What is an Agency?
In business and law, an agency arises when one person (the agent) acts on behalf of another (the principal) in dealings with third parties. The core idea is simple: the agent does not act for themselves, but for someone else.
Imagine this:
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A company director hires a real estate agent to negotiate the sale of an office building.
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The agent finds a buyer and signs the deal on behalf of the company.
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The contract is legally binding between the company (principal) and the buyer (third party), not between the agent and the buyer.
This structure creates three relationships:
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Between principal and agent (authority, duties, commissions).
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Between agent and third party (negotiations, communication).
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Between principal and third party (the actual contract).
The agent’s role is powerful: even if the principal never meets the third party, they are bound by what the agent agreed—so long as the agent acted within their authority.
Trustees, Sellers, Buyers, Distributors and Franchisees
Agency needs to be distinguished from several other relationships that might look similar but are not the same.
1. Agent vs Seller/Buyer
The difference often depends on intention.
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Agent: If Alex sells a piece of equipment on behalf of GreenTech Ltd, Alex is GreenTech’s agent.
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Buyer/Seller: If Alex buys the equipment from GreenTech and then resells it to another company, Alex is not an agent anymore—he is acting as a seller in his own right.
Clues that help determine the relationship:
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Does Alex keep the profit from resale (seller) or receive a fixed commission (agent)?
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Does Alex have to report and account for all money to GreenTech (agent), or is the money his own (seller)?
2. Distributorship and Franchise
Distributors and franchisees often call themselves “agents,” but legally they are usually principals.
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A distributor buys products (e.g. organic coffee beans) from a supplier and resells them in their own store. If the beans are defective, the consumer’s contract is with the distributor, not the original supplier.
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A franchisee runs a business under another company’s brand (e.g. a local fast-food restaurant using a global brand’s recipes and logo). The customers contract with the franchisee, not the franchisor.
The key question is: did the parties intend that the distributor/franchisee would resell the goods as their own business, or act on behalf of the original supplier?
3. Bailment (Deposit of Goods)
A bailment is not an agency. It arises when goods are handed over with an obligation to take care of them and return them later.
Example:
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You leave your winter coat at a cloakroom in a theatre.
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The cloakroom attendant (bailee) must return it when you come back.
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They are not negotiating contracts for you or binding you to third parties—they are just holding your property under agreed terms.
4. Trustee
A trustee holds legal ownership of property for the benefit of others (the beneficiaries).
Example:
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A family trust holds shares in a company.
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The trustee manages the shares and can vote at shareholder meetings.
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The beneficiaries benefit from the dividends, but it is the trustee—not the beneficiaries—who enters into contracts.
Sometimes roles overlap: an agent may hold property in trust, or a trustee may act through an agent. But legally, the functions remain distinct.
Key Takeaways
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An agent acts on behalf of the principal, so the principal is bound by the contract with the third party.
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A seller/buyer acts for themselves, even if they once worked as an “agent.”
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A distributor/franchisee usually sells in their own name, not as an agent.
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A bailee only holds goods and does not create contracts for the owner.
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A trustee manages property for others but enters contracts in their own name as legal owner.
Agency is about representation and authority. Other business relationships—trusts, distributorships, or bailments—may look similar, but only agency allows one person to bind another in contracts with third parties.
Types of Agent & Creation of Agency
Types of Agent
In business and commercial law, understanding the different types of agents is crucial, as each type carries distinct rights, duties, and authority.
1. General Agent vs Special Agent
2. Factor and Mercantile Agent
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Factor: An agent entrusted with possession of goods or documents of title who can sell them either in their own name or in the principal’s name.
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Mercantile Agent: Conducts business in the normal course of trading, with authority to sell, consign, buy, or raise funds against goods.
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Key point: A mercantile agent can give a third party good title to goods even if not explicitly authorized, provided the third party acts in good faith.
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Example: A commodities trader selling grain for a producer under standard trade agreements.
3. Other Agents
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Broker: Negotiates contracts between buyer and seller without holding possession of the goods.
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Commission Agent: Acts on behalf of an owner but enters into contracts with third parties as principal.
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Confirming House: Assists overseas buyers in purchasing goods in domestic markets.
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Del Credere Agent: Guarantees the buyer’s performance to the principal, taking on liability in case of default.
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Forwarding Agent: Arranges transportation of goods and is liable for freight charges, recoverable from the principal.
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Commercial Agent: Typically represents a principal in marketing or distributing goods, often under the Commercial Agents Regulations.
Creation of Agency
An agency relationship arises when a person (the agent) is authorized to act on behalf of another (the principal). There are multiple ways an agency can be established:
1. Express or Implied Agreement
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Most agencies are formed by consent of both principal and agent.
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Example: A tech startup appoints a freelancer to negotiate software licenses on its behalf. The agreement can be written, verbal, or inferred from conduct.
2. Agency by Estoppel (Representation)
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When the principal represents to a third party that someone is their agent, the principal cannot deny it if the third party relies on that representation.
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Example: A CEO publicly introduces an assistant as authorized to sign minor supplier contracts; a supplier relying on this cannot later challenge the assistant’s authority.
3. Ratification
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If someone acts without authority but the principal later approves the action, the principal is bound as if the agent was originally authorized.
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Example: A junior employee negotiates a bulk purchase of office furniture without formal approval; the company later accepts and pays for it.
4. Agency of Necessity
5. Statutory Agency
Key Points to Remember
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Agency is primarily created by consent, but can also arise from law, necessity, ratification, or estoppel.
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No formal contract is strictly required; conduct and circumstances can indicate consent.
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The agent must have some degree of autonomy and discretion, not merely performing ministerial tasks.
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The principal may remain liable to third parties if the agent acts within apparent authority.
The Actual Authority of the Agent
Understanding the authority of an agent is central to agency law. Actual authority refers to the agent’s ability to bind the principal in legal relationships with third parties. Without actual authority, the principal is generally not bound by the actions of the agent, and the agent may be liable for acting outside their powers.
1. What is Actual Authority?
Actual authority arises from the agreement between the principal and the agent and can be divided into two types:
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Express Actual Authority: This is explicitly granted by the principal. For example, a property owner may instruct an agent to sell a specific apartment for a fixed price. The agent has the express authority to negotiate and sign the sale documents.
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Implied (or Incidental) Actual Authority: This arises from the circumstances and is necessary to carry out the tasks expressly authorized. For instance, if an agent is authorized to purchase machinery for a company, they may implicitly have the authority to sign delivery or registration documents required by law.
2. Express Actual Authority
Express actual authority is clearly communicated by the principal, either in writing or verbally. Courts interpret these instructions using normal contract construction principles.
Example:
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A business owner instructs a marketing agent to negotiate a contract for social media advertising campaigns. The agent has express authority to negotiate fees and sign agreements with clients.
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If the instructions are ambiguous, the agent is expected to act reasonably. They may rely on a sensible interpretation of the instructions but should seek clarification if the ambiguity is obvious.
Key point: The agent must stay within the scope of express authority; exceeding it may result in personal liability and the principal not being bound.
3. Implied (or Incidental) Actual Authority
Implied authority allows the agent to perform acts that are necessary or customary to carry out their express authority. It cannot contradict express authority but fills in gaps to ensure the agency functions effectively.
Features of Implied Authority:
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Necessary to complete the task
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Based on past dealings or established practices
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Based on trade or professional standards
Limits of Implied Authority:
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Cannot override express instructions.
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Cannot contradict statutory provisions.
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Cannot rely on general customs if they conflict with the agent’s duties.
4. Why Actual Authority Matters
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Principal liability: The principal is bound only by acts within actual authority, whether express or implied.
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Agent protection: Acting within actual authority allows the agent to claim reimbursement for expenses or remuneration.
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Third-party protection: Ensures that parties dealing in good faith with an agent are reasonably protected.
Example
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Express Authority: A company CEO instructs an agent to negotiate a partnership deal with a software provider. The agent has express authority to finalize terms and sign contracts.
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Implied Authority: To execute the partnership, the agent may implicitly have authority to liaise with lawyers, register the agreement with authorities, and coordinate technical integration—tasks necessary to complete the express mandate.
Summary:
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Actual authority determines when an agent can bind a principal.
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Express authority is clearly granted by the principal.
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Implied authority allows the agent to take actions necessary or customary to fulfill the express instructions.
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Implied authority cannot contradict express authority, statutory rules, or fundamental duties to the principal.
Understanding the nuances between express and implied authority is essential for anyone acting as an agent or dealing with agents in commercial or personal transactions.
In an agency, who is legally bound by the contract with a third party?
The principal, not the agent.
The agent, not the principal.
Which of the following is NOT an agency relationship?
Bailment, where goods are held and returned without creating contracts for the owner.
Special agent negotiating a single property sale on behalf of a client.
What distinguishes a general agent from a special agent?
General agents act in the ordinary course of business; special agents are appointed for a specific task.
Special agents can act on behalf of multiple principals simultaneously, unlike general agents.
What is actual authority in agency law?
The agent’s power to bind the principal, arising from express or implied authority.
The agent’s personal liability for contracts they act on behalf of.
Which type of agency arises when the principal cannot be contacted and urgent action is required to protect their interests?
What protects third parties dealing with an agent?
The agent acting within actual authority (express or implied).
The principal acting without the agent’s consent.
