Chapter 4 - Agency

Question 1

What is an agency?

Answer 1

Agency is a fact of modern business life and describes the relationship which exists where one party, the agent, acts on behalf of another, the principal. Examples include company directors who act as agents on behalf of the company and partners who act as agents for all the partners in a partnership.

Question 2

What is required for agency by consent to be valid?

Answer 2

The agent must have the principal’s express or implied agreement to act on their behalf. Consent can be oral, written, or implied by conduct.

Question 3

What is the role of an agent in contract formation?

Answer 3

An agent forms contracts with third parties on the principal’s behalf. The agent must have authority to enter into the contract, though they do not need capacity to enter into a contract themselves.

Question 4

What is required of the principal in the creation of an agency?

Answer 4

The principal must have full contractual capacity.

Question 5

How can an agency relationship be created?

Answer 5

An agency relationship can be created in the following ways:
By consent: Express or implied agreement between the principal and agent.
By estoppel: When the principal’s actions lead a third party to believe someone is their agent, and the third party relies on this.
By necessity: In emergencies where the agent acts to protect the principal’s property or interests.
By ratification: When the principal validates the agent’s unauthorized actions after the fact.

Question 6

What is “agency by estoppel”?

Answer 6

Agency by estoppel arises when the principal’s words or conduct give a third party the impression that a person is the principal’s agent, and the third party acts upon this belief.

Question 7

Under what condition is the principal “estopped” in agency by estoppel?

Answer 7

The principal is “estopped,” or prevented, from denying the existence of the agency if authority is withdrawn but the third party is not informed.

Question 8

What is the effect of agency by estoppel?

Answer 8

The principal is prevented (estopped) from denying the existence of the agency relationship if their actions led a third party to reasonably believe an agency existed.

Question 9

When does an agency of necessity arise?

Answer 9

An agency of necessity arises in emergencies where the property or interests of another person are in imminent jeopardy, and immediate action is needed to protect those interests.

Question 10

What must an agent demonstrate to act under an agency of necessity?

Answer 10

1. No practical way to contact the principal for instructions.
2. Actions arose from a pressing need (e.g., involving perishable goods or starving animals).
3. Acted in good faith in the principal’s interest.
4. Actions were reasonable and prudent.
5. There was a prior contractual arrangement between the parties.

Question 11

What does “agency by ratification” mean?

Answer 11

Agency by ratification validates past acts of the agent, creating an agency relationship retrospectively, as if the agent was authorized to act from the beginning.

Question 12

What are the 4 conditions for ratification of an agency?

Answer 12

1. The principal was in existence at the time of the agent’s act.
2. The principal had the legal capacity to make the contract at the time of the act and ratification.
3. The agent identified the principal on whose behalf they were acting.
4. Ratification occurred within a reasonable time.

Question 13

Does ratification of part of a contract ratify the entire contract?

Answer 13

Yes, ratification of part of a contract operates as a ratification of the entire contract.

Question 14

How must a principal express the intention to ratify an act?

Answer 14

The principal must clearly express an intention to ratify, either through words or conduct. Passive inactivity is insufficient.

Question 15

What does acting in “good faith” mean in the context of an agency of necessity?

Answer 15

Acting in good faith means prioritizing the principal’s interests over the agent’s own interests.

Question 16

What are the duties of an agent?
acronym

Answer 16

CAN OPPS

Confidence
Accountability
No conflict of interest

Obedience
Performance
Personal performance
Skills

Question 17

CAN OPPS

Answer 17

CAN OPPS - duties of an agent

Confidence
Accountability
No conflict of interest

Obedience
Performance
Personal performance
Skills

Question 18

Can opps
What is the duty of confidentiality for an agent?

Answer 18

An agent must keep all information about the principal confidential, even after the agency relationship has ended.

Question 19

cAn opps
What is the duty of accountability for an agent?

Answer 19

An agent must provide full information to the principal regarding agency transactions and account for all monies received, including bribes or inducements.

Question 20

caN opps
What is the duty of avoiding conflict of interest?

Answer 20

An agent must avoid situations where their own interests conflict with those of the principal.

Question 21

can Opps
What is the duty of obedience for an agent?

Answer 21

An agent must strictly follow lawful and reasonable instructions from the principal. Disobedience is not allowed, even if it seems to be in the principal’s best interest, unless the act is illegal or unreasonable.

Question 22

can oPPs
What is the duty of performance?

Answer 22

An agent must perform their agreed-upon tasks under a contract. Unpaid agents are not bound unless there is other consideration. Agents may refuse to perform illegal acts.

Question 23

can oPPs
What is the duty of personal performance?

Answer 23

An agent is typically selected for their personal qualities and must not delegate tasks unless explicitly allowed (e.g., a solicitor delegating tasks to a stockbroker).

Question 24

can oppS
What is the duty of skill for an agent?

Answer 24

An agent must maintain professional standards of skill and care in their tasks.

Question 25

Rights of an Agent
acronyms

Answer 25

IRL

Indemnity
Remuneration
Lien

Question 26

Irl
What is the right of indemnity for an agent?

Answer 26

An agent is entitled to reimbursement of expenses and indemnity against losses and liabilities incurred while acting properly within their authority.

Question 27

iRl
What is the right of remuneration for an agent?

Answer 27

An agent is entitled to agreed or implied payment for their services. This can be an express amount or a reasonable sum.

Question 28

irL
What is the right of lien for an agent?

Answer 28

An agent can retain the principal’s property or goods as security for unpaid debts owed to the agent.

they can hold on to goods for security for amount you are owed by the principle

Question 29

What are the three sources of an agent’s authority?

Answer 29

1. Actual (STATED) express authority: Explicitly given by the principal for specific tasks. Authority comes from consent.
   Example: A principal instructs the agent to buy 20 wheelbarrows.
2. Actual (POSITION) implied authority: Authority implied by the nature of the role or task.
   Example: A partner in a business ordering supplies for the partnership.
3. Ostensible (APPARENT) authority: Authority created by the principal’s words or inaction/conduct. THINK ‘How does it appear to the 3rd party’
   Example: A company director is allowed to act as if they are the Managing Director, even if not formally appointed

Question 30

Define Actual express authority

Answer 30

Actual (STATED) express authority: Explicitly given by the principal for specific tasks. Authority comes from consent.
Example: A principal instructs the agent to buy 20 wheelbarrows.

Question 31

Define Actual implied authority

Answer 31

Actual (POSITION) implied authority: Authority implied by the nature of the role or task.
Example: A partner in a business ordering supplies for the partnership.

Question 32

Define Ostensible authority

Answer 32

Ostensible (APPARENT) authority: Authority created by the principal’s words or inaction/conduct. THINK ‘How does it appear to the 3rd party’
Example: A company director is allowed to act as if they are the Managing Director, even if not formally appointed

Question 33

What should the decision here be? Watteau v Fenwick 1893
The facts: P owned a hotel and appointed the old owner A to act as manager. Against express instructions A bought cigars on credit from T who sued P for payment. P argued that he was not liable on the contract as A had no authority to make it.

Answer 33

Example of actual implied authority

Decision: Although A had no actual express authority it was usual for managers to buy cigars on credit and as he had not known of the restriction T was entitled to assume that A had the usual authority of a hotel manager.

Question 34

What should the decision here be?
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd 1964
The facts: K and H carried on business as property developers. H lived abroad and the business of the company was left entirely under the control of K. As a director, K had no actual or apparent authority to enter into contracts as agent of the company and he was never formally approved as managing director. However, H and the other two directors allowed him to act as if he were MD, contracting on the company’s behalf. The claimants sued the company for work done on K’s instructions.

Answer 34

Example of ostensible authority

Decision: No actual delegation or appointment as a managing director so no actual express or implied authority. As the company by its acquiescence led the claimants to believe that K was a managing director it was estopped from denying that K was its agent.
I.e. K had apparent authority created by estoppel.

Question 35

INTERACTIVE QUESTION 8: AUTHORITY

Michelle works in Nathan’s building firm. She is employed in the purchases department. Nathan does not have approved suppliers, but Michelle is required by internal policy to get Nathan’s approval for all orders. Nathan has been invited to Oliver’s timber yard as Oliver is keen to get Nathan as a customer.
However, Nathan is busy and doesn’t want to go, so he sends Michelle in his place, telling Oliver that ‘she deals with buying anyway’.
While Michelle was at Oliver’s timber yard, she noticed a very good price on some timber. Knowing that Nathan needed some timber soon for an existing project, she decided to buy it for Nathan. Oliver was delighted, and set up a credit account for the timber in Nathan’s name.
Indicate whether the following statements are true or false in respect of Michelle’s authority to make this contract on behalf of Nathan.

TRUE OR FALSE

A Michelle has no authority to make this contract on Nathan’s behalf.
B Michelle has express authority to make this contract on Nathan’s behalf.
C Michelle has implied authority to make this contract on Nathan’s behalf.
D Michelle has ostensible authority to make this contract on Nathan’s behalf.

Answer 35

A False
B False
C True. As Michelle is employed in the purchasing department, she has implied authority to enter into contracts on Nathan’s behalf.
D True. Nathan has told Oliver that Michelle ‘deals with buying’ so he is entitled to assume that she has the authority to enter into this contract on Nathan’s behalf.

Question 36

What are the liabilities when the agent has authority and is known to be an agent?

Answer 36

Third Party: May sue or be sued by the principal.
Principal: May sue or be sued.
Agent: Usually no liability, unless the principal was not named.

Question 37

What are the liabilities when the agent has authority but is not known to be an agent?

Answer 37

Third Party: Can sue either the principal or agent.
Principal: May sue on the contract, but agent’s rights are subordinate to the principal’s.
Agent: May be liable depending on the circumstances.

Question 38

What are the liabilities when the agent has no authority?

Answer 38

Third Party: Cannot claim against the principal but may claim against the agent.
Principal: Has no obligations.
Agent: May be liable for torts such as deceit or breach of warranty of authority.

Question 39

1 Elsa worked for Lady Grey and part of her job was to buy plants, ornaments and furniture for the gardens of Lady Grey’s country manor house. When her son, Harry, was due to retire she advised Elsa that Harry would be taking on her responsibilities. A few weeks later, Elsa ordered some very expensive roses and marble statues from Lady Grey’s main supplier and collected the goods the next day for her own garden. The invoice was delivered to Lady Grey.
Requirements
Is there an agency relationship between Elsa and Lady Grey in respect of the contract for the roses and statues?
A Yes
B No
Is Lady Grey bound to settle the invoice? C Yes
D No

Answer 39

1 Correct answer(s): A Yes
An agency by estoppel has arisen, by virtue of the supplier relying on the continuing representation by Lady Grey that Elsa is her agent.
Correct answer(s): C Yes
She is estopped from denying the agency relationship. However, she may seek to reclaim the money from Elsa.

Question 40

2 Stephan lives near an isolated headland in Cornwall. One day, he sees a Rolls Royce parked on the beach. No one is in sight but the tide is coming in rapidly. Stephan calls his neighbour and arranges for her to come and tow the Rolls Royce up the beach to safety. The neighbour is happy to oblige but wants payment for what she has done. When the owner, Anthony, returns, he refuses to pay because he says the action was not necessary.
Requirement
Which of the following best describes the legal position?
A An agency of necessity has arisen because Stephan is unable to contact Anthony.
B An agency of necessity has arisen because there is an emergency situation and a pressing need for action.
C No agency of necessity has arisen because the Rolls Royce is not a perishable good and Stephan’s action was not reasonable.
D No agency of necessity has arisen because there is no pre-existing contractual relationship between Stephan and Anthony.

Answer 40

2 Correct answer(s):
D No agency of necessity has arisen because there is no pre-existing contractual relationship between Stephan and Anthony.
Although Stephan acted in good faith and possibly reasonably (and was clearly unable to contact Anthony), the law is unlikely to say that an agency of necessity has arisen, because it is not inclined to allow a person to be bound by the act of a complete stranger.

Question 41

3 Preparing for her 40th birthday party, Scarlett went into a luxury food store and ordered a hamper of food and drink, saying that she was buying it in her capacity as agent for Dame Hilda, a well-known celebrity who lived in the same village and who was planning a summer ball in the grounds of her country house. The store supplied the hamper and then invoiced Dame Hilda.
Requirements
Is there an agency by holding out or estoppel?
A Yes
B No
Can the store demand payment from Dame Hilda? C Yes
D No

Answer 41

3 Correct answer(s): B No
It is the conduct of the principal that might give rise to an agency by estoppel, not the conduct of the ‘agent’.
Correct answer(s):
D No
The contract can only be enforced against Scarlett personally.

Question 42

4 Andrea purchases 10 watercolour paintings from an artist, Ross, for her employer, the Earl of Somerset, even though he has told her not to buy any more watercolours on his behalf but to concentrate on pastels. When the artist learns this, he demands their return as he had no wish for his work to hang in Andrea’s terraced home in Bridgwater. However, the Earl of Somerset had come to like them after seeing them on Andrea’s walls and refused the artist’s demand for their return, sending him a cheque instead.
Requirements
Does the Earl of Somerset’s action amount to ratification of the contract? A Yes
B No
Is the artist able to insist on the return of the watercolour paintings?
C Yes D No

Answer 42

4 Correct answer(s): A Yes
Ratification needs more than passive inactivity but can be inferred from words or conduct. Correct answer(s):
D No
The contract has been ratified.

Question 43

7 With regard to the duties owed by an agent:
Is an agent entitled to delegate the tasks that they are appointed to undertake, as they see fit?
A Yes
B No
Is an agent at liberty to reveal details about their principal discovered during the course of the agency relationship, once that relationship has ended?
C Yes D No

Answer 43

7 Correct answer(s): B No
Generally speaking, an agent owes a duty to provide personal performance and not to delegate it to another person.
Correct answer(s):
D No
An agent must respect the duty of confidentiality even after the agency relationship has ended.

Question 44

12 Are the following statements true or false in connection with agency by estoppel?
The third party must show that they have relied on a representation that the contracting party was acting as agent for their principal.
A True
B False
It is not necessary to show that the claimant’s loss was caused by their reliance on the representation. C True
D False

Answer 44

12 Correct answer(s): A True
Correct answer(s):
D False
There must be a causal link between the third party’s loss and their reliance upon the representation.

Question 45

13 Are the following statements true or false?
For an agency by estoppel to arise, there must be a pre-existing agency relationship between the principal and the agent.
A True B False
When an individual revokes the authority of their agent they should inform the third parties, who regularly deal with the agent, of the change in circumstances in order to prevent the former agent having any continuing authority to act on their behalf.
C True D False

Answer 45

13 Correct answer(s): B False
There is no such requirement. Correct answer(s):
C True
Otherwise, the principal may find themselves still liable if the agent enters into further contracts with the third party without authority and the third party is unaware that they are no longer an agent.

Question 46

14 Roz works in the accounts department of Bizzy Lizzy, a successful florist’s business. The principal owner of the business, Vincent, was due to visit a specialist rose grower on the Isles of Scilly but was unable to go due to illness. Vincent asked Roz to go along instead. He telephoned the rose grower to say that his buying partner would be taking his place. Roz ordered 500 roses for Bizzy Lizzy.

Which of the following best describes the legal position?
A Roz had ostensible authority to order the roses.
B Roz had implied authority to order the roses.
C Roz had express authority to order the roses.
D Roz had no authority to order the roses.

Answer 46

14 Correct answer(s):
A Roz had ostensible authority to order the roses.
By calling her his ‘buying partner’, Vincent has given the impression that Roz was his agent and that she had the authority to purchase goods on behalf of the company.

Question 47

15 Annabel is Phil’s agent. She enters into a contract with Tia, within her authority, expressly describing herself as an agent for Phil.
Requirements
Can Annabel be liable on this contract with Tia?
A Yes
B No
If Annabel enters into a contract, saying that she is acting as agent but without actually naming Phil as her principal, does that mean that Phil will not be liable on the contract?
C Yes D No

Answer 47

15 Correct answer(s): A Yes
If it appears that the parties intended this to be the case, she may be liable.
Correct answer(s):
D No
It means that it is more likely that she will be personally liable but, again, it is subject to the intentions of the parties.

Question 48

16 Ashley is Phyllis’s agent and enters into a contract for the purchase of a vintage car from Vince, as instructed by Phyllis. Vince does not know that Ashley is buying the car for Phyllis, at the time of entering into the contract, but discovers this to be the case one week later.
Requirements
If Vince then defaults on the sale, can Phyllis take action on the contract? A Yes
B No
If Phyllis defaults on the purchase, can Vince take action on the contract? C Yes
D No

Answer 48

16 Correct answer(s): A Yes
In fact, either the agent or the principal can sue on the contract, but the agent’s rights are subordinated to the principal’s rights.
Correct answer(s):
C Yes
Vince may sue either Ashley or Phyllis on the contract (but not both).

Question 49

19 A valid agency relationship can be created by: Express appointment
A Yes
B No
Ratification C Yes
D No

Answer 49

19 Correct answer(s): A Yes
A principal appoints an agent to carry out a specific task or tasks.
Correct answer(s):
C Yes
A principal can subsequently ratify a contract entered into between their agent and third party, subject to certain conditions being satisfied.

Question 50

20 Denis was a partner in Doolittle Solicitors. He retires from the partnership and the firm’s existing clients and suppliers are informed of this fact; the firm amends its stationery so that Denis’s name no longer appears on it. A short time later, Denis orders goods using old stationery which still has his name on it and asks for the bill to be sent to Doolittle Solicitors.
Requirement
Which of the following statements is correct?
A There is a binding contract between Denis and the firm which supplied the goods.
B No binding contract has been created between the supplier and Doolittle Solicitors because Denis was not authorised to act on behalf of the firm.
C There is a binding contract between Doolittle Solicitors and the firm which supplied the goods.
D No binding contract has been created because the partnership shown on the stationery had ceased to exist.

Answer 50

20 Correct answer(s):
A There is a binding contract between Denis and the firm which supplied the goods.
Denis is no longer a partner and there is no express or implied agency and no question of ratification. No agency arises on the basis of Denis holding himself out to be a partner.

Question 51

22 Kit and Lin are partners in a takeaway pizza business. One of their employees, Jeff, decides to try to improve the business’s profits by setting up a parcel delivery operation, using the same business name, that uses the pizza delivery vehicles to deliver the parcels. Kit and Lin do not prevent Jeff doing this and are happy with the extra money the parcel delivery service is making.
Requirement
Which type of authority does Jeff have in regard to the parcel delivery service?
A Actual express authority
B Implied usual authority
C Ostensible authority
D Actual implied authority

Answer 51

22 Correct answer(s):
C Ostensible authority
Express authority is that which is expressly given to the agent. There is no express authority in regard to the parcel delivery service.
Implied authority is given in regard to what is expressly authorised or which is usual by virtue of the agent’s position; neither of which applies to Jeff.
By not preventing Jeff from running the parcel delivery service, Kit and Lin have provided ostensible authority to Jeff. Their acceptance of his actions represents to third parties whom Jeff deals with that he has authority to run the service.

Question 52

23 Alice, acting as Petra’s agent, contracts with Toni to purchase Toni’s car.
Requirement
Under agency law, who may sue and be sued on the contract?
A Alice and Toni
B Petra and Toni
C Alice and Petra
D Alice, Toni and Petra

Answer 52

23 Correct answer(s):
B Petra and Toni
Under agency law, Alice drops out of the picture. The contract is between Petra and Toni.

Question 53

24 Are the following statements regarding agency law true or false?
LO 1c
The duties of an agent are limited to what was agreed and incorporated into the agency contract between agent and the principal.
A True
B False
An agent and their principal have a fiduciary relationship between them. C True
D False

Answer 53

24 Correct answer(s): B False
Duties may be implied by common law and by statute.
Correct answer(s):
C True
Agents and their principals are bound by a fiduciary relationship.

Question 54

26 Which of the following describes the level of skill expected of an agent?
A That of a reasonable person
B That of a person in their profession
C That of an expert in their profession
D That of a reasonable person with the same experience

Answer 54

26 Correct answer(s):
B That of a person in their profession
Agents are expected to demonstrate the level of skill expected of a person in their profession.

Question 55

27 Lionel is Melody’s agent. One day he was booked to attend a series of meetings with third parties who are interested in entering into contracts with Melody. While driving to a meeting, his car broke down and he ended up calling a taxi to ensure he arrived on time. Due to the distance, the taxi fare was very expensive.
Requirement
Is Lionel entitled to be repaid the taxi fare by Melody?
A Yes
B No
Lionel and Melody have agreed that Lionel should be paid for providing his services to Melody but have not agreed how much he should be paid.
Requirement
Lionel’s remuneration will be set at the level of the minimum wage. C True
D False

Answer 55

27 Correct answer(s): A Yes
An agent is entitled to be repaid their expenses and to be indemnified by their principal against losses and liabilities, provided their acts are done properly within the limits of their authority.
Correct answer(s): D False
If the amount of an agent’s remuneration is not fixed, they are entitled to a reasonable amount. Therefore it is not tied to the minimum wage.

Question 56

29 An agent’s implied authority allows them to do all things usually associated with the agent’s office. A True
B False
An agent’s incidental and usual authority are part of their apparent authority. C True
D False

Answer 56

29 Correct answer(s): A True
An agent has implied authority to do all things that are usual by virtue of the agent’s office.
Correct answer(s):
D False
An agent’s incidental authority and usual authority are implied because they are not expressly stated, but they are still part of an agent’s actual authority.