Agency Law: Authority and Liability

Introduction

Agency describes the relationship where one person (the agent) is authorised to act on behalf of another (the principal) in dealings with third parties. It is central to commercial transactions, from retail managers selling stock to company officers signing contracts. Whether a principal is bound turns on the agent’s authority (actual, apparent, and sometimes usual), how the relationship is presented to third parties, and whether the agent stayed within the limits set.

This guide sets out the core rules on authority and liability, key cases, and practical steps for businesses, agents, and counterparties. It also flags important statutory duties, including the Commercial Agents (Council Directive) Regulations 1993, the Proceeds of Crime Act 2002, and UK GDPR.

What You'll Learn

• What an agency relationship is and how it arises
• The differences between actual, apparent (ostensible), and usual authority
• How disclosed vs undisclosed principals affect who is bound
• When ratification can make an unauthorised act binding
• When principals are liable to third parties and when agents are personally liable
• The agent’s core duties (loyalty, no secret profit, care and skill) and key statutory obligations
• Practical checks to manage risk, plus AML and data protection touchpoints

Core Concepts

Actual Authority: Express and Implied

• Definition: Actual authority is the power the principal gives the agent, either expressly (written or oral instructions) or impliedly (inferred from conduct, the role, or past dealings).
• Express: Clear directions (e.g., “Sell at no less than 75% of the marked price”) set the outer limits.
• Implied: Gaps are filled by what is reasonably necessary for the role. In Hely-Hutchinson v Brayhead, a company chairman had implied actual authority from the board’s conduct.
• Effect: If the agent acts within actual authority, the principal is bound and the agent is not personally liable on the contract (assuming a disclosed principal).

Practical points

• Keep written scopes of authority up to date; state limits plainly.
• Review job titles and communications that might expand implied authority.

Apparent (Ostensible) Authority

• Definition: Apparent authority arises where the principal represents to a third party (by words or conduct) that the agent has authority, and the third party reasonably relies on that representation.
• Key elements (Freeman & Lockyer v Buckhurst Park Properties):
  • A representation of authority made by the principal (or someone with actual authority to speak for the principal).
  • Reliance by the third party.
  • A transaction within the scope of the represented authority.
• Limits: An agent cannot give themself apparent authority (Armagas v Mundogas). The representation must come from the principal.
• Effect: The principal is bound even if the agent exceeded actual authority, provided the third party’s reliance was reasonable.

Practical points

• Titles such as “manager” or “director” can imply authority; use them carefully.
• If authority is withdrawn, give clear notice to those who might rely on earlier appearances.

Usual Authority (and its pitfalls)

• Concept: Some roles carry a “usual” bundle of powers (e.g., a shop manager can sell goods and order stock in the ordinary way). Third parties may rely on those customary powers unless they know about specific limits.
• Case: Watteau v Fenwick is often cited for binding an undisclosed principal for acts within a manager’s usual authority, even where the principal had privately limited it.
• Caution: Courts prefer to analyse cases under actual or apparent authority. Treat “usual authority” as a narrow, fact-specific idea tied to recognised customs of a role.

Practical points

• If you restrict an agent’s role, make that clear to counterparties who might otherwise assume ordinary powers.
• For third parties, ask targeted questions about limits where you plan to rely on “usual” powers.

Disclosed vs Undisclosed Principals

• Disclosed principal: The third party knows the agent is acting for a principal (and usually knows who that principal is). The contract is between the principal and the third party.
• Undisclosed principal: The third party is not told there is a principal. In many cases, the principal may later step in to sue or be sued on the contract. Exceptions apply where identity is material (e.g., personal service, creditworthiness, or express terms).
• Effect on authority: Apparent authority depends on the principal’s representation to the third party; this is difficult where the principal is undisclosed. Usual authority may play a larger role (Watteau), but it is contested and fact-sensitive.

Ratification

• Definition: A principal can later adopt an unauthorised act, making it binding as if authorised from the start.
• Conditions:
  • The principal existed and had capacity at the time of the act.
  • The agent purported to act for a principal (Keighley, Maxsted & Co v Durant shows problems if the agent contracted purely in their own name).
  • The act is lawful and capable of ratification; ratification must be of the whole transaction and within a reasonable time.
• Effect: Ratification “relates back” (Bolton Partners v Lambert), binding the third party unless rights have intervened.

Practical points

• Use ratification with care; confirm there has been no material change to the third party’s position.
• If declining ratification, state this promptly and in writing.

Agent’s Duties to the Principal

• Fiduciary duties: Loyalty, avoid conflicts, no secret commissions, no misuse of opportunities; account for profits. Boardman v Phipps confirms profits made by reason of a fiduciary position must be accounted for unless the principal consents.
• Care and skill: Perform with reasonable care and skill; follow instructions; keep proper accounts and pay over sums received.
• Statutory duties: The Commercial Agents (Council Directive) Regulations 1993 require commercial agents to act dutifully and in good faith, and principals to do likewise. They also address remuneration, commission, and compensation/indemnity on termination.

Practical points

• Put conflict disclosures and principal consent in writing.
• Maintain clear, contemporaneous records of instructions and transactions.

Principal’s Duties to the Agent

• Pay agreed remuneration and commission; provide necessary information and support.
• Indemnify the agent for liabilities properly incurred within authority.
• Under the 1993 Regulations, principals must act in good faith, supply documentation, and notify acceptance or refusal of transactions within a reasonable time.

Liability to Third Parties

• Principal’s liability: Bound where the agent acts with actual or apparent authority. May also be bound by ratification.
• Agent’s personal liability:
  • Warranty of authority: If an agent falsely asserts they are authorised, they may be liable to the third party (Collen v Wright).
  • Misrepresentation: Negligent misstatement may give rise to liability (Hedley Byrne v Heller), subject to effective disclaimers.
  • Contract: If acting for an undisclosed principal, the agent may be liable on the contract until the principal is revealed; the third party may elect whom to sue.
  • Tort: Bribes, deceit, or other wrongful acts can expose the agent to liability (and may void the contract).

Compliance Touchpoints

• Proceeds of Crime Act 2002: Creates money laundering offences and reporting duties (Suspicious Activity Reports) in the regulated sector; “arrangements” concerning criminal property can catch agents. Failure to report suspicions in scope can be an offence.
• UK GDPR and Data Protection Act 2018: Agents handling personal data must process lawfully, fairly, and transparently. Roles vary: some agents act as processors, others as independent controllers. Contracts and privacy notices should reflect the role and lawful basis.

Key Examples or Case Studies

Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480

• Facts: A company’s “managing director” (without formal appointment) engaged architects.
• Key point: Apparent authority arises from a principal’s representation and the third party’s reliance. The company’s conduct held it out as giving the MD authority.

Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549

• Facts: The chairman gave guarantees without express authority.
• Key point: Implied actual authority can arise from the principal’s conduct, distinct from apparent authority. The guarantees bound the company.

Watteau v Fenwick [1893] 1 QB 346

• Facts: A pub manager bought goods outside private limits set by the undisclosed owners.
• Key point: Owners were held liable for acts within the manager’s “usual” authority. The case is often treated cautiously but still cited.

Armagas Ltd v Mundogas SA [1986] AC 717

• Facts: An agent purported to grant a sub-charter with no authority and repeated assurances.
• Key point: An agent cannot create their own apparent authority; the representation must come from the principal.

Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465

• Facts: Bank reference contained a disclaimer; claimant relied on it.
• Key point: Negligent misstatement can give rise to liability; effective disclaimers can defeat a duty of care.

Boardman v Phipps [1967] 2 AC 46

• Facts: Fiduciaries made profits from information obtained in their role.
• Key point: Strict fiduciary duty to account for profits obtained by reason of the position, absent informed consent.

Practical Applications

For principals (business owners and companies)

• Define authority in writing. Set clear monetary limits and permitted categories of transactions.
• Control titles and signatures. Limit who may sign, and use dual-signature policies for higher-value deals.
• Communicate limits externally. Notify suppliers and regular counterparties of any restrictions; update them if roles change.
• Remove or vary authority carefully. Give prompt notice to those who might rely on earlier appearances to reduce apparent authority risk.
• Build governance around agents. Keep an authority matrix, board resolutions, and specimen signature lists; review regularly.
• Manage compliance: AML and data protection
  • Train agents on Proceeds of Crime Act offences and reporting lines for Suspicious Activity Reports.
  • Map personal data flows. Set up data processing agreements and privacy notices that reflect agent roles (processor vs controller).

For agents

• Stay within scope. If in doubt, seek confirmation before acting; record instructions and variations.
• Be transparent about limits. Do not overstate your authority; avoid creating impressions that exceed your remit.
• Manage conflicts. Disclose potential conflicts; never accept secret commissions.
• Keep records. Maintain accurate files of contracts, consents, and monies handled; account promptly to the principal.
• Respect AML and UK GDPR duties. Escalate suspicious activity; handle personal data lawfully and securely.

For third parties (buyers, suppliers, lenders)

• Check authority. Ask for written confirmation, board minutes, or a power of attorney for significant transactions.
• Test representations. If relying on a job title, confirm the scope (e.g., can the “manager” purchase stock above a threshold?).
• Protect yourself in contract. Use warranties of authority, evidence of internal approvals, and conditions precedent for large deals.
• Be alert to red flags. Unusual payment instructions, urgent timelines, and requests to bypass standard processes need scrutiny.

Summary Checklist

• Identify whether the principal is disclosed or undisclosed.
• Determine if the agent had actual authority (express or implied).
• If not, assess apparent authority: principal’s representation and reasonable reliance.
• Treat “usual authority” with caution; confirm customary powers for the role.
• Consider ratification conditions before relying on it.
• Remember agent duties: loyalty, no secret profit, conflicts, care and skill.
• Manage principal duties: pay/commission, information, indemnity.
• Address AML: reporting lines, SAR triggers, record-keeping.
• Address data protection: lawful basis, role (controller/processor), contracts and notices.
• Put practical controls in place: authority matrices, signature policies, and third-party checks.

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