Part D The formation and constitution of business organisations 10: Agency law 165Chapter Roundup
Agency is a relationship which exists between two legal persons (the principal and the agent) in which the
function of the agent is to form a contract between their principal and a third party. Partners, company
directors, factors, brokers and commercial agents are all acting as agents.
The relationship of principal and agent is created by mutual consent in the vast majority of cases. This
agreement does not have to be formal or written.
The mutual consent comes about usually by express agreement, even if it is informal. However, it may
also be implied agreement, due to the relationship or conduct of the parties.
A principal many later ratify an act of an agent retrospectively.
An agency may be created, or an agent's authority may be extended, without express consent. This
happens by estoppel, when the principal 'holds out' a person to be their agent, and when there is an
agent of necessity.
If an agent acts within the limits of their authority, any contract they make on the principal's behalf is
binding on both principal and third party. The extent of the agent's authority may be express, implied or
ostensible. Express and implied authority are both forms of actual authority.
An agent's apparent or ostensible authority may be greater than their express or implied authority. This
occurs where a principal holds it out to be so to a third party, who relied on the representation and altered
their position as a result. It may be more extensive than what is usual or incidental.
Agency is terminated by agreement or by operation of law (death, insanity, insolvency).
An agent usually has no liability for a contract entered into as an agent, nor any right to enforce it.
Exceptions to this: when an agent is intended to have liability; where it is usual business practice to have
liability; when the agent is actually acting on their own behalf; where agent and principal have joint liability.
A third party to a contract entered into with an agent acting outside their ostensible authority can sue for
breach of warranty of authority.