Companies have their own legal status independent of that of its owners. Companies employ individuals who carry out various tasks and represent them in dealings with others. Because a company needs to bring in business it grants authority to individuals or other companies called agents to enter into contracts on its behalf. Most legal problems with agents arise due to misuse of the above-mentioned authority.
Up to date there have been lots of cases concerning agents who executed a contract on behalf of their company against the company’s interest or will. In such case there are a number of important questions to answer including:
- Is the contract valid?
- What can the company do about fraudulent agents?
- How to protect the company against improper use of authority to deal on behalf of the company?
To understand better the above questions and fully answer them we need to turn to the legal concepts of agency including the actual and apparent (also known as ostensible) authority.
What is meant by agency?
In company law terms, agency describes the relationship between a company and its agent. An agent is a person or company authorised to act on behalf of its principal (the company). This usually includes power to deal with the company’s contacts and most importantly authority to execute contracts and enter into transactions. Like a simple contract, agency can arise through a written agreement or even verbal statement appointing a person to be an agent. Agent’s authority can also be implied from conduct of the parties.
Types of agents
There are different types of agents and it would be beyond the scope of this article to name all of them. Here are however a few examples:
- General and special agents are one of the most common types of agents. They represent the company in its day to day business dealings. A good example of general agent would be a person appointed to execute contracts on behalf of the principal. If the trades were specific the agent would be called a special agent (i.e. a solicitor authorised to sell company’s property would be a special agent).
- Mercantile agents are usually provided with authority to buy and sell goods on behalf of their principal.
- Brokers acting for their clients are also in effect agents.
What is an actual authority?
Actual authority is a type of an authority granted to an agent by its principal. Actual authority can be either expressed or implied. In both cases, the most important is the scope of the authority. So long as the agent acts within the scope of its authority they will be protected and able to claim an indemnity. Expressed authority is quite obvious and normally means that the agent has been instructed to act under a letter of appointment or verbally (might be difficult to prove).
Implied authority may arise in a number of ways. Normally, implied authority arises in relation to matters that have not been expressly stipulated but are necessary to be done in order to fulfil the expressed authority. The most important point to note is that that implied authority can never override express authority and contradict it. Some agents who are members of professional bodies will also be subject to regulations. Such regulations cannot be overridden by any type of authority. Therefore, if a solicitor breaches the professional regulations under expressed authority this will not diminish his responsibility as professional code overrides any authority. when an agent is placed in a particular position by the principal.
A good real life example would be a general manager of a company. Such person has an implied authority to make all relevant decisions on behalf of the company such as execute contracts. If this topic particularly interest you, you may want to read the judgment in Hely Hutchinson v Brayhead Ltd (1968) 1 QB 549 which concerned similar circumstances as those described.
Apparent authority
Apparent authority exist to suit commercial realities of conducting modern business. Lord Diplock famously pointed out that in the case of Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2QB 480 ‘in ordinary business dealings the contractor at the time of entering into the contract can in the nature of things hardly ever rely on the actual authority of the agent’. The reason behind this is that it is impossible very often to thoroughly study agent’s authority under his contract with the principal. Therefore, when entering into a contract third-party companies need to assume good faith on the part of the agent.
To protect third parties against principals denying the agreement on the basis of agent’s lack of authority the law has developed the doctrine of estoppel. So long as the principal represents to the third party company that the agent is authorised to enter into a contract and the third party company enters into a contract through the agent based upon the representation that the agent has authority, the third party company will be protected and the principal will not be able to deny the agency.
This is a very simple explanation of this complex doctrine and should you wish to further explore this area you may want to refer to further sources. A good article to have a look at can be found here.