Role of Agency Law

What is Law?

Law is a group of rules and regulations that determine roles and responsibilities of specific entities in their life and day to day business and professional activity. In this project report an attempt is made to create a broad understanding about the agency. In respect to this, in the report importance of agency law is described in detail. Along with this different type of agents and their authorities are also discussed in detail in the report. Additionally, agency is defines and along with this three type of relationships are also explained in an appropriate manner. After that in the end part of the report various types of agent authorities are discussed in detail. In respect to this, authorities are divided in to two parts consent and without consent. Authorities in this section are defined their characteristics are explained and relevant cases are discussed in detail.

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Importance of agency law to the business

In order to understand agency law it is necessary to understand agency. Agency is a relationship between two entities in which one of them is one person is obligated to the other person. The person who is able to give order is known as principle and person who receives an order is agent. The principles is bound by the actions that agent perform on his behalf. Following are the importance of agency law for corporations.

Corporate structure – Companies are entities that have status of individual like human being. They can enter in to contract and business transactions on their name. Moreover, they can sue and be sued by others. Board of directors and employees are the agents of the company and due to this reason corporation is liable for the actions taken by the agent on their behalf. But if they do anything beyond their authority then company is not liable for their action. Hence, for wrong action of agent company cannot be made responsible.

Accountability – Companies are responsible for the action taken by the agents on their behalf. Hence, if mistake is committed with in authority then company is made liable for the mistakes committed by its agents. In such sort of cases one company have an authority to sue on other firm provided mistake is committed within given authority. On other hand, if agent performs an act which does not fall in its scope of authority then principal cannot be sue by the third party.

Board protection – This law also provides protection to the company board of directors. As per law if any board of director commit any mistake which create lots of the problems for the firm then they cannot be sued by same. Means that if board of directors do any mistake within scope of authority unknowingly or without any intention then company cannot take action against them[ Jolls, C. and Sunstein, C.R., 2005. Debiasing through law (No. w11738). National Bureau of Economic Research.]. This is because in law it is assumed that board of directors performs any action for helping an organization in achieving its interests. Hence, in this way mentioned law provides protection to the shareholders.

Different type of agent authority

General agents – These are general agents of the firm and they look after all business activities in behalf of their principle. For these agents there are no limitations in law and they can perform any activity or can take any action on their own level for the best of their principle. In such a case if agent does anything wrong then principle will be abided by his mistakes and third party may sue on the principle. In order to abstain from this situation there is a provision in the law. As per this provision principle can set a limit for his agent and agent needs to work within the prescribed limit. For example in absence of specific limit agent can purchase real estate for the principle. If limit is set that without approval of principle agent cannot enter in to any transaction even it is profitable for the firm. Then without taking approval from principle agent cannot take any action.

Special agent – These are those agents that are in contract for performing operations related to the specific task. Due to this reason they have authority to perform specific tasks. Apart from the specific task agent cannot perform other task. Hence, this is specific type of agent.

Agency coupled with interest – This is an agent whose income depends on the continuity of his work. Due to this reason this kind of agent is known as agency coupled with interest. Their authority is related to the tasks that principle deliver to them. Thus, it can be said that this kind of agent is different from above mentioned type of agents.

Sub agent – These are those agent who works under someone who is an agent to the principle. Means that there is a one principle and one agent is working under him. Under that agent there will be another agent who will work. Under this type of agent same may or may not be authorized by the principle. Means that if sub agent is not authorized then principle will not be abide by his acts.

Definition of agency and type of relationships

Agency is a relationship between two people out of which one is in position to give order and other is obliged to follow received order. There are three types of relationships in agency and these are explained below.

Principle agent relationship – Under this relationship there is a principle and its agent. On behalf of the firm agent negotiate with the third party. Means that there is no direct contact of principle with the third party in initial stage. So, entire success or failure of business deal depends on the agent because he is one who is negotiating with the third party. However, powers of the agent entirely depend on the principle discretion. It is the principle who will decide the scope of authority of the agent working for him. In the given case study this relationship will be applied because in same it is clearly mentioned that Fenwick is a principle and Humble is agent. Hence, in this way relationship of both fall in this category.

Agent third party relationship – Here also agent negotiates with the third party on behalf of principle. The only difference is that in this relationship sometimes agent become liable for actions he taken on behalf of principle. But in case of previous relationship he does not bear any liability

Principle and third party relationship – In this relationship in which agent abide principle by his own decisions. Even agent commit a mistake principle will be held responsible for same. Sales contracts are best example of principle and third party relationship.


Case 1 – In case of Humble Fenwick expressly authorizes his agent to purchase cigars on his behalf. But he also states that Humble is not authorized to purchase cigar on credit. This was express authority in which Fenwick clearly state the boundaries with in which his agent needs to work. Hence, on this basis this case in terms of type of authority falls in this category.

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Case 2 – Ireland Vs Livingston is one of the well known case and in same former was agent and later was principle. Livingston order Ireland to purchase 500 KG of sugar and supply to him. Mentioned quantity of sugar was not available and due to this reason Ireland makes purchase of 400 KG sugar. Principle deny from accepting delivery. As per law Livingston was bound to accept delivery because agent follows his order and it was not possible to deliver entire quantity of sugar. So he supplied 400 KG of sugar to the principle. Hence, on this basis Ireland was bound to accept sugar.

Definition- Implied actual authority refers to the authority that agent automatically get due to the responsibility given to him by the principle. Agent on behalf of his principle can make a contact with the prospective clients. This is best example of the implied authority.

Actual express (Apparent) authority

Definition-It refers to the authority that agent get with the consent of the principle either expressly or implied. Means that on the basis of principal past behavior third party assume that agent have relevant authorities to act on behalf of the principle. So, that even principle does not give any authority agent gets authority automatically.

Main features

  • This authority agent automatically gets when principal expressly or implied state about the specific action that an agent can take on his behalf directly to the third party. If principle does not communicate any information about the act that an agent can take on his behalf then this sort of authority will not comes in existence.
  • This authority is applied only when third party assumes its responsibility that comes in existence due to signing a contract with agent who is working on behalf of the principle. This means that if agent is not prepared to bind by the obligations that occur due to signing a contract with agent then this sort of authority cannot be used by the agent.
  • It is an authority in which principle make third party believe that agent has an authority which he actually does not possess. This is a unique kind of authority in which agent does not have an authority to perform a specific task but that authority is granted to him by the principle and agent does not know about same. At place of agent third party have information about such kind of authority. So this is a very special kind of authority.

Case 1 – Bob was working as a cashier at the stationary shop owned by the company. His work was to do accounting work and to listen customer queries. Bob was not authorized to price a product but he was always engaged in customer queries. Due to this reason he had contacts with the customers. This gives him apparent authority to act on behalf of a firm for selling a product. On analysis of the case study we can observe that Bob was performing multiple responsibilities one was of cashier and second was to give guidance to the customers. Accounting was his primary work and along with this it also used to providing information about the price quotes of the stationary products. This make people believe that he has authority to sell company product. On the basis of assumption people start purchasing product from Bob. Agent already has a contact with the customers and due to this reason it also does not have any problem in selling products on behalf of company. Hence, in this was concept of apparent authority applied on the firm.

Case 2 – In the case of Freeman summer vs. Solomon former is a principle and second is agent. Freeman summer makes purchase of jewelry from various companies. It employed a manager to look after its business in proper manner. On behalf of Freeman summer manager purchase jewelry from Solomon several times. Suddenly manager leaves his job and after that Freeman summer enters to trade with the Solomon. After taking delivery of jewelry it absconded with it. Summer was bound to make payment to the Solomon because he does not provide information about the manager resignation from the job. In this trade Solomon supply jewelry by believing that manager is at job. But that was not true and summer was culprit for hiding facts from the summer. Hence, summer was bound to pay an amount to the Solomon.

Usual authority

Definition- It is a kind of authority authorized person usually possess in specific circumstances. It frequently describes range of agent actual and apparent authority. Means that it is a combination of both kinds of authority. Many times principal determine a limit of authority for the agent and that limit is confined to few rights. Sometimes agent does not get a right that he must have as per his job. In that case agent cannot exercise that right that as per job he must have but do not get from the principle (Gawande and Bohara, 2005). In case of this authority even agent does not have authority that must fall under his scope of his duty he can perform that task for which he is not eligible.

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Agency by necessity

It is a unique kind of agency and under same one party can make essential decisions for another party. This kind of agency relationship is acceptable by the court. This kind of relationship is mostly used when one party is unable to make decisions. This inability may happen due to any reason it may be due to some health disease etc. Agency by necessity refers to a situation in which an agent makes a critical decision on behalf of the other party which is not in position to make sound decision making. The main reason behind existence of this sort of agency is that under this arrangement protection is provided to the person this law apply on business widely and bill of exchange comes under this category of agency. In this regard if bill is not accepted by the drawee then by obtaining consent from the bill holder stranger may accept bill of exchange. If stranger have to pay bill then he will be entitled to the rights of holder against drawer.


Mr Balford was unable to move due to accident and he does not trust on his relatives that were residing with him at the home. Due to this reason he kept a servant with him who was responsible to take all day to day decisions on his behalf. Hence, servant on behalf of Mr Blaford was taking sound decisions. In this way agency by necessity apply on this case.


On the basis of entire discussion it is concluded that agency law is very important and it becomes necessary for everyone to understand this law. This is because in these law liabilities under various types of authorities that principle gives to the agent are discussed in detail. On the basis of this law culprit can be easily identified by the third party and it can take wise decisions. There are three kinds of relationships in the business and principle must determine in which they must enter. In this regard an individual must evaluate a situation and on this basis it must make relevant decisions.

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