Creation of Agency

Note on Creation of Agency by Legum

Creation of Agency:


For an agent to be able to act on behalf of a principal, the agent must be given authority so to act either by the principal, by operation of the law, or by the principal’s representation to a third party, inter alia. An agent obtains the authority to act on behalf of the principal after the creation of the agency relationship. This note discusses the four ways in which the agency relationship may be created and the nature of the agent’s authority based on the mode of creation of the agency relationship. The following ways of creating an agency relationship shall be discussed:

1. Agency by Agreement.

2. Agency by Apparent or Ostensible Authority.

3. Agency by the Operation of The Law.

4. Agency by Ratification.

Creation of Agency: Agency by Agreement

An agency relationship can be created when one party, known as the principal, expressly or impliedly appoints another party, known as the agent, to act on his behalf in relation to third parties. In more concise terms, an agency relationship is created by agreement when the principal and agent enter into a contract for the agent to act on behalf of the principal. Whilst agency relationships in modern times are usually created by a contract between the agent and principal, the mere presence of consent to represent and be represented by the agent and principal respectively, suffices for an agency by agreement to exist. This position was upheld in the case of Yasuda Fire and Marine Insurance Company Europe Ltd v Orion Marine Insurance Underwriters Ltd. Per Coleman J,

Although in modern commercial transactions agencies are almost invariably founded upon a contract between principal and agent, there is no necessity for such a contract to exist. It is sufficient if there is consent by the principal to the exercise by the agent of authority and consent by the agent to his exercising such authority on behalf of the principal.

When the agency relationship is created through agreement or the consent of the parties, the agent’s actions are deemed to stem from the agent’s possession of actual authority from the principal. According to 2.01 of the Restatement (3rd) of Agency, “an agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal's manifestations to the agent, that the principal wishes the agent so to act.

Essential to the conceptualization of actual authority is the idea of the “ principal's manifestations to the agent” as a basis for ascertaining what the actual authority of the agent entails. An agent must reasonably interpret the principal’s manifestation to ascertain what the principal requires him to do on his behalf. The characterization of what is reasonable is contained in sections 2.02(2) and (3) of the Restatement (3rd) of Agency. In section 2.02(2) of the Restatement (3rd) of Agency, it is provided that

An agent’s interpretation of the principal’s manifestations is reasonable if it reflects any meaning known by the agent to be ascribed by the principal and, in the absence of any meaning known to the agent, as a reasonable person in the agent’s position would interpret the manifestations in light of the context, including circumstances of which the agent has notice and the agent’s fiduciary duty to the principal.

Further, section 2.02(3) of the Restatement (3rd) of Agency provides that “an agent’s understanding of the principal’s objectives is reasonable if it accords with the principal’s manifestations and the inferences that a reasonable person in the agent’s position would draw from the circumstances creating the agency.” In the case of Ireland v Livingston, the defendant principal, Livingston, wrote to the plaintiff agent instructing the plaintiff to purchase and ship 500 tons of sugar. The defendant added that “50 tons more or less of no moment, if it enables you to get a suitable vessel.” These instructions either meant the plaintiffs should purchase and ship all the sugar in one bulk or purchase and ship two or more bulks on two or more ships. When the plaintiffs adopted the latter meaning of the defendant’s instructions, the defendant refused to take delivery of the shipment on grounds that the plaintiffs were employed to purchase 500 tons of sugar and to ship the same in one bulk. The court held that since the principal’s instructions were capable of two or more meanings, it was reasonable that the agents took one of those meanings.Per Lord Chelmsford, L.J

if a principal gives an order to an agent in such uncertain terms as to be susceptible of two different meanings, and the agent bona fide adopts one of them and acts upon it, it is not competent to the principal to repudiate the act as unauthorized because he meant the order to be read in the other sense, of which it is equally capable

When a principal expressly instructs an agent to act, the agent has express actual authority to act on behalf of the principal. Whilst the principal’s orders in Ireland v Livingston were express, a principal may also impliedly authorize an agent to act on his behalf. When a principal impliedly authorizes an agent to act, the agent has implied actual authority to act on behalf of the principal. Lord Denning succinctly explained these two forms of actual authority in the case of Hely-Hutchinson v Brayhead Ltd:

…actual authority may be express or implied. It is express when it is given by express 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 that office. Actual authority, express or implied, is binding as between the company and the agent, and also as between the company and others, whether they are within the company or outside it.

The terms express actual authority and implied actual authority are further explained below.

Express Actual Authority:

When the manifestations of the principal to the agent are express, thus existing in the form of clear language, the agent’s authority is an expressactual authority or just express authority. Express actual authority is created when the principal writes or speaks to the agent about what he is required to do on behalf of the principal. For example, in the case of E Sfeir & Co v National Insurance Company of New Zealand, Ltd Per Glyndova , the plaintiff company had written to Glyndova Ltd to “act as our claims settling agents should the necessity arise”. Such express manifestation from the principal to the agent makes the authority of the agent an express actual authority. To determine the scope of an agent’s express actual authority, the courts simply interpret the written or oral agreement between the principal and the agent. In E Sfeir & Co v National Insurance Company of New Zealand, Ltd Per Glyndova , the court in examining the limits of the authority of the agents, Glyndova, stated that “ Glyndova's authority to act for the Insurance Company is contained in the letters exchanged between them and the Insurance Company. The extent of their agency or authority, therefore, depends upon the interpretation to be placed upon those documents.

Implied Actual Authority:

Even in the absence of express manifestations from the principal, an agent may still have implied actual authority to act on behalf of the principal. Per Lord Denning in Hely-Hutchinson v Brayhead Ltd, actual authority is implied “when it is inferred from the conduct of the parties and the circumstances of the case”. Thus, an agent is deemed to have implied actual authority when, in the absence of such express instructions, he is allowed to perform acts that are necessary or incidental, usual, and proper to accomplish his (the agent’s) express actual authority. The authority of the agent is also considered implied actual authority if the agent, without express instructions, acts in a manner he reasonably believes the principal wishes him to act based on the agent’s reasonable interpretation of the principal’s manifestations and objectives, and/or other surrounding circumstances.

Summarily, implied actual authority may arise under three conditions:

1. Incidental Authority: The agent has an implied authority to do acts that are incidental (or necessary) to the fulfilment of the principal’s objectives. Sometimes, a principal may expressly instruct an agent to achieve an objective without spelling out how that objective ought to be achieved. The agent, in order to achieve the principal’s objective, may need to achieve several minor objectives. Those minor objectives are necessary for or incidental to the fulfilment of the principal’s objective and an agent is deemed to have an implied actual authority to perform these incidental tasks. In the case of Agbemashior and Others v State Insurance Corporation and Others , the third defendant was given express authority to help the plaintiffs make an insurance claim. The third defendant, to achieve the express objective of the principal, had the actual implied incidental authority to hire a lawyer, an incidental act, to assist him in making the insurance claim. The court recognized the existence of this authority, especially considering the absolute discretion given to him by the plaintiffs.

2. Usual Authority: The agent has an implied authority to act in ways required by their trade or profession. Usual authority can be understood as how things are usually done in a particular trade or profession, such that an agent belonging to that trade can act in the usual way in the absence of express instructions. For instance, a lawyer who is appointed an agent has the implied actual authority to act in ways lawyers usually act, following the usual rules of the legal profession, inter alia.

3. Customary Authority: Usually in commercial settings, some practices crystalize over time and some persons may have an implied authority to act on behalf of others even without express authorization. When an agent acts on behalf of a principal without express manifestations from the principal, and based on the rationalization of “that is how we do things” or “I can do this because my position allows me”, then the agent is said to be acting based on actual implied customary authority. In the case of Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd, the company secretary of Fidelis Ltd, claiming to be acting on behalf of Fidelis Ltd, hired cars from the plaintiffs and used those cars himself. Upon a suit by the plaintiff for recovery of the cost of the hire,Fidelis, relying on the case of Barnett, Hoares & o v South Landon Tramways Co (1887), contended that a company secretary fulfils a humble role and has no authority to make any contracts or representations on behalf of the company. The court held, however, that

times have changed. A company secretary is a much more important person nowadays than he was in 1887. He is an officer of the company with extensive duties and responsibilities. This appears not only in the modern Companies Acts, but also by the role which he plays in the day-to-day business of companies. He is no longer a mere clerk. He regularly makes representations on behalf of the company and enters into contracts on its behalf which come within the day-to-day running of the company's business. So much so that he may be regarded as held out as having authority to do such things on behalf of the company. He is certainly entitled to sign contracts connected with the administrative side of a company's affairs, such as employing staff, and ordering cars, and so forth .

Thus, a company’s secretary, by virtue of the changing times, now has an actual implied customary authority to act on behalf of the principal in ways not hitherto possible.

Creation of Agency: Apparent or Ostensible Authority

An agency relationship may also be created if the principal represents to third parties that the agent has the authority to act on his behalf. An agent who acts on behalf of the principal based on the principal’s representations to third parties is deemed to possess ostensible or apparent authority. In section 2.03 of the Restatement (3rd) of Agency, it is provided that “apparent authority is the power held by an agent or other actor to affect a principal’s legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations .” In the case of Freeman & Lockyer v Buckhurst Park Properties Ltd, Diplock L.J defined apparent authority as

a legal relationship between the principal and the contractor created by a representation, made by the principal to the third party, intended to be and in fact acted on by the third party, that the agent has authority to enter on behalf of the principal into the 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.

From the above definitions, and also per Slade J in Rama Corporation Ltd v Proven Tin and General Investments Ltd, an agent is said to have ostensible or apparent authority under three conditions:

1. Belief of Third Party: A third party must reasonably believe that the agent has the authority to act on behalf of the principal.

2. Reliance by Third Party: Owing to the third party’s belief, the third party alters his position (by dealing with an agent they believe to be representing a principal.

3. Representations of the Principal: The belief of the third party is traceable to the principal’s manifestations or representations. There are two main principles governing this condition. The first is that an agent on his own accord cannot make representations that he has ostensible authority. Per Lord Donaldson MR in the case of United Bank of Kuwait v. Hammond, “It is trite law that an agent cannot ordinarily confer ostensible authority on himself. He cannot pull himself up by his own shoelaces.” In the case of Attorney General for Ceylon v Silva, the defendant sued the A-G for Cylon representing the Crown for damages on grounds that following his purchase of goods at an auction advertised by the Principal Collector of Customs, the Principal Collector, as an agent of the Crown, failed to deliver the purchased goods. The defendant contended that the Principal Collector had ostensible authority to act on behalf of the crown, thereby making the crown liable for the Principal Collector’s breach of contract. The Privy Council dismissed the defendant’s arguments and submitted that “ all ostensible authority involves a representation by the principal as to the extent of the agent’s authority. No representation by the agent as to the extent of his authority can amount to a ‘holding out’ by the principal. ” Also see the case of Armagas Ltd v Mundogas SA, The Ocean Frost(1986).

When the above conditions are met, a principal is estopped from denying that the agent acted with his authority. In the case of Commodore v Fruit Supply (Ghana) Ltd, the defendants sought to deny the authority of one Attoh Quarshie to act on their behalf in relation to a third party. The court per Kingsley-Nyinah J.A, held that

The respondents had, at all material times, held out, suffered, and permitted the said Attoh Quarshie to occupy the position of, and to act as, their director and agent, thereby leading the appellant, particularly, to the acceptance and bona fide belief that he had the unqualified authority of the respondents to further their interests and objectives in their transaction with her; and, furthermore, to accept and receive moneys accruing therefrom But if, as the respondents contend, Attoh Quarshie had no such visible authority (as he so very clearly appears, on the evidence, to have had) then the burden of establishing that absence of authority rested squarely with them, the said respondents, and not with the appellant.

Also, see the case of Freeman & Lockyer v Buckhurst Park Properties Ltd where the defendant company was estopped from denying that one Kapoor has the authority to represent and act on their behalf.

Whilst apparent or ostensible authority may create an agency relationship where none existed, it can also enlarge the agent’s actual authority beyond its scope or beyond its stipulated date of termination.

Creation of Agency: Agency by the Operation of The Law or Agency by Necessity

An agency relationship may be created when the law allows a person (an agent) to act on behalf of another (a principal) to save some proprietary interest of the principal in jeopardy. For instance, where a person’s cargo is in danger of perishing, the shipmaster may be allowed to sell off the cargo to prevent such. In the case of China Pacific S.A. v Food Corporation of India (Winson), the plaintiffs were salvors (persons who salvage a ship or its cargo) and the defendants were importers of wheat and owned cargo aboard the Winson. When the Winson got stranded while carrying the cargo, the shipmaster entered into an agreement with the plaintiffs to salvage the cargo by storing it in their warehouses. The plaintiffs brought an action against the defendants to recover an amount of $110,982 as (additional) payment for their services. Inter alia, the court held that the actions of the plaintiffs were necessary to protect the cargo from deterioration, and the defendants were liable to pay.

Under the agency of necessity, the following rules apply:

1. It must be impossible for the agent to communicate with the principal: in the case of Springer v Great Western Railway Company, the defendant was contracted to carry tomatoes from Channels Island to Weymouth by ship and from there to London by train. When the ship arrived in Weymouth, and due to a strike action by the defendant’s workers, there was a two-day delay in Weymouth causing some tomatoes to start to go bad, the defendant, without communicating to the plaintiff, decided to sell those tomatoes they believed could go bad beyond saleable condition. The plaintiff brought an action against the defendant for damages when they discovered this, and the court held that the defendant’s failure to communicate with the plaintiff about their actions when they could have done so, makes them liable. No agency for necessity thus existed due to the possibility of communication and the failure of the defendant to communicate. Also, see the case of Cargo ex the "Hamburg" (1863) 2 where a bottomry bond could not be enforced against cargo owners because the shipmaster could have communicated with the cargo owners for instructions but failed to.

2. The action is necessary for the benefit of the principal: In the case of Prager v Blatspiel, Stamp and Heacock Ltd, the plaintiffs, from Romania, bought fur from the defendants, based in London, but decided to wait until the First World War was over before taking delivery. The occupation of Romania by Germany made communication impossible between the plaintiff and the defendant. While the fur was in storage with the defendant, it was increasing in value. Towards the end of the war, the defendants began selling off the fur at the local level on grounds of agency by necessity. The court held that no agency by necessity existed because there was no commercial necessity to sell the fur without informing the plaintiffs since the fur was increasing in value.

3. The agent must act bone fide in the interest of the principal. In the case of F v West Berkshire Health Authority, the mother of a 36-year-old woman who was disabled by mental incapacity and living permanently at a mental facility requested that her daughter be sterilized because she (the daughter) had started a relationship with one of the patients at the facility and may get pregnant, a situation that would worsen her condition. The court held that the operation was lawful because it was in the best interest of the mental patient. The court’s ruling was based on the reasoning that the act of sterilization is in the interest of the 36-year-old disabled woman, the principal.

4. The act of the agent must be reasonable and prudent. In the case of China Pacific S.A. v Food Corporation of India (Winson) mentioned above, the plaintiff’s act of storing the wheat was reasonable and prudent since wheat is highly perishable.

5. The principal must not have given express instructions to act otherwise. A principal may expressly inform a shipmaster to allow the cargo to perish when he, the principal, is unable to take delivery. The agent cannot claim to have acted under the agency of necessity by storing the cargo when the principal fails to take delivery.

Creation of Agency: Agency by Ratification

Finally, an agency relationship can be created through ratification. In section 4.01(1) of the Restatement (3rd) of Agency, ratification is defined as “…the affirmance of a prior act done by another, whereby the act is given effect as if done by an agent acting with actual authority.” Thus, a person, without actual authority, may act on behalf of another and subsequently have his acts affirmed (or ratified) by the person on whose behalf the act was done. When ratification occurs, it is as though the person who acted without actual authority had that actual authority at the time of his acts. The case of Wilson v Tunman explained the doctrine of ratification as

…an act done, for another. By a person, not assuming to act for himself, but for such other person, though without any precedent authority whatever, becomes the act of the principal, if subsequently ratified by him, is the known and well-established rule of law… In that case the principal is bound by the act, whether it be for his detriment or his advantage, and whether it be founded on a tort or on contract, to the same effect as by, and with all the consequences which follow from, the same act done by his previous authority.

The following principles govern the doctrine of ratification:

1. Retrospective Effect of Ratification: When the principal ratifies the acts of an agent done without actual authority, it is as though the agent had actual authority to bind and act on behalf of the principal at the time of the agent’s acts. For instance, if the agent, without actual authority, accepts an offer made to the principal, and the principal later ratifies the acceptance, the date of acceptance of the offer is not the date of ratification, but the date of acceptance by the agent who acted without actual authority. In the case of Bolton Partners v Lambert, an agent of the plaintiff accepted an offer from the defendant without actual authority. Before ratification of the acceptance by the plaintiff, the defendant withdrew the offer. The plaintiffs subsequently ratified the acceptance and demanded specific performance. The defendant contended that the offer was withdrawn before the plaintiff’s actual acceptance of it, but the court held that ratification of the agent’s acceptance had a retrospective effect.

2. Existence of Principal at Time of Agent’s Acts: A principal who was non-existent at the time of the agent’s acts cannot ratify the agent’s acts when he comes into existence after the act. In the case of Kelner v Baxter, a group of company promoters for a new hotel, Gravesend, entered into a contract with the plaintiff to purchase wine purportedly on behalf of Gravesend. At the time of the purchase contract, Gravesend was not registered. When Gravesend was eventually registered, it ratified the contract at a time when the wine had already been consumed. Gravesend failed to pay the plaintiff, the plaintiff brought an action against the promoters for recovery of costs. The promoters argued that the liability for the payment of the wine had shifted to Gravesend post ratification, but the court held that Gravesend cannot bear liability because it was non-existent at the time of the contract for the purchase of the wine.

3. The Act must have been done on behalf of the Principal. In other words an Undisclosed Principal Cannot Ratify: A principal cannot ratify the acts of an agent done in the name of the agent. Ratification is only possible if the agent’s acts were done in the name of or on behalf of the principal. In the case of Keighley, Maxsted & Co v Durant, the appellants had authorized one Mr Roberts to purchase wheat on a joint account for him and them at a certain price. Mr Roberts instead purchased the wheat from Mr Durant at a higher price than authorized and in his name instead of in the joint names of himself and the appellants. The appellants on discovering this, agreed to accept the wheat purchased by Mr Roberts but subsequently failed to take delivery. Mr Durant brought an action for compensation against Mr Roberts and the appellants. The House of Lords held that the agreement for purchase was in the sole name of Mr Roberts and the appellants could not have ratified same. Since Mr Roberts also made no mention of the appellants during the time of contracting with the respondents, the appellants were considered undisclosed principals who could not ratify Mr Robert’s unauthorized acts.

4. Void acts cannot be Ratified: If the acts of the agent are void ab initio, the principal cannot subsequently ratify those acts. In the case of Brook v Hook, a man forged his uncle’s signature on a promissory note. Upon discovery of the forgery by a third party who came into possession of the notes, he intended to institute legal proceedings against the forger. The uncle, wanting to prevent his nephew from punishment, purported to ratify his nephew’s acts. It was held that the act of the nephew was void ab initio and the principal could not ratify same.

5. Ratification must be done within a Reasonable Period.