Aspects of Commercial Law Essay (Felicia Fontana)

Should agency law provide more protection to principals or third parties when an agent
acts beyond their actual authority? Your answer should include critical analysis of case
law studied on this module

Introduction

Agency law operates at the core of all commercial transactions, allowing principals to work through agents.^[1] However, a challenge occurs when agents act beyond their authority. The principle of agency law that “he who acts through another is deemed in law to do it himself” highlights that a principal can be legally bound by their agent’s actions, even if they go beyond their instructions.^[2] When an agent acts outside their actual authority, determining whether to prioritize protecting principals or third parties becomes crucial.

This essay argues that agency law should offer greater protection to third parties as they face vulnerabilities due to information asymmetries, commercial reliance and unfair burdens despite reasonable reliance. Third parties must rely on what they perceive the agent’s authority is without really understanding the limits to the agent’s actual authority. Through defining theses boundaries, the law needs to find equality for these competing interests to ensure justice and commercial confidence.

Authority in Agency Law

The doctrine of actual authority constitutes the basis of an agent’s ability to bind their principal in legal settings.^[3] The principal’s explicit or implied consent is the root of this authority, creating clear limits for the agent’s actions. Actual authority protects principals by guaranteeing they can keep control over their agents’ actions. Additionally, it impacts third parties who could be relying on the agent’s apparent authority without knowing the principals’ set boundaries of the actual authority. The law must balance these competing interests to ensure fairness and commercial certainty.

Apparent authority is the framework for the ability to bind a principal even when an agent acts beyond their actual authority.^[4] This principle highlights how important protecting third parties is as they reasonably trust the agent’s supposed authority due to the principal’s actions. The case Rama Corporation v. Proved Tin and General Investments Ltd is fundamental for apparent authority as it set out the requirements that there must be a representation by the principal, reliance by the third party and a consequent change in the third party’s position.^[5] An example of the court’s willingness to protect third parties is found in the case of First Energy (UK) Ltd v. Hungarian International Bank Ltd.^[6] The court held that the words of the senior manager’s could bind the principal, even though the manager lacked actual authority. This case strengthens the belief that commercial certainty and fairness must be upheld when third parties act in good faith based on the outer appearance of authority. First Energy^[7] poses questions regarding how much protection third parties should have when they express their uncertainties with an agent’s authority. The arguments against this case include that guarding third parties even though they have suspicions supports recklessness and goes against the principal’s right to controlling their agent. Another argument consists of the reasoning that if the third party has reasonable reliance, the principal, who allowed the agent to have a position where it could create the appearance of authority, should endure the responsibility. These arguments showcase the challenges in creating balance for the interests of principals and third parties.

Usual authority, a more controversial concept, is shown in the case of Watteau v. Fenwick.^[8] It establishes that within the scope of usual authority, a principal can be held liable for an agent’s actions, regardless of if those actions are prohibited. However, the precedent within Watteau v. Fenwick have not been applied often as the courts are reluctant to follow them due to it contradicting the fundamental agency principle of consent.^[9] Holding principals liable for actions they clearly prohibited promotes concerns about undermining their control over agents. Furthermore, understanding what makes up usual authority is subjective as it varies depending on the context, causing uncertainty in its application.

Unbalanced Protection

Ongoing efforts to strike a balance in the interests of principals and third parties when agents act beyond their authority creates various challenges within agency law as principals are favoured. A key challenge for the courts concerns protecting third parties who have a reasonable belief in an agent’s apparent authority while also making sure the principal is not unfairly bound by unauthorized acts.

The court’s commitment to protecting third parties in undisclosed agency situations is demonstrated in the case of Keighley Maxstead & Co v Durant, particularly by prohibiting ratification in certain circumstances.^[10] In this case, an agent, acting without authority, entered a contract with a third party, Durant. The undisclosed principal, Keighley Maxstead & Co, later attempted to back the contract. However, the court prevented ratification because the third party was unaware of the principal’s existence at the time of contracting.^[11] The court’s decision in Keighley Maxstead & Co v Durant is established by emphasising the need for consent and the significance of protecting the original intention of the third party when entering a contract. It was emphasized by the court that binding a third party to a contract with an undisclosed principal which they did not originally intend to deal with would be unfair.^[12] This ruling highlights the court’s acknowledgement of how vulnerable third parties are in undisclosed agency situations where they lack knowledge about the principal’s connection. By preventing ratification in such cases, the law aims to uphold the integrity of contractual agreements and ensure that third parties are not prejudiced by circumstances beyond their control.

In contrast, Bolton Partners v Lambert exemplifies how the doctrine of ratification, when applicable, can shift the balance toward protecting the principal’s interests.^[13] During this case, a third party offered an agent who did not have the actual authority to accept it. Later, the principal sanctioned the agent’s unauthorized acceptance which in turn made the third party attempt to withdraw their offer, but the court sustained that the contract was based on the principal’s ratification. This decision bound the third party to an agreement they tried to avoid, signifying how ratification can prioritize interests of the principal’s interests over the third party. The opposing outcomes in Keighley Maxstead & Co v Durant^[14] and Bolton Partners v Lambert^[15] highlight the complex use of agency law principles and the challenges in balancing competing interests. While Keighley Maxstead & Co v Durant prioritizes the third party’s original intention and consent, Bolton Partners v Lambert emphasises the principal’s ability to benefit from ratification, even when it might disadvantage the third party.^[16] This conflict is important as it showcases the need for careful consideration regarding the specific facts and circumstances of each case for a just outcome.

The doctrines of merger and election further demonstrate the hardships third parties face when seeking redress for an agent’s unauthorized actions. Merger signifies how once a third party chooses to sue either the agent or the principal, they cannot pursue a claim against the other party.^[17] Election, which is closely connected to merger, focuses on the third parties’ actions regarding who they choose to sue.^[18] Clarkson Booker and Angel identifies the process in deciding when an election has been made, which reflects on the courts continuous attempts to balance competing interests.^[19] These cases often depend on the complex evaluations of the third party’s conduct, creating uncertainty and potentially leading to unfair outcomes for third parties. For example, a third party’s initial attempt to negotiate a settlement with the agent may be construed as an election to sue the agent, preventing them from later pursuing a claim against the principal.^[20]The complexities of election highlight the challenges third parties face in navigating the legal intricacies of agency relationships, particularly when agents exceed their authority. The potential for unfair outcomes underlines the need for clearer guidelines and a more detailed framework that prioritizes protecting third parties who act in good faith reliance on an agent’s apparent authority.

Greater Protection of Third Parties

Providing more protection for third parties in agency relationships is crucial for maintaining trust and efficiency in commercial transactions. This is due to the inherent information asymmetry that is present within these relationships. Third parties are often at a significant disadvantage since they lack information, especially regarding undisclosed agency as they are not aware of the principal’s existence and rely solely on what the agent presents.^[21] This makes it extremely difficult for third parties to confirm the agent’s authority or the principal’s involvement, increasing their vulnerability to potential misrepresentation or overreach by the agent.

Reasonable reliance is a key principle in the argument favouring protecting third parties through fairness and equity. It is unreasonable to expect third parties to examine the details of an agent’s actual authority, especially when the principal has not clearly communicated any limitations.^[22] This is particularly true in demanding commercial environments where fast decisions are essential. Imposing the burden of verifying an agent’s authority on third parties would create significant obstacles affecting the efficiency of business.

Additionally, some of the approaches other jurisdictions use to combat the issue of agents exceeding their authority favor greater protection for third parties. Many European legal systems prioritize the protection of third parties by separating the internal relationship between a principal and agent from the agent’s external authority to bind the principal in transactions with third parties.^[23] This distinction highlights that an agent’s internal selection and instructions from the principal do not automatically limit their ability to bind the principal when working with third parties relying on the agent’s apparent authority. Fairness and commercial certainty are promoted through this approach by making sure third parties which act in good faith are not at a disadvantage from hidden limitations on an agent’s authority.

Furthermore, jurisdictions like the United States have accepted approaches that favor third party protection.^[24] Many American courts have moved away from the English rule established in Bolton v. Lambert^[25], which upheld a contract ratified after the third party attempted to withdraw. These jurisdictions allow third parties to withdraw from a contract before ratification if they were unaware of the agent’s lack of authority at the time of contracting, recognizing that it is unfair to bind a party to an agreement they would not have entered into if they knew the agent lacked authority. The American legal concept of “inherent agency power” demonstrates added commitment to preserving third party interests.^[26] This concept identifies that a principal can be held liable for an agent’s actions even in the absence of traditional authority. Its purpose is to protect individuals who are harmed by engaging with an agent acting outside the scope of their authority.^[27] These real-world alternative approaches favoring third party protection proposes the argument to include potential reforms into English law for increased certainty and security in commercial transactions when interacting with agents.

Moreover, prioritizing third party protection has significant real-world implications for maintaining a successful commercial environment.^[28] Holding principals accountable for their agents’ actions, even when those actions exceed the agent’s actual authority, reinforces accountability in agency relationships. Such an approach aligns with equitable values supporting that those who benefit from a transaction should also bear the associated risks. If a principal allows an agent to operate in a manner that creates a reasonable belief in their authority, the principal should be responsible for the consequences.²⁹ When third parties can confidently rely on the representations of agents without the fear of hidden limitations on their authority, it raises trust in the marketplace.^[29] This trust is the key in creating greater efficiency for commercial transactions, allowing for economic growth. Having more stability within the business environment could reduce the number of disputes and be more reliable for all parties involved.

Proposed Reforms

In order to strengthen the protections for third parties in agency law, practical reforms can potentially be used to address the systems existing imbalances and promote fairness in commercial transactions.^[30] These include making the disclosure of authority limitations mandatory, having an objective standard for apparent authority and enhancing the remedies for third parties.

Firstly, by implementing a statutory duty requiring principals to reveal their limitations on agent authority to third parties, transparency would significantly improve. Having these limitations accessible, either through public records or direct communication, would allow third parties to make informed decisions and ease the risks associated with unapproved actions.^[31] This reform would shift the responsibility onto the principle to communicate authority boundaries as they are already in a better position to manage this information.

Secondly, encouraging a standard for determining apparent authority which is more objective would allow for third parties to have increased certainty and protection. Using the reasonable perception of a third party regarding the agent’s authority, the assessment becomes less vulnerable to subjective interpretations or hidden restrictions and balances the legal framework with the practical realities of commercial transactions.^[32]

Lastly, strengthening the remedies available to third parties who suffer losses due to an agent going above their authority is crucial in ensuring fairness and accountability. In particular, provisions including compensation for dependence losses suffered by third parties who acted in good faith or restoring benefits unjustly kept by principals could be added.^[33] This could help encourage principals to enforce greater control over their agents and minimize potential exploitation when avoid liability using the information asymmetry currently present.

Reasonable counterarguments could be made concerning the restrictions on principals’ freedom of contract and oppressing business activity, but the reforms’ purpose is to balance the interests of principals and third parties, leading to greater certainty, fairness and ultimately, a more efficient and trustworthy commercial environment. Clearer rules on apparent authority would make it easier for third parties to assess the risks of dealing with agents, leading to greater confidence in commercial transactions.^[34] Holding principals accountable for their agents’ actions, within reason, would encourage them to be more thorough in supervising their agents reducing them acting out. A more balanced approach, such as those used in other authorities, wouldn’t excessively restrict principals’ freedom of contract. Principals would still be free to define the scope of their agents’ authority, even if agents have a broader authority when dealing with third parties. This is especially true if the principal has “held out” the agent as having such authority.^[35] Allowing third parties to withdraw from a contract before ratification, if they were unaware of the agent’s lack of authority, would protect them from unfair circumstances out of their control. This wouldn’t prevent principals from ratifying contracts, only ensure third parties aren’t unfairly bound by contracts they wouldn’t have entered knowing the true scope of the agent’s authority.

Conclusion

In conclusion, agency law should provide more protection to third parties when an agent acts beyond their actual authority in order to help balance the competing interests and ensure fairness in commercial transactions. Prioritizing third party protection is essential to promote efficiency, trust, transparency and equitable outcomes in agency relationships. By protecting those who act in good faith, agency law can ensure a just and balanced commercial environment that benefits all parties involved.

Bibliography

Cases

Bolton Partners v Lambert (1889) 41 Ch D 295 (CA).

Clarkson Booker and Angel [1971] 1 WLR 630 (CA).

First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194 (CA).

Keighley Maxsted & Co v Durant [1901] AC 240 (HL).

Rama Corporation v Proved Tin and General Investments Ltd [1952] 2 QB 147 (CA)

Watteau v Fenwick [1893] 1 QB 346.

Books

Beheshti R, Saintier S, and Thomas S, ‘The Authority of the Agent’ in Bradgate’s Commercial Law (4th edn, OUP 2024).

Beheshti R, Saintier S, and Thomas S, ‘Relations with Third Parties’ in Bradgate’s Commercial Law (4th edn, OUP 2024).

Bennett H, ‘Agency: A Flexible Institution’ in Principles of the Law of Agency (Bloomsbury Publishing Plc 2024).

Bennett H, ‘Ratification’ in Principles of the Law of Agency (Bloomsbury Publishing Plc 2024).

Fox D and others, ‘Introduction to the Law of Agency’ in Sealy and Hooley’s Commercial Law: Text, Cases, and Materials (6th edn, OUP 2020).

Krebs T, ‘Ratification’ in Busch D, Macgregor L, and Watts P (eds), Agency Law in Commercial Practice (OUP 2016).

Articles

Brown I, ‘The Agent’s Apparent Authority: Paradigm or Paradox?’ (1995) Jul J B L 360.

DeMott DA, ‘The Contours and Composition of Agency Doctrine: Perspectives from History and Theory on Inherent Agency Power’ (2014) 2014(5) U Ill L Rev 1813.

Tan C-H, ‘Undisclosed Principals and Contract’ (2004) 120 LQR 480.

Other Sources

Guntrip E, ‘The Law of Agency: Definitions and Theories’ (Lecture Slides, M5001: Aspects of Commercial Law, University of Sussex).

1. D Fox and others, ‘Introduction to the Law of Agency’ in Sealy and Hooley’s Commercial Law: Text, Cases, and Materials (6th edn, OUP 2020) 4, 1–21. ↑

2. Edward Guntrip, ‘The Law of Agency: Definitions and Theories’ (Lecture Slides, M5001: Aspects of Commercial Law, University of Sussex). ↑

3. H Bennett, Principles of the Law of Agency (Bloomsbury Publishing Plc 2024) 4, 1–21. ↑

4. Ibid. ↑

5. Rama Corporation v Proved Tin and General Investments Ltd [1952] 2 QB 147 (CA). ↑

6. First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194 (CA). ↑

7. Ibid. ↑

8. Watteau v Fenwick [1893] 1 QB 346. ↑

9. Bennett (n 3). ↑

10. Keighley Maxsted & Co v Durant [1901] AC 240 (HL). ↑

11. Reza Beheshti, Séverine Saintier, and Sean Thomas, ‘The Authority of the Agent’ in Bradgate’s Commercial Law (4th edn, OUP 2024) 5, 169–186. ↑

12. H Bennett, ‘Ratification’ in Principles of the Law of Agency (Bloomsbury Publishing Plc 2024) 5, 85–102. ↑

13. Bolton Partners v Lambert (1889) 41 Ch D 295 (CA). ↑

14. Keighley Maxsted & Co v Durant (n 6). ↑

15. Bolton Partners v Lambert (n8). ↑

16. Thomas Krebs, ‘Ratification’ in Danny Busch, Laura Macgregor, and Peter Watts (eds), Agency Law in Commercial Practice (OUP 2016) 17–34. ↑

17. David Fox and others, ‘Relations with Third Parties’ in Sealy and Hooley’s Commercial Law: Text, Cases, and Materials (6th edn, OUP 2020) 6, 158–197. ↑

18. Reza Beheshti, Séverine Saintier, and Sean Thomas, ‘Relations with Third Parties’ in Bradgate’s Commercial Law (4th edn, OUP 2024) 6, 193–208. ↑

19. Clarkson Booker and Angel [1971] 1 WLR 630 (CA). ↑

20. Fox and others (n 17). ↑

21. Beheshti and others (n 18). ↑

22. Ibid. ↑

23. H Bennett, ‘Agency: A Flexible Institution’ in Principles of the Law of Agency (Bloomsbury Publishing Plc 2024) 1, 1–19. ↑

24. Deborah A DeMott, ‘The Contours and Composition of Agency Doctrine: Perspectives from History and Theory on Inherent Agency Power’ (2014) 2014(5) U Ill L Rev 1813. ↑

25. Bolton Partners v Lambert (n8). ↑

26. DeMott (n 24). ↑

27. Ibid. ↑

28. Tan Cheng-Han, ‘Undisclosed Principals and Contract’ (2004) 120 LQR 480. ²⁹ Beheshti and others (n 11). ↑

29. Tan (n 28). ↑

30. Ian Brown, ‘The Agent’s Apparent Authority: Paradigm or Paradox?’ (1995) Jul J B L 360. ↑

31. Ibid. ↑

32. Ibid. ↑

33. Ibid. ↑

34. Krebs (n 16). ↑

35. Ibid.

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