Commercial law – Essential Reading
The Law on Agency
3 An Introduction to the law of agency
What is Agency?
A typical agency relationship will involve three parties namely:
- The principal appoints an agent to negotiate/contract on his behalf
- The agent negotiates/contracts with third parties on principles
behalf
- A Binding contract is made between the third party and the
principal
A classic agency relationship occurs at an auction
Key Characteristics
- Express consent of the principal and agent, however implied and
non-consensual agency relationships can exist
- The agent usually affects the legal position of the principal,
however, a relationship of agency can exist even where the agent
does not have the ability to affect the principal's relations with third
parties (Pengelly v Business Mortgage Finance 2020)
- The agents ability to affect the legal position of his principal will
usually be limited in some way, in the case of an auction it would
be the reserve price. This is known as the agent’s authority and it
is central to the relationship.
- The principal and agent will each owe each other a number of
duties and obligations, the agent will usually be remunerated for
his services
- Once the agent has completed his tasks he will usually drop out of
the transaction and leave a binding agreement in place.
Types of agent
Several of these classes of agents are no longer relevant to modern
commercial agencies but, as they are referred to in many key agency
cases understanding there function is still useful
General and special agents
Although the distinction between general and special agents has lost
much of its importance today, it has still been used on occasion to
determine the scope of an agent’s apparent authority (Armagas v
Mundogas 1986)
- A general agent is vested with the authority to act for the principal
in relation to the general business of the principal
- A special agents authority is usually narrower and is limited to a
single subject matter or transaction
,Factors and brokers
Factors act 1889, s1(1)
- A factor is an agent with the authority to sell goods or consign
goods for the purpose of sale, or to buy goods, or to raise money
on the security of goods
Baring v Corrie 1818
- A broker is similar however the difference lies in the fact that the
broker will not usually have control or possession of the goods and
he should not sell the goods in his own name
Del credere agents
In addition to negotiating contracts between principal and third parties a
del credere will act as a guarantor for the obligations of the third parties,
thus if the 3rd party becomes insolvent the del credere agent will become
liable to pay the purchase price to the principal
Confirming houses
Act in relation to international trade, may act as an agent for an overseas
buyer who wishes to purchase goods in a country where the confirming
house is based. As overseas buyers may be less credible a confirming
house may guarantee the purchasing parties obligations
Commercial agents
Often appointed to help increase the principals customer base by
locating new customers by introducing them to the principal and helping
affect the transaction between them revenue increases and in return the
agent is paid.
- However, principals may attempt to exploit the situation at the
expense of there agents, where once introduced to the clients they
terminate the contract
EC Directive 86/653 which was implemented by the Commercial Agents
Regulations 1993
1(2) makes it clear the regulations are concerned only with the principal
agent relationship and defines a commercial agent as
- A self employed intermediary who has continuing authority to
negotiate the sale or purchase of goods on behalf of another
person (the ‘principal’), or to negotiate and conclude the sale or
purchase of goods on behalf of and in the name of that principal.
This definition contains a number of key words and phrases which
restrict the scope of the duty
Self Employed
Usually referred to in case law as an independent contractor, a person
who is an agent by virtue of his employment will not be a commercial
agent
,Continuing authority
Poseidon
‘continuing’ would appear to indicate that an agent who is engaged to
effect a one-off transaction would not have continuing authority, and so
would not constitute a commercial agent
- The agent must be responsible for more negotiating more than one
form of contract or for renegotiating the same contract
Nagel v Pluczenik Diamond 2017
Will be determined by reference to the terms of the contract with the
principal, not by the extent or frequency of the exercise of that authority
Regs 14 and 15
However fixed-term contracts are allowed
Sale or purchase of goods
R 2(1)
an agent must have continuing authority to negotiate and/or conclude
the sale or purchase of goods in order to qualify as a commercial agent.
- An agent who’s function is to negotiate and or conclude a contract
of services is not a commercial agent, however, where the contract
involves the provision of goods and services provided goods are
not a secondary activity they will be a commercial agent
The regulations do not define goods but it is clear according to case law
they are to be given a wide interpretation, in certain cases the lack of a
statutory definition has proved problematic and the approach taken by
the courts has been criticised
St Albans v International Computers 1997
The software system designed to estimate poll tax revenues was faulty
and St Albans was underpaid, the court ruled that the software was
classed as goods as the discs it was delivered in amounted to goods
- This is likely to be overruled as the European court of justice ruled
software delivered by discs was not goods however the supreme
court does not have to follow as we left the EU
Negotiate on Behalf of the principle
An agent who does not have authority to enter into contracts on behalf of
the principal can still qualify as a commercial agent as r2(1) covers those
who have continuing authority to negotiate, unfortunately neither
regulations not the directive define what type of activities amount to
negotiation
- Do agents who have authority merely to make an introductions fall
within or does the agent need the authority to engage in the actual
bargaining
Early cases focussed on the dictionary definition of negotiating (Parks v
Esso Petroleum 2000)
, However new cases favour a wide view that an agent need not engage
in actual bargaining
PJ Pipe v Audco India Ltd 2005
PJ did not have authority to agree prices or terms with any potential
customers they would deal directly with Audco, a dispute arose and PJ
sought compensation in the 1993 regulations. However Audco argued
because PJ could not bargain or agree terms it was not a commercial
agent
- Held that PJ was a commercial arrangement
courts should avoid a limited or restricted interpretation of the word
‘negotiate’ that would exclude agents who have been engaged to
develop the principal’s business in this way, and who successfully
generated goodwill for the manufacturer, to the latter’s benefit after the
agency terminated.
- PJ promoted for Audco
- Ensured Audco would be designated an approved vendor
- Introduced potential customers to Audco and provided advice on
preparation of quotations
AMB Imballagi plastic v Pacflex Ltd 1999
Because Paceflex bought the products to sell them on and did not sell
them on a commission basis they were not a commercial agent under
the 1993 regulations
- If a person buys or sells himself as principal he is outside the ambit
of the regualtions that is so because in negotiating the sale he is
acting on his own behalf
However the presence of a markup will not in itself deny the existence of
a commercial agency relationship (Mercantile international Group v
Chuan Soon Huat 2002)
Negotiate and conclude on behalf of and in the name of the
principal
R 2(1) differentiates between an agent who is
- Granted authority to negotiate but not to enter into contracts
- Granted authority to negotiate and conclude
The issues concerning the terms ‘negotiation’ and ‘on behalf of
‘discussed in the previous section will apply to both types of agent but for
agents who have authority to negotiate and conclude contracts, he will
not be a commercial agent if he does not do so in name of his principal.
- This may occur where the agent does not disclose the existence or
identity of his principal, for it cannot be said the agent is acting in
the principals name
- Difficulties also arise where the agent discloses the existence of a
principle but not the identity
The Law on Agency
3 An Introduction to the law of agency
What is Agency?
A typical agency relationship will involve three parties namely:
- The principal appoints an agent to negotiate/contract on his behalf
- The agent negotiates/contracts with third parties on principles
behalf
- A Binding contract is made between the third party and the
principal
A classic agency relationship occurs at an auction
Key Characteristics
- Express consent of the principal and agent, however implied and
non-consensual agency relationships can exist
- The agent usually affects the legal position of the principal,
however, a relationship of agency can exist even where the agent
does not have the ability to affect the principal's relations with third
parties (Pengelly v Business Mortgage Finance 2020)
- The agents ability to affect the legal position of his principal will
usually be limited in some way, in the case of an auction it would
be the reserve price. This is known as the agent’s authority and it
is central to the relationship.
- The principal and agent will each owe each other a number of
duties and obligations, the agent will usually be remunerated for
his services
- Once the agent has completed his tasks he will usually drop out of
the transaction and leave a binding agreement in place.
Types of agent
Several of these classes of agents are no longer relevant to modern
commercial agencies but, as they are referred to in many key agency
cases understanding there function is still useful
General and special agents
Although the distinction between general and special agents has lost
much of its importance today, it has still been used on occasion to
determine the scope of an agent’s apparent authority (Armagas v
Mundogas 1986)
- A general agent is vested with the authority to act for the principal
in relation to the general business of the principal
- A special agents authority is usually narrower and is limited to a
single subject matter or transaction
,Factors and brokers
Factors act 1889, s1(1)
- A factor is an agent with the authority to sell goods or consign
goods for the purpose of sale, or to buy goods, or to raise money
on the security of goods
Baring v Corrie 1818
- A broker is similar however the difference lies in the fact that the
broker will not usually have control or possession of the goods and
he should not sell the goods in his own name
Del credere agents
In addition to negotiating contracts between principal and third parties a
del credere will act as a guarantor for the obligations of the third parties,
thus if the 3rd party becomes insolvent the del credere agent will become
liable to pay the purchase price to the principal
Confirming houses
Act in relation to international trade, may act as an agent for an overseas
buyer who wishes to purchase goods in a country where the confirming
house is based. As overseas buyers may be less credible a confirming
house may guarantee the purchasing parties obligations
Commercial agents
Often appointed to help increase the principals customer base by
locating new customers by introducing them to the principal and helping
affect the transaction between them revenue increases and in return the
agent is paid.
- However, principals may attempt to exploit the situation at the
expense of there agents, where once introduced to the clients they
terminate the contract
EC Directive 86/653 which was implemented by the Commercial Agents
Regulations 1993
1(2) makes it clear the regulations are concerned only with the principal
agent relationship and defines a commercial agent as
- A self employed intermediary who has continuing authority to
negotiate the sale or purchase of goods on behalf of another
person (the ‘principal’), or to negotiate and conclude the sale or
purchase of goods on behalf of and in the name of that principal.
This definition contains a number of key words and phrases which
restrict the scope of the duty
Self Employed
Usually referred to in case law as an independent contractor, a person
who is an agent by virtue of his employment will not be a commercial
agent
,Continuing authority
Poseidon
‘continuing’ would appear to indicate that an agent who is engaged to
effect a one-off transaction would not have continuing authority, and so
would not constitute a commercial agent
- The agent must be responsible for more negotiating more than one
form of contract or for renegotiating the same contract
Nagel v Pluczenik Diamond 2017
Will be determined by reference to the terms of the contract with the
principal, not by the extent or frequency of the exercise of that authority
Regs 14 and 15
However fixed-term contracts are allowed
Sale or purchase of goods
R 2(1)
an agent must have continuing authority to negotiate and/or conclude
the sale or purchase of goods in order to qualify as a commercial agent.
- An agent who’s function is to negotiate and or conclude a contract
of services is not a commercial agent, however, where the contract
involves the provision of goods and services provided goods are
not a secondary activity they will be a commercial agent
The regulations do not define goods but it is clear according to case law
they are to be given a wide interpretation, in certain cases the lack of a
statutory definition has proved problematic and the approach taken by
the courts has been criticised
St Albans v International Computers 1997
The software system designed to estimate poll tax revenues was faulty
and St Albans was underpaid, the court ruled that the software was
classed as goods as the discs it was delivered in amounted to goods
- This is likely to be overruled as the European court of justice ruled
software delivered by discs was not goods however the supreme
court does not have to follow as we left the EU
Negotiate on Behalf of the principle
An agent who does not have authority to enter into contracts on behalf of
the principal can still qualify as a commercial agent as r2(1) covers those
who have continuing authority to negotiate, unfortunately neither
regulations not the directive define what type of activities amount to
negotiation
- Do agents who have authority merely to make an introductions fall
within or does the agent need the authority to engage in the actual
bargaining
Early cases focussed on the dictionary definition of negotiating (Parks v
Esso Petroleum 2000)
, However new cases favour a wide view that an agent need not engage
in actual bargaining
PJ Pipe v Audco India Ltd 2005
PJ did not have authority to agree prices or terms with any potential
customers they would deal directly with Audco, a dispute arose and PJ
sought compensation in the 1993 regulations. However Audco argued
because PJ could not bargain or agree terms it was not a commercial
agent
- Held that PJ was a commercial arrangement
courts should avoid a limited or restricted interpretation of the word
‘negotiate’ that would exclude agents who have been engaged to
develop the principal’s business in this way, and who successfully
generated goodwill for the manufacturer, to the latter’s benefit after the
agency terminated.
- PJ promoted for Audco
- Ensured Audco would be designated an approved vendor
- Introduced potential customers to Audco and provided advice on
preparation of quotations
AMB Imballagi plastic v Pacflex Ltd 1999
Because Paceflex bought the products to sell them on and did not sell
them on a commission basis they were not a commercial agent under
the 1993 regulations
- If a person buys or sells himself as principal he is outside the ambit
of the regualtions that is so because in negotiating the sale he is
acting on his own behalf
However the presence of a markup will not in itself deny the existence of
a commercial agency relationship (Mercantile international Group v
Chuan Soon Huat 2002)
Negotiate and conclude on behalf of and in the name of the
principal
R 2(1) differentiates between an agent who is
- Granted authority to negotiate but not to enter into contracts
- Granted authority to negotiate and conclude
The issues concerning the terms ‘negotiation’ and ‘on behalf of
‘discussed in the previous section will apply to both types of agent but for
agents who have authority to negotiate and conclude contracts, he will
not be a commercial agent if he does not do so in name of his principal.
- This may occur where the agent does not disclose the existence or
identity of his principal, for it cannot be said the agent is acting in
the principals name
- Difficulties also arise where the agent discloses the existence of a
principle but not the identity
