The Rights of a Principal of the Agency - Coursework Example

If a principal appoints an agent, they have relinquished all of their power to that agent, as an agent can essentially enter into legally binding contracts on their behalf as they wish. The focus of this analysis is to critically evaluate the above statement in relation to the rights of a principal in context of agency authority to enter into legally binding contract on a principal’s behalf. It is submitted at the outset that the above statement is inherently dogmatic and ultimately the extent of a principal’s liability under an agency concluded contract is inherently dependent on the concept of authority. The general principle is that the rules of agency will contractually bind the principal and third party on the grounds of either actual authority (express or implied) or apparent authority1which further supports the argument that authority is the determinant factor in enforcement of agent concluded contracts on a principal. This is further evidenced by the decision in the case of Panorama Developments (Guildford) Limited v Fidelis Furnishing Fabrics Limited2 . In this case, a company secretary fraudulently hired cars for his own use without the knowledge of the managing director. However, it was held that it was a routine part of a company secretary’s job to enter into contracts in the company’s name and has administrative responsibilities that would give apparent authority to hire cars. As such, the company was held to be liable as principal. Whilst the doctrine of actual authority is ostensibly restricted, the courts have adapted the doctrine to include “implied actual authority”. To this end it is arguably the ad hoc judicial extension of the authority doctrine, which supports the above statement that principals are effectively bound by all acts of their agents. For example, in the case of Hely-Hutchinson v Brayhead Limited3provided that implied actual authority can also arise from the position which the individual holds. Accordingly, the concept of authority has far reaching ramifications for a principal as even if a contract is outside the actual authority of an agent, the contract with a third party can still be enforceable. This doctrine has been developed to protect third parties. Alternatively, the doctrine of apparent authority has also developed to protect the position of third parties and is the authority of an agent as it appears to others4. To this end, it would appear that the doctrine of authority itself has been utilised as a tool to widen enforceability of agency concluded contracts against principals. For example, as asserted in the case of First Energy (UK) Limited v Hungarian International Bank5, it can operate to enlarge actual authority and create authority where no actual authority exists6. Furthermore, in the case of Rama Corporation Limited v Proved Tin and General Investment 7it was asserted that the requirements for apparent authority are that there is a representation to the third party that the agent has authority and the third party relies on this “apparent” authority, which is otherwise referred to as “ostensible” authority or “agency by estoppel”8. In order to there to be apparent authority, the Slade J presiding in the Rama Corporation case9asserted that the requirements for apparent authority were: 1) that there is a representation of authority by the principal to the third party; 2) the third party relies on this representation; and 3) the third party alters their position to their detriment in reliance on that provision The representation can be by conduct, for example, in the case of Freeman and Lockyer v Buckhurst Park Properties (Mangal) Limited10a director without express or implied actual authority was found to have apparent authority when his actions were within his apparent authority and the board had been aware of his conduct and had acquiesced in it. Diplock LJ further obfuscated the matter by commenting that “actual authority and apparent authority are quite independent of one another. Generally they co-exist and coincide but either may exist without the other and their respective scopes may be different”11. Moreover, Diplock LJ asserted that with apparent authority, the principal has to have given a representation that the agent had authority to enter into the contract, which again negates the absolute assertion that principals “relinquish all power” when appointing agents. Additionally, in the case of Egyptian International Foreign Trade Co v Soplex Wholesale Supplies Limited, The Raffaella12it was asserted that the acts of the principal must constitute a representation that the agent had a particular authority and must be reasonably so understood by the third party. Furthermore, in considering whether the principal had represented his agent as having authority to enter into the particular transaction, the court has to consider the totality of the principal’s conduct13. In the Egyptian case, Lord Browne-Wilkinson further asserted that the most common form of holding out was permitting the agent to act in the conduct of the principal’s business and in many cases the holding out consisted solely of the fact that the company had invested the agent with a particular office such as “managing director” or “secretary”14. Therefore, as the parameters of authority have been widened to protect third parties this would suggest that whilst theoretically the principal is not bound by all acts of an agent, the overriding presumption in favour of third party protection would appear to result in the principal being bound by agency concluded contracts in practice. This is further supported by the doctrine of ratification whereby principals can ratify an agent’s acts. Nevertheless there are limitations to ratification. For example, in order to ratify the conduct the case of Keighley Maxstead Co v Durant15 established that the agent must have purported to act on behalf of the principal out of necessity. In this case, the agent was authorised to buy wheat for the joint account at a certain price. However, he made a contract with a third party Durant at a higher price than authorised with the intention that this would be for the joint account. He failed to disclose this to the principal and although the principal ratified the breach, the principal refused to take delivery. It was held that as the agent had failed to tell the principal what had been done, he had not purported to act for the principal and as such, ratification was impossible. The second limitation for ratification is that the principal must actually have been in existence at the time of the contract between the agent and the third party, which is pertinent to situations where contracts are made on behalf of companies that haven’t been ratified. For example, in the case of Kelner v Baxter 16the promoters of a company had yet to be incorporated and there was an attempt to ratify the contract, which was held to be ineffective with the agent being personally liable. The third requirement is that the principal must have been able to make the contract at the time of the contract and at the time of ratification, which further undermines the absolute nature of agent’s acts binding a principal. Moreover, this has created problems in practice. For example in the case of Grover and Grover v Matthews17, there was an attempt to ratify a contract of fire insurance after a fire had destroyed the property which was the subject of insurance. It was held that ratification was impossible because at that stage the principal would not have been able to make the insurance contract. Nevertheless, these exceptions are inherently limited and once a contract is ratified as determined in the case of Bolton Partners v Lambert18, the contract itself has to be treated as if it had been made with proper authority from the start. However, as determined in the case of A.L Underwood Ltd v Bank of Liverpool19apparent authority cannot be relied upon where the third party is aware of some limitation which prevents the authority from arising or is put on inquiry as to the extent of the individual’s authority. For example, in this case, a director paid cheques drawn in favour of the company into his own personal bank account. The above analysis demonstrates that it is too dogmatic to assert that principals relinquish all power when they appoint agents to conclude and negotiate contracts on their behalf. Whilst the doctrine of ratification and authority clearly swing the pendulum in favour of the third party, apparent authority is nevertheless dependent on principal representation and enforceability of a third party contract does not preclude principal recourse against an agent for breach of fiduciary duty and breach of contract. Nevertheless, the ad hoc development of the authority doctrine and obfuscation between actual and apparent authority clearly muddies the waters, highlighting the need to balance the rights of the principal when considering liability for an agent’s acts. BIBLIOGRAPHY N Bourne., (2007). Bourne on Company Law. Routledge-Cavendish. Dignam & Lowry (2006). Company Law.4th Edition Oxford University Press. Farrar (1999). Farrar’s Company Law. 4th Edition Butterworths. Fridman, G. H. L. (1996). Law of Agency 7th Edition Butterworths. Brenda Hannigan (2003). Company law. 5th Revised Edition. Oxford University Press Keenan (2005). Company Law. Pearson. L.Sealey., & S.Worthington., (2007). Cases and Materials in Company Law. 8th Edition Oxford University Read More