Common Law & Agency Disputes
The article below provides an overview of common law agency and considerations and which aspects most commonly go wrong.
Agency can apply widely to potentially any situation where someone does something on someone else's behalf.
For example, employees and directors can bind companies they work for both to commercial, civil and criminal liabilities, whether the company knew or approved of their actions, and is known as "vicarious liability".
The note below outlines a brief introduction to the principle of agency under English case law (known as "common law agency"). It touches on but does not address fully commercial agency, for which different law applies.
Situated opposite the Royal Courts of Justice and a short distance from central courts in London, Saunders Law is well positioned and well regarded for undertaking commercial litigation and resolving disputes. The firm takes pride in helping take pressure away from business owners and individuals from the initial heat of the dispute, and achieving a measured resolution.
Our commercial litigation lawyers regularly advise on agency in law, which is a complex area and often arises in all kinds of situations, often unintentionally. If you are in a commercial dispute regarding agency or more generally, please get in touch on 02076324300 for a no-obligation initial discussion.
The below does not constitute legal advice and you should always take legal advice tailored to your specific circumstances.
What is agency?
The terms "agency" or "agent" are used freely used in business, but sometimes incorrectly.
An agent, very broadly, means someone who has authority, whether express or implied, to change or enter into legal relations on behalf of another person or business, and does so, whether intentionally or not.
Agency is not limited to commercial situations, and can occur in potentially any situation where someone does something on behalf of someone else. It can occur in personal matters also.
If a person acting on behalf of another person, does not have ostensible or actual authority to do so, or if they cannot change the legal relations of another party without obtaining express authority on every occasion, they are probably not an "agent" in law. Even if someone's job title is agent, their actions may not necessarily bind the person they claim to represent. If that is the case, the agent themselves could potentially become liable in case of a dispute.
Parties who commonly refer to themselves as an agent, for example Estate Agents, or Recruitment Agents, are not necessarily agents in law, as they often don't have authority to bind other parties contractually without express permission.
Conversely, employees or directors for example, can be agents of the company, if they hold themselves out to have authority to bind a company, or if the company does not qualify what permission they have, or if it is reasonable to assume they do.
It is surprising how often businesses fail to have proper safeguards in place to monitor what its employees are doing or agreeing, especially in sales and financial environments.
There is risk, every time that someone acts on your behalf personally or professionally, and if it goes wrong, this could result in you being liable in law for the wrongful actions of others.
In you are in doubt, taking early legal advice is key.
The terminology in agency law can appear overly technical, but in summary: the party who gives authority to another party to act on their behalf, is referred to as the "principal".
The party who has authority to act on someone else's behalf is the "agent".
The party whom the agent contracts with on behalf of the principal, is often referred to as a "third party", or potentially another principal. The agent commonly acts on the principal's behalf, either expressly or impliedly, to negotiate or set up a deal with a third party, with a view to the agent then dropping out of the picture.
What is the legal effect of agency?
When an agent acts on behalf of a principal to negotiate a contract with another party and if the principal confirms the agent has authority to do so or it is reasonable for the third party to assume this, a contract is normally created directly between the principal and the third party and the agent normally falls away from the agreement, leaving the other two parties in place. An agent may potentially remain linked to the principal if their commission is calculated based on future sales.
When agency is intentional, the arrangements can be tailored to specific commercial needs: sometimes agency can be limited by time, or to a particular transaction; it can be limited to a specific area or country, or a specific product or target audience. An agent can have exclusive or non-exclusive rights to bind the principal. You could gather a whole army of agents potentially.
When agency arises unintentionally, the courts will look to what the nature of the agency is as a matter of construction, and will principally address whether or not authority has been granted to another person to act, and can decide whether it is reasonable or not to uphold an agency in law; it might not always be clear cut and can lead to surprising results.
Common types of agency
One of the most common forms of agency our litigation lawyers deal with, is commercial agency. Commercial agents are often used by businesses seeking to expand to new markets or locations, in which the agent may have express authority to conclude sales with new clients. This note is concerned with broader agency, and there is a separate note for commercial agency.
Sales representatives often have express or implied authority to negotiate deals with third parties on behalf of a company, and can create legal contracts directly between the company and third parties. If they do, this probably forms an agency agreement in law and the company can be left holding the pieces if the sales represent misrepresents goods or services or overpromises and under-delivers.
Managing agents, may not be agents in law necessarily. If have express authority to bind an artist, sportsperson or client to new deals, they are likely to be agents in law; but if they can only present the deals to the artists for the artists to decide whether or not they want to accept, they may not be agents; early advice is key.
When can agency potentially be beneficial?
Use of commercial agents might be particularly helpful if a business wants to take advantage of an agent's specialist market, foreign culture or sector knowledge, or the agent's existing commercial contacts and sales ability. Agents with a strong sales record can assist in expanding the sale of goods to a wider audience and more quickly, and avoid some potential pitfalls.
Agents are sometimes used to keep the identity of the principal anonymous when desirable or if the principal is not physically able to sell goods themselves. The principal can act as an "undisclosed principal". Agents are often used when the business owners is simply too busy to deal and wishes to outsource particular tasks. When the agency is intentional and well thought out, and made with a skilful and reliable agent, it can offer powerful commercial advantage. When agency arises unintentionally, it can be difficult to untangle.
What are potential risks of agency?
Issues commonly arise when the principal never intended to create an agency, but one has arisen unintentionally in law and the principal finds themselves bound to unwelcome liabilities; or when the principal did intend to create an agency, but when the agent turns out to be untrustworthy, unreliable, purposefully deceptive or fails to deliver, or overpromises what can be achieved.
If a principal company vaguely represents to a third party that an employee or director has the principal's authority to do or agree something, or if they do not make it clear that they don't, and if the third party takes action or relies on something the employee or director does or says, and it is reasonable for the third party to have done so, the principal may be legally bound, whether or not it knew what the employee or principal has done or agreed, and whether or not it actually agrees it now.
Each case turns on its own facts and early legal advice is sensible. Agency can be a double edged sword; when it is well set out it can offer powerful advantage, but the fact that agency can be implied into situations, and can bind a principal unintentionally makes it conversely potentially very risky.
What is meant by common law agency?
English "common law" refers to law which has developed through historic English court cases.
Common law often stands as its own authority in addition to legislation. Sometimes the law set out in common law, can differ subtly or sometimes substantially to legislation. Law set out in legislation often takes precedence, and can be implied into disputes, whether or not elected, but can be of potentially narrower applicability. If there is no specific legislation that covers a particular situation, there is often some common law which can assist.
How does legislation and common law agency interact?
Commercial agency legislation is more limited in scope than common law agency, and only generally applies to agents who sell or supply goods commercially. It does not apply to employees or to provision of services.
Common law agency does govern provision of services, or arrangements for example between employers and employees, as well as goods. Common law agency applies much more widely, and can act as a catchall, and can apply to both goods and services, and also to employer/employee relations; it may not be clear what law applies and early legal advice is sensible.
Implied obligations between principal and agent
If the agency arrangement is intentional, it may already be set out in a written contract what the agent can or cannot do, where and when it has to perform obligations, and what level of skill they need to use. If so, these are said to be express duties.
Duties can however be implied into agency, and arise where there is no written agreement. Each country has differing approaches on this. English courts have been historically reluctant to impose terms into commercial contracts if they are otherwise fairly comprehensive as to express terms, but if the agency is not commercial, significant implied terms can be implied.
Both a) whether or not an implied duty has arisen or b) whether the implied duty has been breached can be open to interpretation and so it is usually safer to include these in a written agreement.
If the dispute revolves around interpretation, it can be much more difficult to predict what a court would decide and they court retains a high level of autonomy.
Duties of the agent to principal
Some key duties the agent owes to the principal, implied by common law are:
1. The agent has to keep the principal's information confidential. This can be especially critical in manufacturing arrangements where the entire business's value is grounded on a closely guarded process or recipe.
2. An agent cannot delegate its own duties without the consent of the principal. An agent is often hired or instructed precisely because of their personal skill and knowledge. If the agent opts to outsource their duties deceptively, the actions of the other party will likely lie with the agent. If individual skill is not at all material, then subcontracting may be possible.
3. The agent has to properly account for property and monies received, for the principal. To do not do so could amount to theft and conversion, as well as being a breach of duty.
4. The agent has to follow the reasonable instructions of the principal. If they fail to do so, the liability for any wrongdoing might rest with the agent. If the agent's fees are dependent on specific instructions, and they fail to do them, the agent might not be entitled to any money. The agent has to do so with reasonable care and skill, if they don't, they may be partly accountable.
5. The agent has to stick within the guidelines it has been given, provided these are reasonable. The guidelines might be very narrow, and if the agent purposefully ventures outside of these, it could be argued they didn't have authority and liability ought to rest with them.
6. The agent in a common law situation owes a duty of good faith to the principal, and must not make undue profit from abuse of the agent's position, they cannot pursue conflicting interests, and has to disclose if a third party benefits. If the agent doesn't do so, this could be said to be a breach of implied duties.There is on-going uncertainty whether good faith also applies to commercial agency and case law on this is mixed, but only likely applies in very limited circumstances.
7. The agent has to disclose material facts to the principal. It cannot present half truths.
8. If the agent agrees to do something, it has to do so within a reasonable time frame. What is reasonable may depend on what is being contracted for. If it is to sell perishable goods, the need to act quickly may be enhanced.
9. An agent may have a duty not to act in a particular geographic area if it can be implied this was the nature of their instructions, but may only be enforceable if implied if it protects a legitimate business interest and goes no further than is reasonable. These factors will turn on the facts.
Duties of the principal to agent
1. If a principal has implied it will pay the agent for services provided, there can be an implied duty that it has to be bound to that agreement.
2. If payment to the agent is conditional on something happening which doesn't, the obligation may fall away.
3. If payment is conditional on introduction of a customer and the principal refuses to proceed for no good reason and refuses to pay the agent, the principal may be held to be in breach.
4. A principal has to pay the expenses of agents which they incur in discharging their obligations, unless otherwise agreed.
5. Unless otherwise agreed, the principal may have to indemnify the agent for any losses it incurs whilst properly carrying out the principal's instructions.
6. If the arrangement is covered by commercial agency regulations, the principal may be found to act in good faith towards the agent, but there is no general requirement in common law agency.
7. If the principal restricts the agent's authority and the third party knows about that restriction and the agent causes a dispute, then the principal may not be held liable.
Vicarious liability of principal
The term vicarious liability is often used in legal circles but more simply means the principle where one person can be held liable by the actions of another. It comes into play often in agency situations.
Liability of agent
If an agent is negligent in carrying out their duties, they may be liable to either the principal or third party directly. If the agent is deceptive or acts fraudulently, agents may be held liable in civil and criminal law. An agent may become liable personally for a dispute when acting as an agent if they do not make their agency status sufficiently clear; in which case the agent may be seen to have contracted personally.
What remedy can the court award
If the agent is held to be liable for a dispute and to have wronged the principal, the court has very wide scope to award what it considers just. Early legal advice can help to narrow potential issues and outcomes.
Remedies will most commonly be damages or compensation for loss suffered. The court could order that the contract is terminated or that it continues potentially. The court could order an account of profit, if the agent makes unauthorised money at the principal's expense.
There could be added compensation for breach of implied duties and terms. An agent might obtain a right over the principal's property until such time as the principal makes full payment. The contract might be rescinded, which is to say to put the parties back in the position as if the contract had never gone ahead. If money is thought to be inadequate, then potentially the court could order the agent to complete whatever it is they haven't done. Query then whether they would do it well!
Termination of agency
A common dispute which habitually arises is whether an agency agreement can be terminated part way through and what is the outcome.
For commercial agency, governed by Regulations, if it is terminated, the agent may be entitled to compensation as a matter of course, and the dispute can extend to what value of compensation is just. There is a minimum amount of notice required.
An agency agreement may be terminated automatically in law, if the task has been completed, if the contract has been frustrated, if death, insolvency or insanity applies.
There is no general outcome of termination in common law, and each case turns on its facts as to what is agreed or can be implied.
How to prevent disputes
Disputes arise most commonly in an agency situation when they have arisen by construction or implied terms, and proper regard has not been had to the terms, the scope of authority, how the arrangement is to be handled, how and when the obligations arise, lack of termination and compensation provision, or where the agent simply goes off on their own and does a bad job.
The simplest prevention is to have a written contract carefully drafted and tailored to commercial needs and to try and protect against high potential risks. If it is too late, and an agency has arisen, taking early legal advice before terminating is essential, as otherwise the agent may be entitled to a large amount of compensation and may claim breach of contract.
If both agency, and a dispute has already arisen, taking early legal advice on what the law says can help you plan an extraction plan whilst trying to limit loss. If it is not clear whether or not the agent has authority to do what they did and whether it is a breach, legal advice can assist. If you are concerned whether you will be held liable by the actions of an agent, then early legal advice may assist and may help you to distance yourself.
At Saunders Law, we're dedicated litigators with vast experience assisting clients to resolve their commercial disputes. We're well known for our high-profile work and excellent client satisfaction. We regularly deal with disputes involving agency and vicarious liability, both in civil and criminal law.