ACCA F4 - Corp and Business Law (ENG)

Part D The formation and constitution of business organisations  10: Agency law 163

This is important – ostensible authority arises in two distinct ways. It may arise where a person makes a

representation to third parties that a particular person has the authority to act as their agent without

actually appointing them as their agent. Alternatively, it may arise where a principal has previously

represented to a third party that an agent has authority to act on their behalf.

3.4.4 Representations creating ostensible authority

The representation must be made by the principal or an agent acting on their behalf. It cannot be made

by the agent who is claiming ostensible authority.

It must be a representation of fact, not law, and must be made to the third party. This distinguishes

ostensible authority from actual authority, where the third party need know nothing of the agent's

authority.

3.4.5 Reliance on representations

It must be shown that the third party relied on the representation. If there is no causal link between the

third party's loss and the representation, the third party will not be able to hold the principal as liable.

Illustration^

If the third party did not believe that the agent had authority, or if they positively knew they did not, then

ostensible authority cannot be claimed. This is true even if the agent appeared to have authority.

3.4.6 Alteration of position following a representation

It is enough that the third party alters their position as a result of reliance on the representation. They

do not have to suffer any detriment as a result, but damages would in such an event be minimal.

3.5 Revocation of authority

Where a principal has represented to a third party that an agent has authority to act, and has subsequently

revoked the agent's authority, this may be insufficient to escape liability. The principal should inform

third parties who have previously dealt with the agent of the change in circumstances. This is particularly

relevant to partnerships and the position when a partner leaves a partnership.

3.6 Termination of agency

Agency is terminated by agreement or by operation of law (death, insanity, insolvency).

Agency is terminated when the parties agree that the relationship should end.

It may also be terminated by operation of law in the following situations:

 Principal or agent dies

 Principal or agent becomes insane

 Principal becomes bankrupt, or the agent becomes bankrupt and this interferes with their position

as agent

Termination brings the actual authority of the agent to an end. However, third parties are allowed to

enforce contracts made later by the 'agent' until they are actively or constructively informed of the

termination of the agency relationship.

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