Agency Theory

March 22, 2017 Communication

AGENT: Person employed to act on behalf of another.
PRINCIPAL: Person employing agent on their behalf.
THIRD PARTY: The person with whom the agent brings the principal into legal relationship.
AGENCY defined by the High Court of Australia; ???a word used to connote an authority or capacity in one person to create legal relations between a person occupying the position of the principal and third parties??? (International Harvester Co of Australia Pty Ltd v Carrigan??™s Hazeldene Pastoral Co (1958)

Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other to act.

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There are situations in which a person acts through another but is deemed to have acted in person. This is possible through the operation of the relationship of principal and agent. Much activity of everyday life is taken through agents; houses are bought and sold through real estate agents, travel is arranged through travel agents ect.
The notion of the agent suggests one person acting on behalf of another but in legal terms it goes somewhat further. The principle can be deemed to act in person because the agent has the authority of the principal. Having said this, an agent is different to a representative in that, the agent is authorised to act on behalf of the principal and able to enter into a transaction which binds the principal.
The agent has a relationship with the principal but also a relationship with the third parties. It is the work of the agent that brings the principal into a legal relationship with the third parties Petersen v Moloney (1951) 84 CLR 91. This means while this is occurring there is no legal relationship between the agent and the third party. The agent is limited to the extent of the principal??™s capacity.

The key issue in most cases is whether the principal is bound by the actions of the agent.

Beazley v Seed & Grain Sales Moree Pty Ltd (1988) 4 BPR 9529 per Young J at 9532:

???It is never sufficient to say of a person that he is an agent, one must always ask for what purpose the person concerned was appointed agent and one must always look to see whether the particular act was being done by the agent as agent or in some other capacity.???
The Fiduciary Dimension (Duties of Agent)
An Important feature of the agent??™s relationship is that it is fiduciary: That is there are onerous duties imposed on the agent and these obligations exist even if the contract is silent.
??? Agents must always act in principles interests
o They must follow the principles instructions or they may be liable for any loss suffered by the principal as a result of a breach
??? Agents must make full disclosure of any personal interests
o Agents must never allow the duty of the principal and personal interest to conflict e.g. where a stockbroker is also a share trader. Therefore such personal interests must be fully disclosed to the principle as required by Corporations Law.
o Armstrong v Jackson (1917) 2 KB 82: where a sharebroker, unbeknown to the buyer, sold him shares which the stockbroker owned. It was held that the buyer could rescind(withdraw) the contract as there has been a conflict of interests.
o Linstrose Nominees Pty Ltd v King (1995) where the agent acted both for the respondent purchaser (to give advice for a fee), and unknown to the respondent, the appellant vendor. It was held that the purchaser could rescind.
??? Agent must not make a secret profit or accept payments from another party
o The ultimate breach of the fiduciary duty would be for the agent to accept a secret commission; that is a benefit received by the agent from a third party and is given without the principles knowledge or consent Industries & General Mortgage Co Ltd v Lewis (1949)
o Regal (Hastings) Ltd v Gulliver (1967): A group of directors of a company bought and sold, for a large profit, shares in a subsidiary company. It was held that the directors were liable to account for the profits that they had made as a result of using their positions without the knowledge or consent of the parent company.
??? Agent must exercise due care, skill and diligence
o The agent is not under any special duties in respect of care, skill and diligence. The usual standard of care, skill and diligence apple. An exception of this is where an agent is hired due to a special skill and is engaged for that purpose.
o Mitor Investments Pty Ltd v General Accident Fire & Life Assurance Corp (1984): AN insurance broker was instructed to obtain unqualified insurance coverage against damage caused by storm and flood but, unknown to the client did not obtain coverage against flooding by sea. When the client suffered loss against flooding by sea, the insurance company avoided liability. However, the broker was held liable because of his failure to exercise reasonable care and skill.
??? Agent must account for all transactions
o The agant must be able to account for all transactions to the principle. In effect this means that the agent must maintain separate accounts. This was a problem in periods where stockbrokers where not as regulated as they are now and they mixed their funds with those of clients with the inevitable result that the financial affairs became hopelessly muddled. This legislation makes it mandatory for proper accounts to be kept.


Agency can be created:
??? Expressly
1. By deed (ie, a document signed and witnessed in a special way, usually called power of attorney)
2. by a contract, either:
? in writing (required for some agencies to be effective) or
? Orally (ie, by word of mouth)
??? Impliedly (ie, by operation of law)
1. by necessity ??“ in an emergency where communication with the principal is not possible, and for deserted, married woman
2. By cohabitation ??“ a woman living with a man can pledge man??™s credit for necessaries
??? By holding out or estoppel ??“ where the principal gives the impression that the agent has authority, even thought the agent does not have actual authority
??? By ratification ??“ where the agent, acting as an agent for and on behalf of the supposed principal, has acted without the principal??™s authority and the principal, who was in existence at the time of the making of the contract and with full knowledge, has subsequently ratified (approved) the whole act ??“ note that the agent must have disclosed the agency.


Did the agent have the authority to do the particular act he/she did

If an agent performs an act, but did not have the authority to perform that act then the principal can sue the agent for a breach of duty

The third party would be able to sue the agent for a breach of warranty of authority.

One of the important phenomena in the law of agency is the phenomenon of authority. In agency law, authority means the power, right or commission that an agent has or appears to have to do acts or make contracts with third parties on the principal??™s behalf. Authority can be divided into sub-categories of actual authority and constructive authority.
Constructive authority is more commonly know as OSTENSIBLE authority or apparent authority. Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd (1964).


Actual Authority Constructive authority

A case which illustrates the application of the concept of authority in agency law and also provides a useful and authoritative exposition of authority is Equiticorp Finance Ltd (In Liq) v Bank of New Zealand (1993)

Actual Express Authority: This is where the principal has given the agent instructions orally or in writing or
Actual Implied Authority: includes the power to do thing which are necessarily incidental to the principles express instruction (eg, where the agent is authorised to buy certain shares, they have the authority to do everything in the usual coarse of business to complete the transaction; or a managing director, where the office bearer will have authority to do the things that someone holding that office would normally have);

Consent (permission) is the basis for actual express authority, in short there must be a consensual agreement between the principal and the agent.??? Clarke and Cripps JJA in Equiticorp Finance v BNZ (1993) 32 NSWLR 50 at [132].

???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???: Lord Pearson in Gamac Grain Co Inc v HMF Faure and Fairclough Ltd [1968] AC 1130 at [1137].

Note that both the agent and the principal must consent.

The authority actually exists ??“ but it has not been spelled out in writing or orally by the principal
The implied agreement creates an implied authority for the agent to act in a certain way. It arises where the express agreement is silent on the matter. It may be stated as a general rule that every agent has implied authority to act in accordance with the customs and usage of the sphere in which the relationship applies. As stated before includes the power to do thing which are necessarily incidental to the principles express instruction (eg, where the agent is authorised to buy certain shares, they have the authority to do everything in the usual coarse of business to complete the transaction).

So in this circumstance we must look at the conduct of the parties to determine whether an agency exists, and if so, its particular parameters. Norwich Fire Insurance Society Ltd v Brennans (Horsham) Pty Ltd.

Under actual implied authority the consent of the principle is inferred (Indirect).
There can be no consent where there is an express contrary instruction from the principle to his agent (Fray v Voules). Thus a contrary instruction will immediately defeat an argument of an implied actual authority.

Norwich Fire Insurance Society Ltd v Brennans (Horsham) Pty Ltd,

Norwich instructed the Brennans to deal with their agents.

The Brennans could deal with Norwich directly if they wished but the strong suggestion was that they deal with Norwich??™s agent.
However, Norwich did not expressly declare that the agent could receive payment for the insurance premium.
The Brennans paid the agent and signed the relevant contracts.
The agents then went bankrupt without passing on the monies to Norwich.
The Court at trial, focused on what could be implied from the conduct of the parties.
The implication was that the agent had actual authority to receive payment on behalf of Norwich.

ANZ Bank Ltd v Ateliers de Constructions Electriques de Charleroi (1967): The agent an overseas principle paid cheques which had been drawn in favour of the principle into its own account. When the agent went into liquidation it became apparent that the agent had not transferred to the principal all of the money that it had received on its behalf. The principal sued on the basis that the agent had no authority to pay cheques made out to the principal into its own account. The Privy Council held that in view of all the circumstances ??“ the principal was based in Belgium, it had no bank account in Australia and foreign restrictions were an obstacle ??“ thus the agent had an implied authority to bank the cheques. It was necessary to imply that authority to give business efficacy to the relationship.

How else can Authority be implied

Custom or trade usage: Generally, a person who holds a certain position may normally have a certain authority.

For example, managing directors usually have the power to do certain things:

Managing directors: usually have the authority to; employ others, provide services to company, guarantee loans made to the subsidiary of the company and agreeing to indemnify other guarantors: Hely-Hutchinson v Brayhead Limited.

There is a difference in the general level of authority that a corporation usually bestows on a managing director as opposed to an ordinary director.

Managing directors??™ authority also usually includes; borrowing money and giving security over company??™s property, authorising agents to enter into contracts on company??™s behalf: Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd.

An Ordinary director does not usually have authority to bind the company: Northside Developments Pty Ltd v Registrar-General.

An Individual director can execute a document but it is not likely to be binding without the authorisation of another director or the board.

Note that there are prerequisites that must be satisfied before trade, custom or usage may be relied upon to implying authority. It must be demonstrated that the usage or custom is notorious, certain and reasonable: Con-Stan Industries Australia Pty
Ltd v Norwich Winterthur Insurance (Australia) Ltd

How else can Authority be implied

A course of past dealing; or

History of dealings determines authority for future dealings. Eg: If a board of company directors has allowed one of its directors to continually act as if he has a certain level of authority and to sign certain contracts, then they might find that they are bound by future agreements that he signs: Hely-Hutchinson v Brayhead Limited.
Hely-Hutchinson v Brayhead Limited [1968] 1 QB 549

The director in question, Richards (who is the agent in this case-example) frequently made decisions without seeking the authority of the board of directors.

The board of directors knew of Ricjhards conduct but whenever it had arisen they had failed to discipline him.

Ultimately, Richards signed some letters that created obligations that the company did not want to honour.
They argued that Richards lacked authority.

The Court said that he did have authority because of his past dealings.

This can be describes as ???the authority of an agent as it appears to others???. Where the principle gives third parties the impression that the agent has apparent of ostensible authority, as with holding out or estoppel above, the principle will be bound even though the agent may have acted outside the terms of their actual authority.


1. representation by the principal

2. reliance on that representation

detriment or damage to the person who relied

(Rama Corporation Ltd v Proved Tin & General Investments at 149-50.)
When these elements are fulfilled the principal becomes bound.


The representation can be made by words, conduct, course of dealings, description, silence or principal equipping person with certain title, status and facilities.

Most often the representation will take the form of providing the agent with a job title, business card and other facilities: Pacific Carriers Ltd v BNP Paribas.

The representation must relate directly to the person who is making the claim: Leipner v McLean.

Where a person??™s conduct creates the impression that there is an agency the principal of estoppel applies. This means that a person, having created an impression, cannot later deny that a certain state of affairs applies. Thus, if one expressly or impliedly represents that another has authority to act as an agent and a third party relies on the representation and deals with the ???agent??™ in that capacity, the person who made the representation will be held liable as if the agent did in fact have the authority. The representation that there was authority will create the authority. The person who made the representation will be estopped from denying the existence of the authority and thus the agency relationship. The authority is not, as in an agency created by express agreement, actual; it is described as apparent or ostensible because it involves the appearance of authority. Examples of apparent authority occur when members of partnership holdout that a person is a partner or where a former agents termination is not notified to those who are accustomed to dealing with that person as an agent.

Freeman & Lockeyer v Buckhurst Park Properties (Mangal) Ltd (1964): The articles of a company operating as a property developer provided power to appoint a managing director. Kapoor was acting as the managing director with the knowledge and approval of the board but had not been formally appointed to the position. He engaged architects on behalf of the company but it disclaimed liability arguing that kapooor had no authority to act on its behalf. The court held that Kapoor had no actual authority but the company, by permitting him to act as managing director, had created apparent authority and any act done within the ambit of that authority was binding on the company. The conduct of Kapoor fell within the ordinary scope of a managing director of a property developer.

Tooth v Laws (1888): where the defendant had been a licensee of a hotel and allowed his name to continue to be displayed over the door but failed to tell the plaintiff that he sold the business. It was held that when the person??™s who ran the business failed to pay for the liquor they bought from the plaintiff, the defendant was estopped from denying that they were his agents.

The focus is on the reasonable expectations of the parties:

First Energy (UK) Ltd [1993] 2 Lloyd??™s Rep 194

First Energy required credit. They met with the branch manager of a merchant bank. The manager informed them that the head office in London would need to approve the loan. Subsequently the manager told First Energy that the loan was approved. It was not actually approved and the bank refused the loan. First Energy sued. It was held that the agent had ostensible authority to communicate the decision of the board, and the bank was bound by his letter

i) Entrusting indicia of title to an ???agent??™
ii) Possession of property for the purposes of sale
iii) Occupancy of a particular position
iv) Within the ordinary scope of the business or custom of the particular agent
V) Provision in articles authorising delegation of a power to an officer acting on behalf of the company.
VI) Permitting business card to be used
(vii) Previous course of dealings

(i) Entrusting indicia of title to an ???agent??™

Possessing the deeds of title, even lawfully, does not warrant using them in a sale or as security for a loan: Brocklesby v Temperance Permanent Building Society

Egan v Ross (1928) 29 SR (NSW) 382

Principal was negligent in giving signed memoranda in blank to his agent who then sold it to someone who the principal had said he would not sell to.

Held that agent had general authority to sell to a buyer within the terms of the memorandum.

(ii) Possession of property for the purposes of sale

Simply possessing somebody else??™s property does not give rise to a right of sale: Johnson v Credit Lyonnais Co.

However, it is relevant if the property is held for the purposes of sale: Motor Finance and Trading Co Ltd v Brown.

Motor Finance and Trading Co Ltd v Brown,

An ???agent??™ was permitted to possess the vehicle.

It was kept on the premises and appeared to be for sale.

The representation was that it was for sale and that the agent had the authority to sell it.

As the representation was made with owner??™s approval, when the vehicle was duly bought the principal was bound by the transaction.

(iii)Occupancy of a particular position

A certain level of authority will be imputed to a person in a certain position.

A third party is entitled to rely on that authority.

Robinson v Tyson (1888) 9 LR (NSW) 297

The representation is limited to the authority tht a person in that position would normally possess.

British Bank of the Middle East v Sun Life Assurance of Canada.

In some cases it is relevant to look not only at the position that the agent holds, but also the totality of dealings between the third party and the principal:

Egyptian International Foreign Trade Co v Soplex Wholesale Supplies Ltd and PS Refson & Co Ltd (???The Raffaella??™) [1985] 2 Lloyd??™s Rep 36

Egyptian International Foreign Trade Co v Soplex Wholesale Supplies Ltd and PS Refson & Co Ltd (???The Raffaella??™)

A documentary credit manager of a bank signed a letter of guarantee on his own.
This was outside of his authority.
But the circumstances suggested that ostensible authority existed.
Firstly, the agent??™s position suggested a certain level of authority.
Secondly, the bank had security from the customer.
Thirdly, the signing took place at the bank??™s premises.
Fourthly, the signing occurred after three days of negotiations.
Fifthly, the bank??™s stamp was affixed.

British Bank of the Middle East v Sun Life Assurance of Canada,

The Principal??™s allowed an agent to use the title of ???Branch Manager??™ in correspondence.

The representation was was relied on by a third party.

But the ostensible authority that was created did not give the agent the ability to make a representation that a junior employee had a certain level of authority..

vi)Permitting business card to be used

Prospect Industries v Anscor Pty Ltd [2003] QSC 296

The agent had pre-printed business card with ???financial planner??™ on it.

The third party argued this meant he had been held out as having authority to deal with financial planning matters.

Card was held not to constitute a holding out as the third party understood the ???agent??™ was not there on behalf of the company named on the card.

The card had been supplied because it contained the agent??™s contact details and the third party had in fact handwritten a different company name on the card.

Pacific Carriers Ltd v BNP Paribas [2004] HCA 35

Bank (principal) had provided a manager (agent) with an official rubber stamp ??“ this implied a higher level of authority

The agent acting exceeded her authority by stamping an indemnity
The Court held that the bank was bound by the indemnity.

Consequences of Ostensible authority:

The principal may have to honour an obligation to a third party.
The principal may be able to sue the agent for breach of duty.

If the agent commits a fraud, whilst acting in the scope of his/her ostensible authority, the principal may still be liable.

The principal will be bound, even where the agent acted only to advance their own personal interest: Lloyd v Grace, Smith & Co.


A causal connection must exist between the representation to the third party and the dealing that eventuates between third party and agent.

Lack of knowledge of the representation, lack of belief, or the ability to easily find out, will negative reliance: Hely-Hutchinson v Brayhead Limited at 567-8.

Reliance is difficult to demonstrate in circumstances where the third party should have made inquiries: Northside Developments

Northside Developments (1989) 170 CLR 146

Mortgage over land owned by Northside Developments to guarantee a loan made by Barclays bank to S, a director

The land mortgaged was the only major asset of Northside Developments

The seal was affixed to mortgage by one director of the company and his son (who has false documents supporting a claim to be the company secretary)

The High Court held that the bank should have been on inquiry ??“ major asset was being used to secure a loan which gave it no benefit and only benefited the director.

The transaction was outside its usual operations

Held that no-one can rely on a representation as to authority if the circumstances should reasonably have put them on enquiry

General Principles of reliance:

The agent need not be aware of the representation: Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd at 503.

Once ostensible authority is established it is not relevant that the third party or their legal representatives, may, had they taken certain steps, have discovered the lack of authority: argued unsuccessfully in Klement v Pencoal Ltd.

This is slightly different from the ???unusual transactions??™ cases.

If the third party understands that the agent is acting outside the authority bestowed by his position then he cannot establish ostensible authority: Alliance Acceptance Company Ltd v Oakley.

ELEMENT 3 (DETRIMENT)/ Alteration of position

Detriment must be suffered by the third party as a consequence of such reliance.

It is sufficient if the third party has entered into a contract, or altered his position as a result of relying on the representation.

Egan v Ross, held that the third party had clearly acted to his detriment ???by engaging a solicitor and giving necessary instructions for completion of the contract.??™

The standard for detriment would appear low.

What is ratification
Ratification involves the retrospective authorization of conduct. An example is where the agent has exceeded the existing limits of authority in a transaction and the principal later takes benefit of the transaction. Thus the principal adopts the contract as if it had been properly authorized. The principle by ratifying the agents unauthorized conduct, puts the transaction into a state it would have been had the agent been fully authorized at the time of the transaction.
As well as the need for the existence of an agency it is also necessary that the agent was acting as an agent and not personally. If the contract had been made for the agents benefit then it is not capable of ratification because the principle has no interest in the transaction.
Ratification is making good of an agents lack of authority. It follows that if there is to be ratification the principal must ratify the whole of the agents conduct. There is no intermediate position, no partial ratification. The act of ratification must be positive in the sense of being conduct by the principal which indicates not only knowledge of the agents exceeding authority but also adoption. It can occur wither expressly or by implication arising from the principal taking advantage of what the agent did. If an agent purchased goods on behalf of a principle but purchased more than the authorized quantity, the principal knowing of the breach would ratify the agents conduct by accepting the goods. Irvine v Union Bank of Australia.

General Principles

Where a contract has been made subject to ratification there is no contract in existence until the ratification is communicated to the third party by the principal: Watson v Davies.

Once ratified, the principal cannot withdraw.






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