Agency: Contract and Principal

Topics: Contract, Contract law, Contract of sale Pages: 10 (3421 words) Published: September 24, 2014
Agency is a fiduciary relationship created by express or implied contract or by law, in which one party (the agent) may act on behalf of another party (the principal) and bind that other party by words and/or actions. The etymology of the word agent or agency says much. The words are derived from the Latin verb ago, agere (the respective noun agens, agentis). The word denotes one who acts, a doer, force or power that accomplishes things.1 Agency is the exception to the doctrine of privity under the law of contract.

Lord Alverstone CJ in THE QUEEN V KANE2 defined an agent simply as ‘any person who happens to act on behalf of another’. A principal is one who authorizes another to act on his or her behalf as an agent.

The general rule is that where an agent makes a contract on behalf of his principal, the contract is between the principal and the third party and prima facie at common law, the only person who can sue and be sued on the contract is the principal. The agent acquires no rights under the contract, nor does he incur any obligation. Having performed his task by bringing about a contract between his principal and a third party, the agent drops out of the picture subject to any outstanding matters between him and principal.3 The onus is on the person alleging that he entered into a contract with another person through an agent to prove that in fact the agent was acting as such. Agents of the state can never be personally liable for the state’s failure to perform a contractual obligation as stated in STICKROSE (PTY) LIMITED V THE PERMANENT SECRETARY MINISTRY OF FINANCE4. In law, agents are recognized as having the power to affect the legal rights, liabilities and relationships of the principal. In CAVMONT MERCHANT BANK v AMAKA AGRICULTURAL HOLDINGS5, the Supreme Court held that where an agent in making the contract discloses both the interest and the names of the principal on whose behalf he purports to make a contract, the agent as a general rule is not liable to the other contracting party. Apart from having the power to affect the legal rights, liabilities and relationships of the principal, the agent may also affect the legal position of his principal in other ways. For instance, he may dispose of the principal’s property in order to transfer ownership to a third party or he may acquire property on his principal’s behalf. Sometimes the actions of the agent may make the principal criminally liable as illustrated in the case of GARDENER v ACKEROYD6.

The rights and liabilities of principal and agent against third parties may differ according to whether the agency is disclosed or undisclosed. The distinction between disclosed and disclosed agency is important as it affects the principal’s ability to ratify the agent’s actions. Furthermore, the agent’s liability to third parties may depend on whether the agency was disclosed or not. Agency is disclosed where the agent reveals that he is acting as an agent; if the agency is disclosed it is of no legal significance that the principal is not named. If an agent contracts with a third party without disclosing that he is acting as an agent the agency is undisclosed.7 An undisclosed principal can intervene on the contracts of an agent within his actual authority.

Where an agent makes a contract disclosing the agency, the normal rule is that a direct contractual relationship is created between the principal and the third party and either party can sue the other on the contract. It is important to note that only a disclosed principal can ratify an unauthorised contract. In KEIGHLEY MAXTED v DURANT8 a principal authorized an agent to buy wheat at a given price in the joint names of the principal and the agent. Having failed to purchase wheat at that higher price, the agent bought wheat in his own name at a higher price. The principal being satisfied with this act purportedly ratified the wheat...
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