AVOIDING A CAR CRASH “Why the difference between acting as an agent or principal matters to your business”

This Article is taken from a seminar by Nigel Adams of Goodman Derrick LLP, held at Bicester Heritage.

(The seminar was made possible by the support of Anglo American Oil Company.)

1. What is an Agent?

• An agent is a person or company etc which acts on behalf of another, referred to as the “principal”.
• Agents have the power to affect the legal relationships of their principals with third parties.
• Agents are subject to various duties and obligations which are outlined further on in this article.

2. What is a Principal?

• A principal is a person or company etc which acts for and on behalf of itself, or which acts via an agent.
• A principal acting via an agent can remain hidden – the so called “undisclosed principal”, or they can be “disclosed” by the agent to the third party if the principal has permitted the agent to disclose their presence and identity.

3. How does an agency relationship arise?

• An agent cannot confer authority on itself.
• Normally both the agent and principal give express consent to their relationship of principal and agent – often there will be a written agency agreement so there is no doubt as to each party’s respective rights and obligations.
• However, an agency relationship can also be imposed by operation of law – consent to act as an agent can be inferred from a course of conduct or dealings.
• As it is not always necessary to have a written agreement to be an agent, problems can arise where an agent does not recognise or appreciate that they are in law acting as the agent of a principal.

4. Elements of an express agency agreement

• If you are to create an express written contract of agency then the following are important terms to include:
• The identity of the agent (a specific person or a member of a group?)
• The identity of the principal (who has authority to direct the agent?)
• Timescale – how long will the agency last?
• What can the agent do?
• What is the agent not allowed to do?
• Payment/commission terms.

5. Duties of an Agent

• There are a host of implied duties on an agent (which will apply even if there is no express agency agreement):
• Follow the terms of a written agency agreement and stay within the limits of the authority which has been granted.
• Follow the lawful instructions of the principal.
• Avoid conflicts of interest – an agent cannot act for two competing principals at the same time without the informed consent of each.
• Act in good faith.
• No secret profits or bribes.
• An agent must not act for its own benefit (or another’s benefit) without the consent of the principal.
• An agent must disclose all material facts to the principal and keep it properly informed.
• The principal’s confidential information must be preserved.
• An agent must account for all money and profits.

6. Duties of a Principal

• The principal owes a duty to pay the agent any commission lawfully due or legitimate expenses incurred.
• An agent has the right to be indemnified by the principal against any loss suffered by the agent while carrying out the agency tasks.
• The principal is liable for all of the agent’s acts carried out within the authority of the agency.
• The principal is bound to honour contracts which the agent lawfully creates on behalf of the principal with third parties.

7. Why does this matter?

As set out above, an agency relationship can arise without an agent being fully aware of it.  The duties owed by an agent to their principal apply regardless of whether or not the agent actually appreciated they were an agent.  By reason of this it is very likely that an agent that has not recognised it was an agent could be in breach of duty to its principal without intending to be.

Being in breach of duty as an agent can have very costly consequences and can ruin classic car dealers and traders who fail to get the distinction right between when they act for themselves (as a principal) and when they are acting for others (as an agent).  The difference can result in dealers and traders having to pay what it thought were its own profits away to its principal – that is the “car crash” which dealers and traders need to avoid at all costs.  By taking time at the outset of a business transaction to clarify if you act as principal or as agent should hopefully mean that possible future problems with a confused role are avoided.

Nigel Adams

Partner, Goodman Derrick LLP