Agency - Business Environment

As business activity has become more specialized and complex, firms have increasingly turned to outside individuals to carry out specialist functions such as freight forwarding, overseas representation, insurance broking and commercial letting. These individuals (known as agents) are authorized by the individual or organisation hiring them (known as the principal) to act on their behalf, thus creating an agency relationship. As in other areas of commercial activity, special rules of law have evolved to regulate the behaviour of the parties involved in such a relationship.

In essence, the function of an agent is to act on behalf of a principal so as to effect a contract between the principal and a third party. The agent may be a ‘servant’ of the principal (i.e. under their control as in the case of a sales representative) or an ‘independent contractor’ (i.e. their own master as in the case of an estate agent) and will be operating with the consent of the principal whether by contract or implication. Having established a contractual relationship between the principal and the third party, the agent generally leaves the picture and usually has no rights and duties under the contract thus made.

With regard to an agent’s specific obligations under an agency agreement, these are normally expressly stated under the terms of the agreement, although some may also be implied. Traditionally the common law of agency prescribes, however, that agents:
_ Obey the lawful instruction of the principal, otherwise they may be in breach of contract.
_ Exercise due care and skill, in order to produce a deal which is to the principal’s best advantage.
_ Act personally, rather than delegate, unless expressly or implicitly authorized to do so.
_ Act in good faith, thus avoiding conflicts of interest or undisclosed profits and bribes.
_ Keep proper accounts, which separate the principal’s funds from those which belong personally to the agent.

Moreover, in so far as an agent is acting under the principal’s authority, the principal is bound to the third party only by acts which are within the agent’s authority to make. Consequently ultra virus acts only affect the principal if he or she adopts them by ratification and the agent may be liable for the breach of the implied warranty of authority to the third party.

In addition to these common law duties owed by the principal, the Commercial Agents (Council Directive) Regulations 1993 apply when an agent falls within the definition of a commercial agent (Reg. 2(1)). They apply to transactions involving the sale or purchase of goods and they bestow certain rights and obligations upon both the principal and agent. It is clear that these duties overlap to some extent with the common law duties. Regulation 3 provides the agent’s duties to their principal:

_ a commercial agent must look after the interests of her/his principal and act
dutifully and in good faith;
_ make proper efforts to negotiate and, where appropriate, conclude the transactions;
_ communicate to their principal all the necessary information available to them;
_ comply with reasonable instructions given by the principal.
Regulation 4 specifies the duties of the principal:
_ to act dutifully and in good faith;
_ to provide the commercial agent with the necessary documentation relating to
the goods in question;
_ to obtain necessary information for the agent. This is a higher standard, perhaps
requiring searching for data, than under the common law, where all the principal
needs to do is to disclose information in their possession;
_ to notify the agent within a reasonable period of time if the usual volume of
trade is likely to be significantly reduced;
_ to inform the agent within a reasonable period of time of the principal’s acceptance,

refusal, or non-acceptance of a commercial transaction arranged by the agent.

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