Agency is a fiduciary relationship between two parties where one party acts on behalf of the other. The party who act on behalf of the other is referred to as an agent while the other party is a principal (Miller 2013, p.969). An agent is, therefore, able to enter into contracts that are binding to the principal. The principal engages an agent to facilitate buying and selling contracts implying that an agent can buy or sell on behalf of the principal. A sales agent enters into a sales contract with the buyer on behalf of the principal implying that the latter is bound by the contract without physical participation. An agent can facilitate a sales contract between the buyer and the seller as is in marketing agency. In this case, the agent looks for buyers and connects them with the sellers. In other words, the agent does not transact with the seller but facilitates a sales transaction by connecting the seller and the buyer. Agency plays a critical role in an economic system. It enables business owners to multiply themselves by engaging many agents to transact on their behalf. As a result, they are able to reach many clients at a go by distributing many agents in the market. Agents have specific duties to the principals that create a sustainable relationship.
Understanding agency relationships and the nature of authority conferred to agents can provide a good basis for comprehending the duties of agents to the principal. Agency creates a relationship between three parties that are the principal, the agent, and the customer. Agency is created through a contract between the principal and an agent to confer authority to the agent to act on behalf of the principal. The agent and the principal agree to the terms of the engagement including the role of the agent in the relationship. The agreement also covers the commission the principal should pay to the agent for services offered. A relationship exists between the agent and the third party. An agent is privy to the contract between the principal and the third party. However, the agent facilitates the contract by enabling parties to the contract to meet. The agent’s representations form the basis of a contract as it is assumed that he is representing the opinions of the principal in a contract. The principal and the customer (third party) are privy to the sales contract arising from the agency. The agent binds the principal to the contract entered on his behalf with the third party (Wood 2009, p.229-234).
There are four main types of authorities possessed by agents that define their responsibility to the clients. The absence of these authorities insinuates that agency does not exist. These authorities are the actual authority, ostensible authority, usual authority, and ratified authority. Actual authority occurs when the principal knowingly gives actual authority to the agent empowering him to act in a certain manner. Actual authority is either express or implied. Express authority arises from specific words of the principal where the details of the agent’s authority are expressed in writing or by the word of mouth. As was in Ireland v Livingston, Livingstone (the principle) was compelled to accept the 400 tons of sugar procured by Ireland (the agent) since the principal had expressly authorized the agent to procure the sugar on his behalf. Implied actual authority emanates from customs in a certain professionals or trade. For instance, a director has the authority to contract on behalf of the company. Such contracts are binding to the company since directors are agents of the company. They are appointed by the shareholders to govern the day to day dealings in the company that includes contracting with third parties on behalf of the company. In Hely Hutchinson v Brayhead Ltd case, Mr. Richards who was Brayhead Ltd’s managing director possessed implied authority since directors in ordinary cases act on behalf of the company (Rush & Ottley2006, p.330). The ostensible authority also referred to as apparent authority emanates from the perception that the agent has the authority to transact on behalf of the principal. Actions of the principal can create an impression that a certain individual (agent) is authorized to transact on their behalf. Such an impression makes the third parties believe that indeed agency relationship exists between the principal and the perceived agent. As a result, transactions initiated by the agent with third parties are binding to the principal in such conditions. The principal is required to implement the necessary measures to make potential buyers that agency relationship does not exist in case there are fears that potential buyers are likely to have such a perception. Three conditions must be fulfilled for apparent authority to exist. Firstly, a representation must exist that the agent possesses the authority. Secondly, the representation must emanate from an authentic source such as the principal. Lastly, a third party must rely on the representation when transacting with the agency (Becker & Strömberg 2012,p.1931). Usual authority is the third type of authority enjoyed by agents. It is derived from the position occupied by the agent and it can expand the scope of apparent and actual authority. Authority by ratification is the last form of authority enjoyed by the agents. It is created when the principal ratifies a contract that is facilitated by a person who initially lacked the capacity to act as an agent. Identifying the four main authorities of an agent supports a clear definition of the responsibilities of an agent to the principal. Duties only arise when the person expected to perform them has adequate authority. In other words, an agent cannot exercise duties well when adequate authority is not given.
Duties of an Agent
The fact that agents bind the principals in their engagements presents loopholes for damaging the interests of the principal. The law clearly states the duties that agents owe the principals that to a great extent protect the principal from malpractices of agents. These duties are broadly classified into duty to instructions, the duty of care, and fiduciary duties (Hart 1998,p.609). The fiduciary duties are broad and have a greater impact in the agency than the other two duties. However, it is necessary to closely examine the three duties since each category plays a crucial role in the agency.
Duty of Skills and Care
An agent owes the principal the duty to exercise skills and care for the principal’s interests. Principals make an assessment of the agent’s skills before allowing them to transact on their behalf. It implies that the agent should exercise skills in consideration to promote the interests of the principal during transactions. In Chaudhry v Prabhakar, the defendant was liable for misleading the plaintiff regarding an advice of buying a car. In this case, the plaintiff sought advice from the defendant concerning the fitness of the car where the advice was used as a basis for making decisions (Rush & Ottley 2006, p.327). The defendant knew too well that the plaintiff would solely rely on the advice when acquiring the car. The law recognizes the duty of care of both paid and unpaid agents. It implies that agents who give volunteer services are liable if they do not exercise the duty of care in service delivery. Apart from the payment, there are other factors that come into play when determining the agent’s duty of care. Firstly, the level of experience is a key factor to consider when evaluating the agent’s duty of care. Agents are expected to exercise the duty of care in line with their level of experience. An agent cannot be expected to exercise a duty of care and skills that are beyond his level of experience. The skills and profession are also put into consideration when determining the agent’s duty of care. An accountant cannot exercise a duty of care in the engineering field due to the absence of engineering skills. It is the responsibility of the principal to measure the skill level of the agent before authorizing them to perform agency roles.
Duty of Following Reasonable and Lawful Principle’s Instructions
Agents are governed by instructions given by the principals. However, the instructions given must be technically and legally feasible (Dang & Jacob 2010,p.219). Agents are strictly required to comply with the principal’s instructions whenever the instructions are clear. However, agents are free to deviate from the instructions in case they are engaged by the principal as providers of professional services. In case a professional discretion is required, agents are free to deviate from the directives of the principal but such a deviation must be in line with the rules of the concerned profession. Sometimes principals give ambiguous instructions that compromise the ability of the agent to perform their duties. Such a situation requires the agent to seek clarifications from the principal. The legality of the instructions is a key determinant of the agent’s duties. An agent can be charged for committing illegal activities in the course of executing agency duties. The principal’s instructions must be practical to enable the agent to exercise duties. The agent is required to inform the principal in case the instructions are not implementable.
In addition to the duty of care and following instructions, agents have fiduciary duties. There must be trust and confidentiality between the agent and the principal. Agency relationships raise many ethical issues as agents can deliberately compromise the welfare of the principals. The fiduciary duty requires the agents not to conduct themselves in a manner that damages trust and confidentiality. The relationship between the agent and the principal also provides opportunities for the agents to unjustifiably benefit themselves from the agency. It is therefore important to ensure that an agent does not unjustifiably benefit from the engagement. High level of transparency is required to ensure the principal is aware of the activities of the agent. Under the fiduciary duty, agents have specific duties that are aimed at enhancing good agency relationship. These duties include avoiding conflict of interest, loyalty, not to act on own benefits or the benefits of other parties not part of the agency, not to accept bribe, duty to account, and not to delegate(Dang & Jacob 2010,p.541).
Avoiding Conflict Of Interest
Agents are charged with the responsibility of ensuring their activities are not influenced by a conflict of interest. Conflict of interest works against the principal since it makes the agent pursue personal interests at the expense of those of the principal. Agents have an obligation of assessing the situation surrounding the contract and report to the principal matters capable of raising a conflict of interest. In addition to reporting to the principal, agents are not supposed to facilitate any contract where their interests conflict with the interests of the customers or the principal. In Armstrong v Jackson case, there was a conflict of interest where the agent who was also the owner of the shares sold the shares to the principal (Baskind, Osborne & Roach 2013, p.127). It implies that the defendant was promoting his own interests at the expense of the principal’s interests. It was held that the agent ought not to have acted since the conflict of interest was present. In an ordinary sense, the agent would charge high prices since he was the beneficiary of the sale.
Duty Not To Act for the Interests of Third Parties or Personal Interest
Agency brings together different stakeholders with conflicting interests. It is only the principal’s interest that should matter during transactions with the third parties. Acting in the best interest of the principal ensures that they are protected from possible losses. Sometimes opportunities come up in the course of offering agency services. A decision by the agent to exploit such opportunities is against the principles of the agency since such a move is not in the best interest of the principal. Boardman v Phipps provides sound guidance concerning acting on personal interests. In this case, the defendant was a family trust solicitor. The trust owned 27% of a shareholding in a company and the defendant wanted the trust to increase its holding in order to turn around the company (Elias 2002,p.72-73). The defendant purchased the shares himself when the trust objected his suggestion where he made profits from assets redistribution. It was held that the defendant was acting against the principles of the agency since he was pursuing personal interest at the expense of the principal’s interest. According to the ruling, profit generated from the acquisition was an entitlement to the principal. The agent was only entitled to the agency fee for helping the principle make profits. This case set precedence for many cases involving agents acting against the interests of the principal.
Duty of Loyalty
Agents should portray absolute loyalty to the principal and should always uphold the principal’s interests above their own. Agency environment is characterized by people with conflicting interests that threatens agent’s loyalty to the principal. The business environment is characterized by competition where competitive forces pose a major threat to the agent’s loyalty. Competitors seek to outdo each other and such initiatives can be directed towards convincing the agents to compromise their loyalty to their principals. Agents are required to remain loyal to the principal despite the pressure emanating from their operating environment (Black 2001, p.4-7).
Duty Not To Accept Bribe
Bribery is a major ethical issue in an agency that requires agents to strictly observe agency principles. Agents should reject all bribes and incentives given by third parties without the knowledge of the principal. Bribes compromise objectivity in agency practices since they deflect the agent from the interests of the principal. In the case Boston Deep Sea Fishing and Ice Co v Ansell, the managing director of the plaintiff engaged in fraudulent activities that damaged the welfare of the company (Marsh & Soulsby 2002,p.281). Being the agent of the company, the managing director was not supposed to get any incentives when entering into contracts on behalf of the company. Directors are confronted by corrupt stakeholders who are willing to give bribe to enter into contracts with the company. Such bribes compromise the ability of the directors to negotiate on behalf of the company. In the Boston Deep Sea Fishing and Ice Co v Ansell case, the company had the right to refuse to pay the director outstanding salaries since he had engaged in fraud. The director’s salary was equivalent to the agency fees and it was right for the company to withhold the salary since the director did not perform the agency roles properly.
Duty to Account
The agent is required to keep a record of all contracts created between the principal and the outsiders. These records should contain all the relevant elements aimed at enabling the principal to comprehend the nature of transactions with the third parties. It is the responsibility of the agent to understand the type of records that should be maintained in case of an out of ordinary dealing. However, a framework may exist to guide the agents about the records required in agency engagement. Some principals have multiple agents and the only way they can comprehend the activities of the agents is through monitoring the accounts maintained by the agent. For instance, a multinational manufacturer can have thousands of sales agents distributed in different parts of the world. These agents can only be managed through evaluations of the accounts maintained by each one of them.
The Duty of Not Delegating
Agents are required not to delegate their authority to third parties as such delegations are binding. For instance in De Bussche v Alt, the person acting on the delegated authority of the agency was treated like a core agent. The defendant, in this case, was contracted to sell the plaintiff’s ship. The agent’s partner purchased the ship and sold it later making immense profits. It was held that the partner was a co-agent and was therefore prevented from making profits from the deal. The conclusion was that profit made by the co-agent was recoverable since the principal was unjustifiably denied the profit (Burrows & Bridge 2015,p.29).
Agency arises when a party appoints another party to transact on its behalf. Agency involves three parties that include the principal, the agent, and the third party. The role of an agent is to facilitate a transaction between the principal and third parties. Decisions made by the agent are binding to the principal and the third party. Agency confers specific powers to the agents that include duty to instructions, duty of care, and fiduciary duties. Agents can be held liable for breaching these duties.
List of References
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Dang, D.T. & Jacob, S., 2010. Corporate Governance and Directorsʼ Duties. InPractical Law Company Corporate Governance and Directors Duties Handbook 2010. p. 219-227.
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