BT : The complex role of an agent

Business Times - 19 May 2010

The complex role of an agent

By TAN CHENG HAN

THE complexities and demands of life mean that people rely on others a great deal to get things done. We sometimes ask or are asked by family members or friends to obtain information, make appointments, purchase items, babysit children, and do other everyday things. In a sense, we are all accustomed to being 'agents' for others.

The law, however, has a more technical understanding of the word 'agent'. In law, an agent is a person who has been authorised by his principal to perform an act that has the power to affect the principal's legal relations with a third party. The paradigm agency situation involves an agent being empowered by his principal to enter into a binding contract with a third party. Through the intermediation of the agent, the principal's legal relations will be altered because the agent's acts will bring the principal into a contractual relationship with the third party.

Based on this definition of agency, some who describe themselves as 'agents' are not true agents in a legal sense. Many 'sole agents' for example do not sell goods on behalf of the manufacturer but sell on their own account, making a profit from whatever mark-up they manage to obtain. And 'estate agents' in most cases cannot commit the vendor to a sale; their role is simply to introduce potential purchasers to the property and transmit offers to the vendor.

The law of agency is of some antiquity as businesspeople frequently act through agents, particularly where the business is of some scale. The rise of the corporation as the preferred business vehicle has also contributed to the importance of the law of agency as the corporation, being an artificial entity, can only act through human individuals. The use of agents, it has been said, allows a person (or corporation) to multiply his presence across geographical boundaries.

In determining the scope of the agent's power to affect the principal's legal relations with third parties, the starting point is to ascertain the agent's actual authority. Such authority can arise where the principal has expressly authorised the agent either orally or in writing to act in a certain way, or where the authority is implied because such authority, though not expressly conferred, is necessary for the agent to fulfill the mandate given to him. One instance of implied authority arises where an agent is appointed to a particular position or office without any detailed instructions as to the scope of the agent's duties.

For instance, a managing director's contract of employment may simply state that the managing director shall be responsible for the day to day management of the company. In such circumstances, the law will imply that he will have such authority as is usual or necessary for a managing director in such a company to be able to manage the company effectively.

The law of agency would not be unduly complex if the law only allowed a principal to be bound where the agent acted within the scope of the actual authority expressly or impliedly conferred. However, a principal can be bound even where the agent had exceeded his authority if the third party reasonably believed, as a result of what the principal had represented to the third party, that the agent was so authorised. Thus a principal may have used loose language to give the third party the reasonable impression that the agent had authority larger than what the principal had conferred. Alternatively, the principal may have placed the agent in a position that would usually carry with it implied actual authority but which the principal has restricted without informing the third party. The latter therefore reasonably assumed that the agent did have such implied authority.

In such circumstances, fairness dictates that because the appearance of authority was fostered by the acts or words of the principal, the principal should be bound by what the agent did - notwithstanding the absence of real authority. This form of authority is known as apparent authority and is frequently a source of contention, as was the case in the recent High Court decision of Skandinaviska Enskilda Banken v Asia Pacific Breweries (Singapore) Pte Ltd which the Court of Appeal will hear soon. An appeal against the decision has since been heard and the Court of Appeal has reserved judgment.

In that case, one of the main points of dispute was whether APB's finance manager had apparent authority to enter into various banking facilities. If he did have such authority, APB would be bound notwithstanding that the finance manager was acting fraudulently. The High Court had held that there was no such authority.

Apparent authority is relied upon by third parties who wish to hold the principal to the transaction even though the agent may not have been authorised. Where it is the principal who wishes to benefit from the agent's unauthorised acts, the principal must ratify what the agent has done. Such ratification is allowed to have retrospective effect so that the agent is deemed to have been clothed with authority from the outset.

Astonishingly, the law allows ratification to be effective even where the third party has purported to withdraw from the transaction prior to ratification. This is unlike the position in civil law jurisdictions which allows the third party to withdraw as long as ratification has not taken place.

Obviously such a state taken to its logical conclusion places the third party in a vulnerable position. Until the principal ratifies, the third party will not know whether he is bound or not and that places the full burden of commercial uncertainty on the third party. Towards this end, the common law has to develop compensating mechanisms such as requiring ratification to take place within a reasonable time, and disallowing ratification where property rights have already passed to some other person.

One other aspect of the law of agency that even today is controversial is that it allows an agent to act for an undisclosed principal. That could bind a third party to such principal even though the third party was completely unaware of the existence of such principal and thought he was contracting with the agent as a principal.

Civil law jurisdictions do not recognise such a concept and even lawyers in the Anglo-American common law tradition have difficulty articulating a principled basis for such a doctrine. It is often justified on utilitarian reasons as fostering commercial convenience since principals sometimes do not want others to know that they are the ultimate contracting parties, or the agents themselves do not want their counterparties to know that they are acting for others for fear that the counterparties may try to bypass them in future.

However, as the third party may have contracted with the agent for specific reasons, such as the agent's particular skill and expertise, in some circumstances the undisclosed principal is prohibited from taking the benefit of the transaction.

The foregoing illustrates the delicate process that the law has put in place to balance the interests of all the actors in an agency relationship and this balancing exercise accounts for much of the law's complexity. The law here, as elsewhere, is in service to society and needs always to strike an optimal balance between many legitimate competing interests. Law, after all, is to society what medicine is to the body.

The writer is the Dean of the Faculty of Law at National University of Singapore. His forthcoming book, The Law of Agency, will be available in July from Academy Publishing

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