Agency is a tripartite relationship in which one person (the agent) has the authority to create legal relations between a principal and a third party. If an agency relationship exists, the agent’s actions can create binding legal relationships between the principal and the third party. Therefore, agency can have significant legal implications for principals and their obligations to third parties. In this short article we will discuss how an agency relationship can be formed.
For an agent to bind a principal, their actions must fall within the scope of their authority. This establishes when the principal will be bound by the agent’s acts and when liability will arise. Authority may arise in a number of ways:
- Actual Express Authority
- Actual Implied Authority
- Apparent Authority
- Ratification
Actual Express Authority
Actual express authority is when the agency relationship between the principal and the agent is created by agreement expressly. This can be done in writing or orally.
Express authority will usually be determined by a contractual relationship between the principal and third party.
Actual Implied Authority
Actual implied authority is when the agency relationship is inferred by the words or conduct of the parties, rather than express words. Implied authority may arise from the usual authority of the agent on other matters, past dealings or trade/customs.
Implied authority however cannot be contradictory to express authority.
Apparent Authority
Apparent authority is created where the principal, either by words or conduct, leads the third party to believe the agent is the principal’s agent. Although the principal may not have been given actual authority, the circumstances are such that the principal cannot deny the authority given to the agent. The principal will be estopped from denying the authority.
Aparant authority is also legislated under sections 124-130 of the Corporations Act 2001 (Cth). Under sections 128 and 129 of the Corporations Act, a third party is entitled to make assumptions as to the authority of a person to act as an agent for a company if that company has held the person out to have authority to act as an agent.
Ratification:
Agency can be created through ratification. Where the agent acts without the authority of the principal, the principal, by later approving or acting to comply with the agent’s actions, may render the action as valid and effectual as if it had been done by their duly authorised agent.
Conclusion:
An agency relationship is one in which a principal provides authority to another party to legally bind the principal. An agency relationship can be established through formal processes – in which express authority to act for and on behalf of the principal is created. Or it can be established through less formal processes, in which it is implied or assumed that authority has been granted to the agent.
An agent’s act or promise can bind the principal as if the promise was made by the principal, provided the agent acts within the scope of their authority.
Written by Ibrahim Doruk, Nathan Haynes, LLB (Hons), BA
Note: This is a general guide only. Circumstances may vary and advice should be sought about your specific circumstances.
