In last week’s Article we looked at how an Onshore Agent Company and Offshore Principal Company can be deployed to open a Paypal Account Facility.
(As alluded to last week) this week we look in detail at the nature of a Principal/Agent relationship and how it works both at Law and Practically.
A Principal-Agent relationship is an arrangement in which one entity (the “Principal”) legally appoints another (The “Agent”) to act on its behalf.
An agent creates legal relations between a principal and a third party. The agency exists when one party is authorised by the other to act on their behalf in respect of acts that affect their rights and duties in relation to third parties. The existence of the agency may be openly acknowledged, or the agent may enter into the contract without revealing that they are contracting on behalf of another. At common law, the latter situation falls within the doctrine of the undisclosed principal.
The relationship between the principal and the agent is called the “agency,” and the law of agency establishes guidelines for such a relationship. The formal terms of a specific principal-agent relationship are often described in a contract.
For example, when an investor buys shares of an index fund, he is the principal, and the fund manager becomes his agent. As an agent, the index fund manager must manage the fund, which consists of many principals’ assets, in a way that will maximize returns for a given level of risk in accordance with the fund’s prospectus.
An agent who acts within the scope of authority conferred by his/her principal binds the principal in the obligations he/she creates against third parties.
There are essentially two kinds of authority recognised in the law: actual authority (whether express or implied) and apparent authority.
Actual authority can be of two kinds. Either the principal may have expressly conferred authority on the agent, or authority may be implied. Authority arises by consensual agreement, and whether it exists is a question of fact. An agent, as a general rule, is only entitled to indemnity from the principal if she has acted within the scope of her actual authority, and may be in breach of contract, and liable to a third party for breach of the implied warranty of authority.
Express actual authority
Express actual authority means an agent has actually been expressly told she may act on behalf of a principal.
• Ireland v Livingstone (1872) LR 5 HL 395
Implied actual authority
Implied actual authority, also called “usual authority”, is authority an agent has by virtue of being reasonably necessary to carry out his express authority. As such, it can be inferred by virtue of a position held by an agent. For example, partners have authority to bind the other partners in the firm, their liability being joint and several, and in a corporation, all executives and senior employees with decision-making authority by virtue of their position have authority to bind the corporation.
• Hely-Hutchinson v Brayhead Ltd  1 QB 549
Apparent authority (also called “ostensible authority”) exists where the principal’s words or conduct would lead a reasonable person in the third party’s position to believe that the agent was authorized to act, even if the principal and the purported agent had never discussed such a relationship. For example, where one person appoints a person to a position which carries with it agency-like powers, those who know of the appointment are entitled to assume that there is apparent authority to do the things ordinarily entrusted to one occupying such a position. If a principal creates the impression that an agent is authorized but there is no actual authority, third parties are protected so long as they have acted reasonably. This is sometimes termed “agency by estoppel” or the “doctrine of holding out”, where the principal will be estopped from denying the grant of authority if third parties have changed their positions to their detriment in reliance on the representations made.
• Rama Corporation Ltd v Proved Tin and General Investments Ltd  2 QB 147, Slade J, “Ostensible or apparent authority… is merely a form of estoppel, indeed, it has been termed agency by estoppel and you cannot call in aid an estoppel unless you have three ingredients: (i) a representation, (ii) reliance on the representation, and (iii) an alteration of your position resulting from such reliance.”
• Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd  2 QB 480
• The Raffaella or Egyptian International Foreign Trade Co v Soplex Wholesale Supplies Ltd and PS Refson & Co Ltd  2 Lloyd’s Rep 36
• Armagas Ltd v Mundogas Ltd or The Ocean Frost  AC 717, an agent cannot clothe himself with ostensible authority simply by saying that he has authority
• Hudson Bay Apparel Brands Llc v Umbro International Ltd  EWCA Civ 949
Watteau v Fenwick
In the case of Watteau v Fenwick, Lord Coleridge CJ on the Queen’s Bench concurred with an opinion by Wills J that a third party could hold personally liable a principal who he did not know about when he sold cigars to an agent that was acting outside of its authority. Wills J held that “the principal is liable for all the acts of the agent which are within the authority usually confided to an agent of that character, notwithstanding limitations, as between the principal and the agent, put upon that authority.” This decision is heavily criticised and doubted though not entirely overruled in the UK. It is sometimes referred to as “usual authority” (though not in the sense used by Lord Denning MR in Hely-Hutchinson, where it is synonymous with “implied actual authority”). It has been explained as a form of apparent authority, or “inherent agency power”.
The doctrine of the undisclosed principal
In ordinary agency, where the principal and the existence of the agency relationship are disclosed, the agent is merely the instrument through which the principal becomes a party to the contract. Therefore, the principal acquires rights and liabilities under the contract. Where the principal is undisclosed, to all intents and purposes, the agent is the party to the contract who will assume the rights and liabilities.
The doctrine of the undisclosed principal is at variance with one of the fundamental rules of the law of contract. The rule of privity of contract allows only the parties to the contract to acquire rights and liabilities under that contract. Under the doctrine of undisclosed principal, the principal may be sued or may sue on the contract that is made by its agent, despite the fact that upon strict interpretation, the agent is the contracting party and the undisclosed principal is a third party to that contract.
Commentators have suggested that the basis of the doctrine is similar to assignment, without the evidence of a transfer, the undisclosed principal being the implied assignee of the agent. In his landmark text “Bowtead & Reynolds on agency the noted commentator Bowstead, W suggests that the doctrine developed simply for commercial convenience, and is now firmly established despite being criticised as “unsound”, “unjust” and “inconsistent with elementary principles”. In Armstrong v Stokes, Blackburn J stated in respect of the legality of the doctrine: “It has often been doubted whether it was originally right to hold so: but doubts of this kind come now too late.”
As in any agency relationship, for the undisclosed principal to sue or be sued on the contract, the agent must have acted within its authority in entering into the contract. The authority can be either express or implied.
The agent of an undisclosed principal will be personally liable under the contract to the vendor, as the agent has contracted personally. The agent loses the right to sue if the principal intervenes on the contract. Therefore, both the agent and the undisclosed principal may sue and be sued on the contract. Upon the vendor discovering the existence of the undisclosed principal, the vendor has the option to choose between the agent or the principal to enforce the rights under the contract. If the vendor seeks to enforce the contractual rights or liabilities against the Agent, the Agent will be personally liable.
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The above information is provided by way of courtesy and should not be construed as legal advice nor be relied upon. If you need to know or would like to know where you stand in terms of the law of Principal and Agent you should seek local specialist legal advice. Whilst all due care has been taken in its preparation the publisher Offshore Companies International Limited shall not be liable for any loss that may flow directly or indirectly as a result of any person reading, acting upon or relying upon the above information