1893] 1 QB 146.