Before we commence this section, it is very important to realise that the law of
agency is much wider than its application to insurance agents (important as that is).
Therefore, in the following paragraphs, do not think only of insurance agents. The
comments apply to every kind of agent (a shipping agent, an estate agent, etc.), an
explanation of which immediately follows.
(a) An agent in this context is a person who represents a principal. In insurance, the
position is made a little complex because insurance intermediaries may be
described as Insurance Agents (usually representing the insurer) or as Insurance
Brokers (usually representing the insured/proposer), as the case may be. Within
the law of agency, they are both agents.
(b) The law of agency is deceptively simple in theory, but sometimes quite complex in
practice. Essentially, this whole area of law is governed by the legal principle that
‘he who acts through another is himself performing the act’. In other words, the
principal is bound (for good or ill) by the authorised actions, and sometimes even
the unauthorised actions (see 2.2.2 and 2.2.3 below), of his agent. Thus, when a
child (agent) buys something on credit from a grocery store at his mother’s
(principal) bidding, a contract of sale is created between the store and the mother
so that she becomes liable to pay the price.
(c) The principal who becomes bound by the acts of his agent is exposed to vicarious
liability, liability incurred as a result of an act or omission of another.
Agency is the relationship which exists between a Principal and his Agent.
Because it is a relationship, it may arise as a matter of fact rather than as a precise
agency appointment. In legal terms, an agency relationship may be deemed to
arise in certain given circumstances.
The law of agency are those rules of law which govern an agency
relationship. The law of contract also has to be considered as the agent often
arranges an agreement with the third party, or performs it, on behalf of his
principal. There are two contracts to consider:
(a) one between the agent and the principal; and
(b) another quite different one between the principal and the third party.
Note: an agency can exist without an agency contract. For example: a child
(gratuitous agent) goes to buy a pack of sugar on behalf of his mother
(principal), with authority to bind the mother in so doing, which is not
granted under a contract of agency between them (remember that a
domestic arrangement generally does not constitute a contract).
2.How Agency Arises
When we say that an agency relationship exists between two parties, we
are, in essence, saying that the agent owes certain duties to the principal and vice
versa, and that the agent has some sort of authority to bind the principal in respect
of some contract or transaction to be made on the principal’s behalf with another
person (third party).
There are a number of ways in which an agency relationship may arise.
These we consider below:
(a) By agreement: whether contractual or not; express, or implied from the
conduct or situation of the parties.
(b) By ratification: Ratification is the giving of retrospective authority for a
given act. That is to say, authority was not possessed at the time of the act,
but the principal subsequently confirms the act, effectively backdating
approval. It can be done in writing, verbally, or by conduct.
For example, an insurance agent who is only authorised to canvass
household insurance business for an insurer has an opportunity to secure an
attractive fire insurance risk and purports to grant the required fire
insurance cover to the client. The proposed insurance contract is
technically void for it has been made without authority from the insurer.
However, the insurer may subsequently accept the insurance and confirm
cover so that the contract becomes valid retrospectively.
3. Authority of Agents
The issue of authority is related to, but distinct from, the issue of agency
relationship. Where a certain act done by A purportedly on behalf of B will be
binding on B, A is said to have B’s authority to do it; but that does not necessarily
mean that there is an agency relationship, or a full agency relationship, between
them, which will, for instance, entitle A to reimbursement by B of expenses
incurred on behalf of B. The various types of authority that an agent may have are
considered below:
(a) Actual authority: The authority of an agent may be actual where it results
from a manifestation of consent that he should represent or act for the
principal, expressly or impliedly made to the agent himself by the principal.
An actual authority can be an express actual authority or an implied actual
authority. An express actual authority is an actual authority that is
deliberately given, verbally or in writing. By contrast, an implied actual
authority arises in a larger variety of circumstances; put simply, it may arise
out of the conduct of the principal, from the course of dealing between the
principal and the agent, or the like.
(b) Apparent authority: The authority of an agent may be apparent instead of
actual, where it results from a manifestation of consent, made to third
parties by the principal. The notion of apparent authority is essentially
confined to the relationship between the principal and a third party, under
which the principal may be bound by an unauthorised act of the agent of
creating a contract or entering into a transaction on behalf of the principal.
Suppose an underwriting agent has been expressly forbidden by his
principal from accepting cargo risks destined for West Africa. In
contravention of this prohibition, the agent has on several occasions
verbally granted temporary cover to a client for such risks purportedly on
behalf of the principal, each time followed by issuance of policies for them
by the principal to the client. Because of such past dealings, future similar
acceptance by the agent may be binding on the insurer on the basis of
apparent authority to the agent.
(c) Authority of necessity: In urgent circumstances where the property or
interests of one person (who may possibly be an existing principal) are in
imminent jeopardy and where no opportunity of communicating with that
person exists, so that it becomes necessary for another person (who may
possibly be an existing agent) to act on behalf of the former, the latter is
said to have an authority of necessity so to act and becomes an agent of
necessity by so acting even though he has not acquired an express authority
to do that. The implications are that: by exercising such an authority, the
agent creates contracts binding and conferring rights on the principal, and
becomes entitled to reimbursement and indemnity against his principal in
respect of his acts. Besides, he will have a defence to any action brought
against him by the principal in respect of the allegedly unauthorised acts.
For example, when a person is very ill in hospital, a neighbour and friend
volunteers and gives help, by assisting with domestic arrangements at his
home. This includes payment of the renewal premium for his household
insurance. As a result, he will probably be unable to refuse repaying the
neighbour for the premium, as the neighbour will almost certainly be
considered an agent of necessity. Secondly, he will probably be unable to
declare the insurance void and demand a return of premium from the
insurer. Thirdly, it is unlikely that the insurer will be able to deny claims
under the policy on the grounds that the policy was renewed without his
authority.
(d) Agency by estoppel: Where a person, by words or conduct, represents or
allows it to be represented that another person is his agent, he will not be
permitted to deny the authority of the agent with respect to anyone (third
party) dealing with the agent on the faith of such representation. Despite the
binding effect of the acts of the agent done in such circumstances, this
doctrine, agency by estoppel, does not generally create an agency
relationship unless, say for example, the unauthorised act of the agent is
subsequently ratified. In other words, the operation of this doctrine only
concerns the relationship between principal and third party.
Note The doctrine of apparent authority is distinct from the doctrine of estoppel.
The first doctrine applies where an agent is allowed to appear to have a
greater authority than that actually conferred on him, and the second
doctrine applies where the supposed agent is not authorised at all but is
allowed to appear as if he was.
5. Duties Owed by Agent to Principal
These may be summarised as follows:
- Obedience: The agent has to follow all lawful instructions of his principal,
strictly or as best as is reasonably possible.
- Personal performance: The agent is not allowed to
delegate his authority
and responsibilities to others (subagents) unless he has authority to do so.
- Due care and skill: The law does not demand perfection, and an agent is
normally only required to display all reasonably expected skills and
diligence in performing his duties. Whilst his principal may be bound by
his lack of care, the principal may in turn reclaim from the agent in respect
of a loss caused by the lack of care.
- Loyalty and good faith: The agent’s obligations of loyalty and good faith
are governed by several strict rules of law, the no conflict rule being one of
them.
- Accountability: The agent has to account for all moneys or other things he
receives on behalf of his principal. He also has to keep adequate records
relating to the agency activities.
4. Duties Owed by Principal to Agent
These may be summarised as follows:
(a) Remuneration: The agent is entitled to receive commission or other
remuneration (such as bonus) as agreed. This the principal has to pay
within a reasonable time or any specified time limit, as the case may be.
(b) Expenses, etc.: The principal, subject to any express terms in the agency
agreement, has to reimburse the agent for costs and expenses properly and
reasonably incurred by the agent on behalf of the principal; e.g. legal
defence expenses paid by a claims settling agent.
(c) Breach of duty: The agent may take action against the principal for the
latter’s breach of obligations to him.
5 . Termination of Agency
There are a number of ways in which an agency agreement can be brought
to an end. These include:
- (a) Mutual Agreement: Generally speaking, all agreements may be terminated
by mutual agreement, on terms agreed between the parties.
- (b) Revocation: Subject to any contract terms as to notice and/or compensation,
either the principal or the agent may revoke (i.e. cancel) the agreement
during its currency.
- (c) Breach: If either the principal or the agent commits a fundamental breach of
contract, the other party may treat the contract as ended (with a possible
right of compensation). For example, an exclusive agent, upon discovering
that the principal, in breach of a contract condition, has appointed a second
agent before the expiry of the agency agreement, may terminate
performance immediately and sue the principal for any loss of the profit
expected from performing the agreement during the remainder period.
- (d) Death: Because an agency relationship is a personal one, the death of either
the principal or the agent will end the agreement. Should either party be a
corporate body (company), its liquidation will have the same effect.
- (e) Insanity: If either the principal or the agent becomes insane so that he no
longer can perform the agreement, the agreement will automatically come
to an end.
- (f) Illegality: If it happens that the agency relationship or the performance of
the agreement is no longer permitted by law, this will automatically end the
agreement. Suppose a British company (buying agent) has a contract with a
company (principal) incorporated and domiciled in another country
whereby the buying agent will purchase in the United Kingdom stuffs like
wheat, steel, sulphur and other chemicals on behalf of the principal. On the
outbreak of a war between the two countries, this agreement will, in the
English law, automatically end for illegality.
- (g) Time: If the agreement is for a determined period, it will terminate at the
end of such period.
