Episode 26 – “Call My Agent!”: Agency Law in Context

TRANSCRIPT

STEPHEN BOTTOMLEY

There are agents everywhere

STEPHEN PARKER

You mean like James Bond?

STEPHEN BOTTOMLEY

Well, maybe, but I mean in an everyday sense.

STEPHEN PARKER

So, agents who are licenced to be ordinary, you mean.

STEPHEN BOTTOMLEY

Yes, but still very important. Look, forget the cloak and dagger. In this episode we ask what is an agent, and why is it so important in all walks of life, every day?

STEPHEN PARKER

The law generally works on the basis that we live in a world in which individuals deal with each other directly, one-to-one. The law on contracts, which we discussed in Episode 25, is built on this assumption. But quite often this does not hold up in everyday life.  For reasons of distance, lack of time, insufficient knowledge or expertise, or not having legal capacity, one person may be unable or unwilling to deal directly with another. 

STEPHEN BOTTOMLEY

If the law did not have a solution to this practical problem, everyday commercial activity would quickly grind to a very slow pace.  And there is a particular problem for companies.  As we’ve seen, a company is a legal actor, but because it is an inanimate thing a company needs human beings to exercise its legal powers.

So how does the law respond to all this?  How does the law allow a person or a company to enter into a binding contract if they are not directly involved in the process? The answer lies in the concept of agency.

STEPHEN PARKER

The idea of ‘agency’ has different meanings in different disciplines. In philosophy, for example, it refers to a person’s capacity to intentionally pursue their goals and to be responsible for the consequences – in other words, to be a ‘free agent’. In spy thrillers, it means a secret agent.  In law, ‘agency’ has a narrower, more technical meaning, although it is nevertheless directed at allowing individuals to achieve their goals.

STEPHEN BOTTOMLEY

The law of agency allows two individuals to enter into a contract with each other in a situation where one or both of them is not directly involved in the actual process of negotiating and concluding the terms of the contract. The standard agency situation involves relationships between three parties: the agent, who acts on behalf of their principal, to bring that principal into a legally binding relationship with the otherparty (sometimes called the third party). 

STEPHEN PARKER

The whole purpose of the agency relationship is to use the agent’s expertise to establish a legal relationship between the principal and the other party. Once the agent has properly completed their assigned task of bringing the principal and the other party into a binding agreement, the agent steps out of the picture. They have no legal obligations in relation to that agreement.

The agent may earn a fee or commission for their work; that is part of the contract between the agent and the principal. 

STEPHEN BOTTOMLEY

Our daily lives are full of these agency relationships: the real estate agent who arranges the purchase or sale of a property for a client; the mortgage broker who seeks out the best financial loan for a new home purchaser; or the tax agent who fills out and submits annual tax returns to the tax office as requested by clients.  In these examples, the agent is given a specific task to perform.

STEPHEN PARKER

In some instances, however, the agent may have a broader or continuing remit such as a solicitor acting for a client ; a person with a power of attorney acting for a frail relative; or a parent making decisions about their child’s welfare.  in situations such as these, the law imposes particular requirements on the agent’s work.  In a previous episode we looked at the ethical constraints on lawyers when acting as an agent. .

STEPHEN BOTTOMLEY

One of the critical things about an agency arrangement is that an agent can only act for a principal if they have a legally recognised authority to act in that capacity.  In the most straightforward case, there is an express agreement about a grant of authority from the principal to the agent, specifying what the agent is required to do, and what payment if any they will receive for this work.  Lawyers call this a grant of actual authority.  Depending on the circumstances this might be done by a formal deed or contract, or by a verbal agreement.

STEPHEN PARKER

But in a complex commercial world, it is quite possible that the agreement about a grant of actual authority might not expressly deal with all aspects of the agent’s functions.  In practice, a grant of actual authority may amount to nothing more than the agent being formally appointed to a designated position, such as managing director of a company.  What is the extent of the agent’s actual authority in this situation?  It’s an important question because if an agent does something that falls outside the bounds of their authority, they can be personally liable for those actions.

STEPHEN BOTTOMLEY

Agency law deals with this by saying that an agent has an amount of implied actual authority in addition to any express grant of authority.  The extent of an agent’s implied authority is determined by looking at the circumstances of their appointment, the way in which the principal has allowed them to act, and the nature of the particular transaction in question.  Sometimes, if an agent’s position falls into a generally recognised category, such as a company general manager, these are relatively straightforward questions. 

STEPHEN PARKER

So, actual authority can be made up of powers that are granted expressly and those that arise by clear implication from that express grant.

Sometimes, however, things can get tricky.  The law recognises that in some circumstances an agency relationship exists even if there has never been a grant of actual authority by the principal. This can happen when the principal has in some way made it appear to the third party that the person is his or her agent.  Perhaps the principal has been aware of the agent’s actions and has just acquiesced without ever formally appointing them to the role.  For this reason, the law calls this apparent authority.  As far as the third party is concerned, the principal has made it appear that the agent is acting for them, and that is enough. 

STEPHEN BOTTOMLEY

The whole idea behind apparent authority is that there are some situations in which the principal should be prevented from denying the consequences of their actions or inaction.  It is about protecting the interests of third parties who deal with the agent in good faith. 

There’s a case, well known to company law students, that illustrates this.  The company secretary of a fabric company had signed several contracts with a hire-car company on behalf of the fabric company, purportedly to hire luxury cars for company purposes.  The company secretary had no actual authority to hire the cars, and was in fact using them for his own personal pursuits.  He charged the contracts to his company’s account, and signed them as “company secretary”.  He used the company’s stationery and letterhead in his correspondence with the car company.  The fabric company refused to pay the hire charges, and so the car company sued the fabric company (the company secretary had since been prosecuted and imprisoned).  [PARKER, so the company had no material witness!] The question was whether the company secretary was an agent of the fabric company for purposes of these contracts.  Clearly there was some actual authority, but it did not cover these contracts.  The Court held that the secretary had apparent authority because the fabric company had allowed him to go out into the world with the usual trappings of business.  It had tacitly represented him to be its agent.

STEPHEN PARKER

On one view of the case, both the fabric company and the car hire company were innocent parties.  The fabric company didn’t know what its secretary was up to, and the car company didn’t know that the car hires were not authorised.  The question was which of these two parties should be made to bear the cost, remembering that the secretary was in prison.  Or, put another way, which of these two companies was in the better position to check on and monitor the company secretary’s actions?

But remember, it all depends on the appearance of authority.  It follows from this that if the third party is aware that the agent has no authority, or has only limited actual authority, then the third party cannot argue that they relied upon the appearance that the agent had full authority to enter the contract

STEPHEN BOTTOMLEY

Agency law is very useful in facilitating transactions that would otherwise be difficult and expensive.  But there are also risks.  An agent might decide to exploit their position and make profits that are not passed back to their principal.  For example, I appoint an agent to sell my car.  They find a buyer who agrees to pay a certain amount, but the agent tells me that the sale is for a lesser amount and pockets the difference.  The law has to have some way of controlling what agents can and cannot do.

STEPHEN PARKER

Generally, this is done by imposing duties on the agent, sometimes fiduciary duties, which we looked at in Episode 14.  An agent has a duty to use reasonable care and diligence in carrying out their instructions; and they must always act in the principal’s interest, not their own.  They cannot make any undisclosed profit or take any undisclosed advantage from the transaction.

Another duty requires an agent to carry out their instructions personally, unless they are authorised to delegate this to someone else.  You’ll be delighted to know that there’s a Latin maxim that sums this up: delegatus non potest delegare – meaning: a delegate cannot delegate.

STEPHEN BOTTOMLEY

We’ve seen that an agency relationship can come about because the principal has granted actual authority, or because they have created an appearance of authority.  There’s a third way in which a principal can become bound to a contract through the actions of an agent.  I’ll use a hypothetical illustration.

Our regular listeners will know from our Contracts episode that Steve is hoping, hypothetically, to sell his Fender guitar for $4,000, but I reckon he’s dreaming.  Let’s say that without Steve’s knowledge, I find someone to buy his Fender guitar for $3,000, and I write up an agreement stating that Stephen Parker agrees to sell his Fender guitar to this person for $3000.  I sign the agreement as ‘Stephen Bottomley, for and on behalf of Stephen Parker’.  I then present the agreement to Steve at which point he has two legal options. (He possibly has other non-legal options, but we’ll ignore those). He can say ‘no’.  He didn’t give me any actual authority, and because he had no idea I was doing this, there is no apparent authority.  There’s no contract between him and the other person, and they will have to see whether they have any legal remedies against me, for what is called breach of warranty of authority.  Or, Steve could say ‘yes’, figuring that he doesn’t have the time to pursue a better deal.  He could give me authority to be his agent retrospectively.  This is called authority by ratification. 

STEPHEN PARKER

The rules of agency law were settled at a time when commercial dealings were done in person, even if that involved remote trans-global dealings.  Today, the use of algorithms and AI systems with the capacity to learn and make decisions without direct human intervention raises interesting questions for the law of agency.  The reliance on automated online share trading platforms by investment banks and private investors is an example.  We could apply agency law to this situation, where the person using the platform is the principal, and the AI platform is their agent.  This would give legal status to a non-human actor. 

STEPHEN BOTTOMLEY

But hasn’t agency law been doing that already? Corporations are legally recognised as non-human agents.

STEPHEN PARKER

Yes, but corporations rely on human beings to do things.  AI platforms are self-actuating.  We are entering quite a different legal world here.  

STEPHEN BOTTOMLEY

So that’s agency law – in a changing context.