LAWS1100 Nickolas James Business law 4_e_----_(chapter_10_contract_law_working_with_agents)

LEARNING OBJECTIVES
10.1 What is the relationship between a ‘principal’, an ‘agent’ and a ‘third party’?
10.2 When will the principal be legally responsible for statements, payments and contracts made by
their agent? If the agent does something they are not actually authorised to do, is the principal still
legally responsible for their actions?
10.3 What duties are owed by an agent to their principal? What if the agent breaches those duties?
10.4 What are the entitlements of the agent? Can they insist upon being paid for their efforts?
10.5 In what circumstances will the agent be personally liable to the third party?
10.6 How can the principal–agent relationship be brought to an end?
CHAPTER 10
Contract law: working
with agents
James, Nickolas. BUSINESS LAW 4E, Wiley, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/uql/detail.action?docID=4748089.
Created from uql on 2019-04-06 00:54:01.
Copyright©2014.Wiley.Allrightsreserved.

CHAPTER 10 Contract law: working with agents 357
JOHNNY AND ASH
[Johnny and Ash are sitting in adjacent seats in the business-class section of a commercial aircraft.
They are about to take off on a flight to Thailand for a holiday together. Ash is sitting peacefully, hands
clasped in her lap, eyes closed as she awaits take-off. Johnny is fiddling with his mobile phone, trying
to send a text.]
Ash — You are supposed to have that switched off by now. Apparently the signal interferes with the
plane’s navigation system.
Johnny — That’s just a myth. I don’t think a single plane has ever crashed because somebody didn’t
turn their phone off.
Ash — Well, I hope that ours isn’t going to be the first one.
Johnny — Yeah, yeah. Anyway, I have to text Cathy.
Ash — Cathy?
Johnny — Yeah, my manager at the restaurant. I’ve left her in charge for the 2 weeks that we are
going to be away. I want to remind her again not to make any important decisions without checking
with me. Last time I left her in charge she nearly cost me a lot of money.
Ash — Why? What happened?
Johnny — Well, last year I took a week’s holiday and left her in charge of the restaurant. I told her
before I left that all she had to do was order the stock, keep the place clean and serve the customers.
I made it very clear that if anything out of the ordinary happened she was to get in touch with me and
seek instructions.
Ash — What went wrong?
Johnny — Well, little did I realise, but the week I was away was the week the only other vegan
restaurant in town was closed for renovations, so of course our turnover doubled. Cathy didn’t realise
it was only for the week, and decided to hire a new waiter. A disaster! When I got back turnover was
back to normal and I had to explain to the new waiter that Cathy had made a mistake, and that he
didn’t actually have a job.
Ash — How did he take it?
Johnny — Well, he wasn’t happy, but I explained that Cathy wasn’t authorised to hire new employees,
and he accepted it.
Ash — Wow, you were lucky. It could have turned out much worse for you. You realise he could have
insisted that he had a legally binding employment contract with you?
Johnny — What? How? Cathy wasn’t authorised to hire any new staff on my behalf!
Ash — Cathy may not have had any actual authority to act on your behalf, but she almost certainly
had apparent authority, and that would have been enough to create a binding contract between you
and the new waiter.
Johnny — What on earth are you talking about? This is about law again isn’t it?
CHAPTER PROBLEM
As you make your way through this chapter, consider whether Cathy, in hiring the new waiter, created a
legally binding contract between the new waiter and Johnny.
Introduction
It is very common for contracts to be negotiated and finalised not by the parties directly but by other
people acting on behalf of the parties. A person who makes a statement, creates a contract or makes or
receives payments on behalf of another is called an ‘agent’, the person on whose behalf they act is called
a ‘principal’, and the person with whom the agent deals on behalf of the principal is called a ‘third party’.

358 PART 2 Legal consequences
10.1 Getting someone else to do it
LEARNING OBJECTIVE 10.1 What is the relationship between a ‘principal’, an ‘agent’ and a
‘third party’?
A successful business owner is unlikely to do everything personally. They will have workers who, on
their behalf, deal with third parties such as suppliers, customers, other employees and other businesses.
For example, the owner of a car dealership will have salespeople who sell the cars to the customers. The
business owner may never meet the customers; nevertheless, the contracts of sale are between the busi-
ness owner and the customers. The business owner will be legally bound by any statements, contracts
or payments made (and possibly even torts and crimes committed) by any worker authorised to act on
the business owner’s behalf.
A person who acts on behalf of another in dealing with a third party is called an agent, and the
person they are acting for is called the principal (see figure 10.1). In the situation described by Johnny
at the beginning of this chapter, Johnny is the principal, Cathy is the agent, and the new waiter is the
third party.
The principal may be an individual or a corporation. The same is true of the agent and the third
party.
The third party will only be able to enforce the statement, contract or payment against the principal if
the agent acting on the principal’s behalf had authority to do so. If the agent acted without the principal’s
authority, the third party will not have any legal rights against the principal (see ‘Scope of authority’
later in the chapter).
The existence of the agency relationship may be alleged by:
•• the principal — for example, because they are insisting that the agent owes them certain duties (see
‘The agent’s duties’ later in the chapter),
•• the agent — for example, because they are insisting that the principal owes them remuneration or
reimbursement (see ‘The agent’s entitlements’ later in the chapter), or
•• the third party — for example, because they are insisting that even though they dealt with the agent
they actually have a contract with or claim against the principal.
Examples of common agent–principal relationships are set out in table 10.1.
has
contract
with
authorises
deals
directly
with
Principal
Agent
Third party
FIGURE 10.1 The agency relationship

TABLE 10.1 Examples of agents and principals
Agent Principal
Employee Employer (although see Caution! below)
Auctioneer Seller
Mercantile agent Seller
Solicitor Client
Real estate agent Client
Stockbroker Client
Director Corporation
Partner Partner
Donee of power of attorney Donor of power of attorney
CAUTION!
While it is common for an employee to be the agent of their employer, the employment relationship and
the agency relationship are not the same thing. Not all agents are employees, and not all employees are
agents. Similarly, while it is common for a solicitor to be appointed as an agent of the client, a solicitor
is not necessarily the client’s agent.1
Agents can be classified as universal agents, general agents and special agents.
•• A universal agent has unrestricted authority to act on behalf of the principal, and can do almost any-
thing in the principal’s name that the principal could do themselves. For example, an elderly person
might appoint a younger relative as their universal agent using a power of attorney (see the section
below on powers of attorney) and authorise the younger relative to sign any document and make any
decision on their behalf.
•• A general agent has broad but not unrestricted authority to act on behalf of the principal. For example,
a business owner may prefer to have little to do with the day-to-day running of the business, and so
appoint a manager as their general agent to run the business on the business owner’s behalf.
•• A special agent has limited authority to act on behalf of the principal, often in relation to a single
transaction. For example, a house owner may be trying to sell their house at the same time that they
will be taking an overseas holiday, and so appoint their real estate agent as their special agent to sell
the house on their behalf while they are away. The real estate agent is authorised to sign the con-
tract of sale on the owner’s behalf but does not have any authority to enter into other contracts in the
owner’s name.
CAUTION!
The word ‘agent’ is one that is used frequently in the world of business. However, somebody who
describes themselves as an ‘agent’ or an ‘exclusive agent’ is not necessarily an agent in the legal sense.
They may simply be a distributor or a retailer of the products of a particular manufacturer, and they will
not have the power to make statements, contracts or payments on behalf of the manufacturer.
1 Nowrani Pty Ltd v Brown [1989] 2 Qd R 582.

A mercantile agent is an agent appointed to sell the property of the principal. There are two types of
mercantile agent.
1. If the mercantile agent is given possession of the principal’s property, the agent is referred to as a
factor. A factor usually sells the property in their own name. For example, a person who wishes to
sell their car may give it to a motor dealer to sell on their behalf. The motor dealer may not inform the
buyer that the car belongs to the principal.
2. If the mercantile agent does not have possession of the principal’s property, the agent is referred to as
a broker. Examples of brokers include insurance brokers, stockbrokers and finance brokers.
CAUTION!
Be careful to distinguish between an ‘insurance broker’ and an ‘insurance agent’. An insurance broker is
an independent intermediary between the client and the insurance company. They are usually the agent
of the insured person. An insurance agent is engaged by and represents the insurance company. They
are the agent of the insurer.
Another type of agent is a del credere agent. This agent is similar to other types of agents with one
important exception: the agent has agreed to indemnify the principal in the event of non-performance
by the third party. For example, in the case of an agent negotiating a contract between the principal and
the third party according to which the third party has promised to purchase the goods of the principal at
a certain price, if the third party defaults under the contract, the agent will compensate the principal for
their loss. Del credere agents are usually paid a higher commission in return for this indemnity.
ACTIVITY 10.1 — REFLECT
Is the relationship between a principal and an agent necessarily a contract? Explain.
The principal–agent relationship is regulated primarily by case law. However, legislation exists in
most States and Territories regulating specific types of agents, such as commercial agents and real estate
agents.2
This legislation may, for example, require a person acting as such an agent to obtain a licence
before doing so.
REVISION QUESTIONS
Before proceeding, ensure that you can answer each of the following questions.
10.1 What is ‘agency’? What is the relationship between a principal and an agent?
10.2 What are some examples of principal–agent relationships?
10.3 Is an employee necessarily an agent of the employer? Explain.
10.4 What are the differences between a universal agent, a general agent and a special agent?
10.5 What is the difference between a factor and a broker?
10.6 What is the distinguishing feature of a del credere agent?
2 Agents Act 2003 (ACT); Commercial Agents and Private Inquiry Agents Act 2004 (NSW); Factors (Mercantile Agents) Act
1923 (NSW); Property Stock and Business Agents Act 2002 (NSW); Agents Licensing Act 1979 (NT); Factors Act 1892 (Qld);
Introduction Agents Act 2001 (Qld); Property Occupations Act 2014 (Qld); Security Providers Act 1993 (Qld); Land Agents Act
1994 (SA); Property Agents and Land Transactions Act 2005 (Tas); Security and Investigations Agents Act 2002 (Tas); Estate
Agents Act 1980 (Vic); Private Security Act 2004 (Vic); Employment Agents Act 1976 (WA); Real Estate and Business Agents
Act 1978 (WA); Settlement Agents Act 1981 (WA).

10.2 Scope of authority
LEARNING OBJECTIVE 10.2 When will the principal be legally responsible for statements, payments and
contracts made by their agent? If the agent does something they are not actually authorised to do, is the
principal still legally responsible for their actions?
If the agent is acting within the scope of their authority, the resulting contract or other legal relationship
is between the principal and the third party, and the agent incurs no personal liability.
There are five main ways in which an agent can be authorised to act on behalf of a principal. These
include express annual authority, implied actual authority, apparent authority, agency of necessity and
authority by ratification.
Express actual authority
The principal can expressly authorise the agent, in writing or verbally, to act on the principal’s behalf.
For example, the board of directors of a company might expressly authorise a senior manager to attend a
meeting with a potential new supplier and negotiate a contract on behalf of the company.
It is usually a good idea for the authorisation to clearly state the duration of the agent’s appointment,
the precise scope of the agent’s authority and (if relevant) the agent’s entitlement to any commission
or payment. It is also a good idea for the authorisation to be in writing rather than verbal, especially if
the authorisation includes the authority to commit the principal financially. In some circumstances the
express authorisation of the agent must be in writing and signed by the principal, such as where the
agent will be buying and selling land on behalf of the principal.
Powers of attorney
A power of attorney is a written grant of express actual authority to an agent. It empowers the agent
to sign documents and make decisions on behalf of the principal. Powers of attorney are regulated by
specific State and Territory legislation.3
There are two types of power of attorney: a general power of attorney and an enduring power of attorney.
•• A general power of attorney authorises the agent to act on behalf of the principal. It is often used to give
someone the power to sign contracts and make decisions on the principal’s behalf when the principal is
absent, for example, while they are overseas.A power of attorney is a contract between the principal and
the agent and as such a general power of attorney will automatically terminate by operation of law if, for
example, one of the parties dies, becomes bankrupt or loses the intellectual capacity to contract.
3 Powers of Attorney Act 2006 (ACT); Powers of Attorney Act 2003 (NSW); Powers of Attorney Act 1980 (NT); Powers of Attorney
Act 1998 (Qld); Powers of Attorney and Agency Act 1984 (SA); Powers of Attorney Act 2000 (Tas); Instruments Act 1958 (Vic).

•• An enduring power of attorney is sometimes called an ‘irrevocable power of attorney’ or a ‘living
will’. It is usually set up to take effect in the event something happens to the principal such as ill-
ness, old age or accident that results in the principal being unable to make their own decisions. In
some jurisdictions an agent under an enduring power of attorney can even make decisions about
medical treatment on behalf of the principal.4
Unlike a general power of attorney, an enduring power
of attorney does not automatically lapse if the principal loses intellectual capacity.
In what circumstances would it be useful to authorise someone to act on your behalf by appointing
them as your agent under (a) a general power of attorney and (b) an enduring power of attorney?
ACTIVITY 10.3 — RESEARCH
Search online for a power of attorney form that would be valid within your State or Territory.
Under both types of power of attorney, the decisions made and the actions taken by the agent have the
same legal force as if the principal had made the decision or taken the action themselves.
Whether or not a power of attorney is used, the scope of the agent’s express actual authority may be
very narrow (restricted to only a particular type of transaction or even to a particular transaction) or very
broad (with the agent empowered to do almost anything the principal can do for themselves).
Implied actual authority
The principal can authorise the agent to act on the principal’s behalf by implication, usually by instructing
the agent to carry out a particular task on the principal’s behalf or appointing them to a particular pos-
ition in a way that makes it obvious that the agent will be required to enter into a contract with a third
party on the principal’s behalf. For example, whenever two people go into business together as partners
there is an implied grant of actual authority by each partner to the other authorising them to act on behalf
of the other in relation to matters incidental to the partnership business.
LAW IN CONTEXT: LAW IN PRACTICE
Company directors
The implied authority of a company director to act on behalf of the company will depend upon the
position of the director on the board. The general rule is that the more senior the role the greater the
person’s implied authority is likely to be.5
• An individual company director acting alone as a general rule has no implied authority to act on behalf
of the company. The authority of company directors is usually exercised collectively, as a board.6
• The company chairperson acting alone will not normally have any more implied authority to act on
behalf of the company than an individual director.7
• The managing director or CEO acting alone, on the other hand, does have implied authority to commit
the company to contracts entered into within the ordinary course of the company’s business.8
• The company secretary acting alone also has implied authority to act on behalf of the company, but
this authority is limited to making representations and contracts of an administrative nature.9
4 For example, Medical Treatment Act 1988 (Vic) s 5A.
5 Giltrap City Ltd v Commerce Commission [2004] 1 NZLR 608.
6 Northside Developments Pty Ltd v Registrar-General (NSW) (1990) 170 CLR 146.
7 Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549, 583–584.
8 Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549, 583.
9 Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711.

Whenever an agent is expressly authorised to act on behalf of a principal there is a grant of implied
authority to do all things incidental to carrying out the main task. For example, when a real estate agent
is appointed to sell a house they are given implied authority to provide information about the house to
potential purchasers.
An agent may have implied authority to act on behalf of the principal in order to give business effi-
cacy to a contractual arrangement. Authority may also be implied if the agent has had authority to act
on behalf of the principal in the past, or if agents in the particular trade or industry are usually granted
certain authority by their principal.
In ascertaining the extent of the agent’s implied actual authority the court will consider the sur-
rounding circumstances and the past conduct of the parties.
What are the advantages of expressing the actual authority of an agent in writing rather than relying
upon the authority implied by law?
At common law, if two people live together as spouses, each spouse has the implied authority of the
other to incur debts in their name in order to purchase necessaries.10
In the ACT, New South Wales,
the Northern Territory and South Australia, however, this implied authority has been abolished by
legislation.11
Apparent authority
If the principal allows the third party to believe that the agent has authority to act on the principal’s
behalf, it would be unfair to permit the principal to avoid responsibility for the agent’s actions by insisting
that the agent was not actually authorised to act on the principal’s behalf. The law acknowledges this
potential unfairness: if a principal has not actually authorised the agent to act on the principal’s behalf,
the agent will nevertheless have authority, and the principal will nevertheless be bound by the agent’s
actions in dealing with the third party, if three requirements are satisfied.
CHECKLIST
An agent will have apparent authority to act on behalf of the principal if all of the following requirements
are satisfied.
◼◼ The third party did not know that the agent did not have actual authority.
◼◼ The principal ‘held out’ the agent as having authority to act on the principal’s behalf — for example,
by appointing the agent to a particular position, or by having held the agent out as having authority
in the past.
◼◼ The third party relied upon that holding out, and reasonably assumed that the agent had actual
authority.
If all three of these requirements are satisfied, the agent will have apparent authority (some-
times called ‘ostensible authority’ or ‘authority by estoppel’) to act on behalf of the principal, and
the principal will be legally bound by the actions of the agent, even if the principal expressly told
the agent that the agent was not to enter into such a contract or act in that manner on the principal’s
behalf.
10 Debenham v Mellon (1880-81) LR 6 App Cas 24.
11 Married Persons Property Act 1986 (ACT) s 5; Married Persons (Equality of Status) Act 1996 (NSW) s 7; Married Persons
(Equality of Status) Act 1989 (NT) s 5; Law of Property Act 1936 (SA) s 104.

Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711
The company secretary of Fidelis Furnishing Fabrics (FFF) hired cars on behalf of FFF from Panorama
Developments. Some of these cars were hired by the company secretary for his private use, and FFF
refused to pay for these cars because the company secretary had hired them without actual authority. The
court decided that the company secretary had acted with FFF’s apparent authority, and FFF was therefore
liable to pay for the cars. The court explained that by appointing the person as company secretary, FFF was
holding him out as having the authority to do all the things that company secretaries normally do, including
making contracts on behalf of the company that fall within the normal day-to-day business of the company.
If the principal has recently withdrawn the actual authority of the agent to act on the principal’s
behalf, the principal may nevertheless be bound by the actions of the agent if the third party with whom
the agent is dealing does not know that the agent’s actual authority has been withdrawn.
Summers v Solomon (1857) 7 El & Bl 879; 119 ER 1474
The agent was employed as a manager of a jewellery shop, and authorised to order stock on behalf of
the owner. The owner terminated the agent’s employment. The agent ordered more jewellery and took it
with him when he left. The owner refused to pay the supplier for the jewellery, arguing that the agent did
not have actual authority to order that jewellery. The court decided, however, that because the supplier
did not know that the agent’s employment had been terminated, the agent had acted with the owner’s
apparent authority, and the owner was therefore liable to pay for the jewellery.
Tooth v Laws (1888) 9 LR (NSW) 154
Laws was the owner and licensee of a hotel, and was named as such on a sign above the door of the hotel.
Tooth regularly supplied liquor to the hotel. Laws sold the hotel to Kinchela, but the sign was not changed
and Tooth was not informed of the change in ownership. Tooth continued to supply liquor to the hotel. When
Kinchela failed to pay for the liquor, Tooth sought to recover the amount owing from Laws. Laws insisted that
he was not liable since he was no longer the owner of the hotel, but the court decided that Laws was liable
to pay for the liquor because when Kinchela ordered it, Kinchela was acting with Laws’ apparent authority.
CAUTION!
In order to establish apparent authority it must be shown that the principal has somehow held the agent
out as having authority to act on their behalf. If it is only the agent who has held himself or herself out as
having authority, this is insufficient to establish apparent authority.
Essington Investments Pty Ltd v Regency Property Pty Ltd [2004] NSWCA 375
The agent was acting on behalf of the principal in negotiating a contract with the third party. The prin-
cipal had signed the contract but before faxing it to the third party for their consideration, the agent had
made a number of handwritten changes to the contract. The third party signed the contract with the
handwritten changes, but the principal later insisted that it was not bound by the handwritten changes
because they had been made by the agent without the principal’s actual authority. The third party
insisted that the changes had been made with the principal’s apparent authority and that the principal
was therefore bound by them. The court decided that the agent had not acted with the principal’s
apparent authority: the principal had done nothing to hold the agent out to the third party as having
authority to make changes to the contract on the principal’s behalf.
The principal can terminate the agent’s apparent authority by expressly informing the third party that
the agent is not authorised to act on the principal’s behalf.

Is it fair that a principal may be bound by the actions of an agent who has done something the principal
did not actually authorise them to do? Why or why not?
The relationship between express, implied and apparent authority is set out in figure 10.2.
Did the principal expressly
authorise the agent to act
on their behalf, e.g. by
power of attorney?
YES
Agent had express authority.
Contract is enforceable
against principal by
third party.
YES
Agent had implied authority.
third party.
NO
Did the principal 'hold out'
the agent as having
authority, e.g. by appointing
them to a senior position?
YES
Agent had no authority.
Contract is not enforceable
third party.
YES
Did the third party rely
upon the 'holding out' and
assume the agent had
authority?
NO
third party.
YES
Agent had apparent authority
against principal
by third party.
NO
against principal
by third party.
NO
Did the third party know
that the agent lacked
express or implied
authority?
NO
Did the principal authorise the
agent to act on their behalf by
implication, e.g. by appointing
them as their partner?
FIGURE 10.2 Express, implied and apparent authority

Agency of necessity
The principal may not have actually authorised the agent to act on their behalf but the agent will never-
theless have authority if the agent has to deal with the third party on behalf of the principal or deal with
the property of the principal in order to protect the interests or the property of the principal.
CHECKLIST
An agency of necessity will only exist if four requirements are satisfied.
◼◼ The agent has possession or control of property belonging to the principal.
◼◼ The property of the principal is under threat.
◼◼ The agent cannot contact the principal to get express instructions.
◼◼ The agent acts in good faith to protect the property of the principal.
Great Northern Railway Co v Swaffield (1873–74) LR 9 Exch 132
Swaffield purchased a horse and arranged for it to be delivered to him by train. When the train arrived at
the station Swaffield was not there to collect the horse. An employee of Great Northern Railway (GNR)
arranged for the horse to be stabled for the night. Swaffield refused to pay for the cost of stabling,
arguing that he was not the one who made the contract with the stable owner. The court decided that in
the circumstances, GNR acquired authority to act on behalf of Swaffield, and the contract was therefore
between Swaffield and the stable owner. Swaffield was obliged to pay for the stabling of the horse.
Springer v Great Western Railway Co [1921] 1 KB 257
Springer entered into a contract with Great Western Railway Company (GWRC) according to which GWRC
would deliver tomatoes belonging to Springer by a certain date. The delivery was delayed by weather and
by industrial action, and rather than allow the tomatoes to perish GWRC sold the tomatoes to local buyers.
Springer sued GWRC in the tort of conversion (a form of trespass to goods). GWRC argued that it had
authority to sell the tomatoes. The court decided that GWRC was not an agency of necessity because the third
requirement was not satisfied: GWRC could have contacted Springer for express instructions but did not.
Think of another example of a situation where one person has to act on behalf of another in order to
protect the other person’s interests or their property.
Authority by ratification
Even if an agent acts without actual or apparent authority it is still possible for the principal, upon later
learning of the agent’s action, to ratify that action by authorising it retrospectively. As long as the prin-
cipal ratifies the agent’s act within a reasonable time of the act, it is as if the agent was acting with the
principal’s actual authority at the time.
Bolton Partners v Lambert (1889) 41 Ch D 295
Lambert made a written offer to Bolton Partners (BP) to lease certain property to BP. The managing
director of BP accepted the offer on behalf of BP. However, the managing director did not have actual
authority to accept such an offer on behalf of BP. Lambert attempted to withdraw the offer. BP then
ratified the managing director’s acceptance of Lambert’s offer. Was there a contract between BP and
Lambert? The court decided BP’s ratification of the managing director’s acceptance operated retro-
spectively so that it was as if the managing director had actual authority at the time of acceptance.
Lambert’s offer had therefore been validly accepted and it was too late for him to withdraw the offer.

The ratification can be express, or it can be implied from the conduct of the principal.
Section 131 of the Corporations Act 2001 (Cth) permits a new company (the principal) to ratify con-
tracts made by the founders of the company (the agents) prior to the company coming into existence.
REVISION QUESTIONS
10.7 What are the five ways in which an agent can be authorised to act on behalf of a principal?
10.8 When will an agent be expressly authorised to act on behalf of a principal?
10.9 What is a power of attorney?
10.10 When will an agent have implied authority to act on behalf of a principal?
10.11 When will an agent have apparent authority to act on behalf of a principal?
10.12 When will an agent have authority by necessity to act on behalf of a principal?
10.13 When will an agent have authority by ratification to act on behalf of a principal?
10.3 The agent’s duties
LEARNING OBJECTIVE 10.3 What duties are owed by an agent to their principal? What if the agent
breaches those duties?
The relationship between the agent and the principal is a fiduciary one. The agent is in a position of
trust and responsibility, and the agent therefore owes a range of duties to the principal under the law of
equity (see figure 10.3).
Duty to follow
instructions
Duty to act
personally
Duty to act
in the best
interests of the
principal
Duties of
an
agent
Duty of
confidentiality
Duty to
communicate
information
Duty to
account
Duty of care
FIGURE 10.3 Duties of an agent
The agent also owes duties to the principal under tort law and contract law. It is reasonably foresee-
able that the actions of the agent could affect the principal, so the agent owes the principal a duty of care.
And the relationship between principal and agent is usually (but not always) a contractual one, which
leads to the imposition of certain duties upon the agent.

Certain types of agent will also owe statutory duties to their principal. For example, real estate legis-
lation in most States and Territories obliges real estate agents to comply with certain rules of conduct. Stat-
utory obligations are also imposed upon company directors, partners, stockbrokers and insurance brokers.
Duty to follow instructions
In exercising their authority the agent is obliged to obey the lawful instructions of the principal. If they fail
to do so they will be personally liable to the principal for any harm caused to the principal as a result of the
agent’s breach of duty.12
For example, if the agent is instructed to make a contract on certain terms with
the third party and they in fact make a contract with the third party on different terms, the agent will have
breached their duty to follow the principal’s instructions and will be liable to compensate the principal.
CAUTION!
We explained earlier that even if an agent does something on behalf of the principal that the principal
has expressly told the agent they are not authorised to do, the principal will still be bound by the actions
of the agent if the agent has acted with apparent authority. However, in these circumstances, the agent
may have breached their duty to follow the principal’s instructions. The principal will be liable to the third
party against the principal’s wishes, but the agent will be liable to compensate the principal.
The agent will not be liable if they fail to carry out instructions of the principal that are unlawful.
Does the agent have to obey any lawful instructions of the principal or only those related to the subject
matter of the agency? Explain.
If the principal’s instructions are vague or ambiguous, and the agent interprets those instructions
honestly but incorrectly, the agent will not be in breach of their duty to the principal even though they
have not done what the principal wanted them to do.13
Duty to communicate information
An agent owes a duty to the principal to communicate to the principal information relevant to the agency.
The agent should pass on to the principal anything they learn that a reasonable agent would consider rel-
evant in the ordinary course of business.14
For example, if a real estate agent fails to inform their client
about a person interested in purchasing the property at a price known to be acceptable to the client, the
real estate agent is in breach of this duty.
John D Wood & Co (Residential & Agricultural) Ltd v Knatchbull [2002] EWHC 2822 (QB)
John Wood & Co (JWC) was appointed to sell a certain property belonging to Knatchbull. JWC advised
Knatchbull to set a price of £1.5m, and it sold at that price. JWC was aware that a similar property in the
same street was being offered for sale at the same time for £1.95m, but did not pass this information
on to Knatchbull. The other property sold for £1.8m. Upon learning of the sale, Knatchbull successfully
sued JWC for breach of its duty to communicate relevant information to the principal.
12 Bertram Armstrong & Co v Godfray (1830) 1 Knapp 381; 12 ER 364.
13 Jones v Canavan [1972] 2 NSWLR 236.
14 Neeson v Wrightson NMA Ltd [1989] ANZ ConvR 605.

Duty to act personally
An agent is obliged to carry out the principal’s instructions personally. This means that an agent is not
permitted to delegate the task to another person, or appoint a sub-agent, unless the principal gives them
permission to do so.
John McCann & Co v Pow [1974] 1 WLR 1643
John McCann & Co (JMC) was appointed by Pow as agent to sell Pow’s property. JMC appointed
another agent to sell the property, and the other agent found a buyer. The court decided that JMC had
breached its duty to act personally, and that neither JMC nor the other agent was entitled to be paid a
commission by Pow.
Why do you think the law imposes a duty upon an agent to carry out the principal’s instructions
personally?
It is, however, acceptable for an agent who operates a business — such as a real estate agent or a travel
agent — to delegate minor aspects of the task such as clerical responsibilities to the agent’s employees.
Duty of care
An agent owes the principal a duty to carry out the principal’s instructions with due care and skill. An
agent who fails to do what a reasonable agent would have done in the same circumstances will be liable
to the principal in the tort of negligence.15
Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (1991)
25 NSWLR 541
Consolidated Wood Products (CWP) appointed Provincial Insurance Australia (PIA) as its insurance
broker and instructed PIA to obtain property insurance against all contingencies, including water or
flood damage. PIA carelessly obtained insurance that excluded flood risk. When CWP suffered loss
caused by flood and was unable to make a claim under the insurance policy, it sued PIA for breach of
PIA’s duty of care. The court ordered PIA to compensate CWP for the loss.
The civil liability legislation in New South Wales, Queensland, South Australia, Tasmania, Victoria
and Western Australia provides some protection for agents who are ‘professionals’ by providing that
a professional does not incur liability in negligence if it is established that the professional acted in
a manner that is widely accepted in Australia by peer-professional opinion as competent professional
practice.16
A ‘gratuitous’ agent — that is, an agent who is not paid by the principal — still owes the principal a
duty of care although the standard will usually be a lower one: the agent must exercise ‘such care and
diligence as persons ordinarily use in their own affairs, and such skill as he has’.17
15 Mitor Investments Pty Ltd v General Accident Fire & Life Assurance Corporation Ltd [1984] WAR 365.
16 Civil Liability Act 2002 (NSW) s 5O; Civil Liability Act 2003 (Qld) s 22; Civil Liability Act 1936 (SA) s 41; Civil Liability
Act 2002 (Tas) s 22; Wrongs Act 1958 (Vic) s 59; Civil Liability Act 2002 (WA) s 5PB.
17 Beal v The South Devon Railway Co (1864) 3 H & C 337; 159 ER 560.

Chaudhry v Prabhakar [1989] 1 WLR 29
Chaudhry asked her friend Prabhakar to help her to find a second-hand car to purchase. She insisted
that the car must not have been in an accident. Prabhakar found a car for sale by a panel beater.
Prabhakar told Chaudhry that the panel beater was a friend of his (he wasn’t) and advised Chaudhry
to buy the car. Chaudhry bought the car, and when she discovered that the car had been involved in a
serious accident in the past, she sued Prabhakar for compensation. The court decided that Prabhakar
was Chaudhry’s gratuitous agent, and that he had breached his duty of care by failing to exercise the
degree of care that a person would ordinarily use in their own affairs. Prabhakar argued that he had not
breached his duty of care because he would have bought the car for himself, but the court explained
that the test is an objective one not a subjective one — the question is whether the agent has done
what a reasonable person in the same position would have done.
Why should a ‘gratuitous’ agent owe a lower standard of care than an agent who is being paid by the
principal?
Duty to act in the best interests of the principal
An agent has a fiduciary obligation not to exercise their authority in a way contrary to the interests of the
principal. For example, an agent under a general power of attorney should not (unless clearly authorised
by the principal to do so) exercise their authority so as to use the principal’s money to pay the agent’s
own debts.18
(In some jurisdictions the power of attorney legislation specifically provides that an agent
under a power of attorney has no authority to do any act that confers a benefit on the agent unless it is
permitted by the terms of the power of attorney.)19
Conflicts of interest
An agent should not put themselves in a position where the best interests of the principal are in conflict
with the agent’s own personal interests. If there is such a conflict of interest the agent must make full
disclosure to the principal, and if they fail to do so they are in breach of their duty to the principal.
An agent should not sell their own property to the principal without informing the principal before-
hand. For example, a stockbroker should not, in their capacity as the agent of their client, sell their own
shares to (or buy shares from) the client.
Hewson v Sydney Stock Exchange Ltd [1968] 2 NSWR 224
Hewson was a stockbroker who, without informing his clients that he was doing so, sold his own shares
to his clients and bought shares himself from his clients. He was held to have breached his duty to act
in the best interests of the principal.
An agent acting for two principals who are dealing with each other is also in a position of conflict of
interest.20
For example, a real estate agent should not act for both the buyer and seller in a transaction,
and a solicitor should not act for both parties in a dispute.
18 Reckitt v Barnett, Pembroke & Slater Ltd [1929] AC 176.
19 Powers of Attorney Act 2006 (ACT) s 34; Powers of Attorney Act 2003 (NSW) s 12.
20 Lintrose Nominees Pty Ltd v King [1995] 1 VR 574.

Secret commissions
An agent is in breach of their duty to act in the best interests of the principal if they receive a secret
commission from the third party. A secret commission is a payment made by the third party to the agent
without the principal’s knowledge and permission, and intended to induce or reward the agent for acting
on behalf of the principal in a way that favours the third party. It is effectively a bribe.
For example, if Dan, an employee at Johnny’s restaurant, is authorised by Johnny to locate a new sup-
plier of beer for the bar, and one particular supplier offers Dan six free cartons of beer if Dan chooses him
as the new supplier, Dan will be guilty of taking a secret commission if he accepts the supplier’s offer.
If an agent is discovered to have received a secret commission from the third party, the principal may
be entitled to:
•• recover the secret commission from the agent,
•• refuse to pay a commission to the agent,
•• terminate any contract with the agent, and/or
•• terminate the contract between the principal and the third party.
The receipt of a secret commission is not only a breach of the agent’s duty to the principal, it is also a
criminal offence that could lead to a fine and even jail.21
What is the penalty in your State or Territory for an agent who accepts a secret commission?
Duty of confidentiality
An agent has an obligation to maintain the principal’s confidentiality. This means that they should not
disclose to others or use for their own benefit information about the principal or the principal’s affairs
without the permission of the principal. It also means that they should not use for their own benefit infor-
mation acquired during the course of the agency. For example, if an agent appointed by the principal to
locate and purchase a suitable investment property finds a particularly cheap property while doing so,
they should inform the principal and not keep that opportunity for themselves.
Duty to account
The agent owes the principal a duty to account; that is, they are obliged to keep proper records of any
funds that are spent or received on behalf of the principal, and to produce these records when asked to
do so by the principal.
The agent must also keep any money and property belonging to the principal in their possession
separate from their own money and property. Many professional agents such as accountants, solicitors
and real estate agents operate what is known as a trust account — a separate account in which they
keep their clients’ money.
REVISION QUESTIONS
10.14 What duties does an agent owe to a principal?
10.15 What must an agent do in order to comply with their duty to follow instructions?
10.16 What must an agent do in order to comply with their duty to communicate information?
21 Criminal Code Act 1995 (Cth) div 141; Crimes Act 1900 (NSW) pt 4A; Criminal Code Act 1983 (NT) ss 236–7; Criminal
Code 1899 (Qld) ch 42A; Criminal Law Consolidation Act 1935 (SA) pt 6; Criminal Code 1924 (Tas) s 266; Crimes Act
1958 (Vic) ss 175–186; Criminal Code 1913 (WA) ch 55.

10.17 What must an agent do in order to comply with their duty to act personally?
10.18 In what circumstances can an agent delegate to another person responsibility for carrying out
the principal’s instructions?
10.19 What must an agent do in order to comply with their duty of care?
10.20 Does a gratuitous agent owe the same duty of care as an agent who is being paid?
10.21 What must an agent do in order to comply with their duty to act in the best interests of the
principal?
10.22 When will an agent be in conflict of interest? What should they do?
10.23 What is a ‘secret commission’? What are the possible consequences of an agent accepting a
secret commission?
10.24 What must an agent do in order to comply with their duty of confidentiality?
10.25 What must an agent do in order to comply with their duty to account?
10.4 The agent’s entitlements
LEARNING OBJECTIVE 10.4 What are the entitlements of the agent? Can they insist upon being paid for
their efforts?
Remuneration
Remuneration is payment by the principal to the agent for the time and effort expended by the agent in
carrying out the principal’s instructions.
An agent has no inherent right to remuneration. They will only be entitled to insist upon payment by
the principal if the principal and the agent have agreed that the agent should be paid; that is, the payment
of remuneration to the agent is a term of the contract between the principal and the agent.
The remuneration may be a flat fee, a commission based upon the application of a formula to a trans-
action amount, or some other arrangement. Commissions are common in relation to professional agents
such as real estate agents.
What is the amount of commission typically payable to real estate agents in your State or Territory?
If the agent has been appointed by the principal to sell the principal’s property, whether the agent is
entitled to payment of a commission upon finding a suitable buyer who makes a legitimate offer or upon
completion of the contract of sale will depend upon the terms of the agreement between the agent and
the principal.22
It is therefore important that the contract between the principal and the agent be worded
carefully and understood by both parties.
Moneywood Pty Ltd v Salamon Nominees Pty Ltd (2001) 202 CLR 351
Salamon appointed Moneywood as its agent to sell certain land belonging to Salamon. Moneywood
found a buyer who signed a contract to purchase the land, but the contract was not completed, and
Salamon did not pay any commission to Moneywood. Some time later Salamon and the buyer signed
another contract without Moneywood’s involvement, and this contract reached completion. Salamon
refused to pay any commission to Moneywood. The court decided that Moneywood was entitled to
payment of the commission, since Moneywood had originally located the buyer.
22 Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) (2001) 188 ALR 566.

LAW IN CONTEXT: LAW IN PRACTICE
Real estate agents
All real estate agents are required to have a written and signed agency agreement with their client. If
the agent has been appointed to sell the client’s property, the agreement will set out the fees and com
missions payable to the agent, as well as:
• the details of the services the agent is to provide,
• the circumstances in which the agent will be entitled payment (for example, when the property is
sold),
• a warning notifying the client of the circumstances in which a commission may be payable to more
than one agent,
• the extent of the agent’s authority to act on behalf of the client, and
• the estimated selling price for the property.
The agreement will usually be one of four types. An exclusive agency is one of the most commonly
used types, and gives the real estate agent the exclusive right to sell the property; that is, they are the
only person entitled to sell the property. This means that the agent will be entitled to the commission
even if the client sells the property themselves or the property is sold by another agent during the term
of the agreement. A sole agency is similar to an exclusive agency except that if the client finds a buyer
themselves no commission is payable to the agent. An open agency or general listing is used where the
property is listed with a number of different agents. The commission is only payable to the agent who
finds the buyer. With a multiple listing, the agent appointed by the client is a member of a network of
different agents who all work together to try to sell the property. The commission is paid to the original
agent, who usually shares it with the agent who actually finds the buyer.
Indemnity
All agents are entitled to be indemnified by the principal; that is, they are entitled to be reimbursed for
payments made, expenses incurred and liabilities assumed while carrying out the principal’s instructions.
Unlike the right to remuneration, this is an inherent right: the agent is entitled to be reimbursed even if
there is no specific agreement by the principal to do so. It is however possible for the contract between
the principal and the agent to expressly exclude the agent’s right to indemnity.
Lien
If the principal owes money to the agent — either remuneration or indemnity — and refuses to pay the
amount owing, the agent is entitled to a lien over any property of the principal in the agent’s possession.
This means that if the agent has any of the principal’s property — including money — they are entitled
to retain it until the principal pays the debt to the agent.
REVISION QUESTIONS
10.26 What is the difference between ‘remuneration’ and ‘indemnity’?
10.27 In what circumstances is an agent entitled to remuneration?
10.28 In what circumstances is an agent entitled to indemnity?
10.5 Liability of agent and principal
LEARNING OBJECTIVE 10.5 In what circumstances will the agent be personally liable to the
third party?
In this section we consider the various possible liabilities of the agent and of the principal.

Personal liability of agent
As a general rule, any deal negotiated by the agent on behalf of the principal is between the principal
and the third party. The agent is merely an intermediary and is not personally liable, provided that they
make it clear to the third party that they are in fact acting as an agent. The agent does not need to iden-
tify the principal specifically, but they do need to inform the third party that they are acting on behalf of
a principal.
There are three circumstances where the agent may be personally liable to the third party.
Intentional liability
An agent will be personally liable if the circumstances show that the parties intended that the agent be
personally liable. This intention may be expressed in the terms of the contract, or it may be implied as a
result of custom or standard practice within a particular field. For example, at an auction the auctioneer
is the agent of the seller but they traditionally assume personal responsibility for statements that they
make during the auction.
Undisclosed principal
If the agent did not tell the third party that they were acting as an agent, the agent will be personally
liable. This is known as the doctrine of the undisclosed principal. This is why it is important that
the agent informs the third party that they are acting as an agent. If the agent signs a written contract
on behalf of the principal, they should make it clear that they are signing on behalf of the principal by
including appropriate words such as ‘as agent’, ‘for principal’ or ‘on behalf of principal’ after their
signature.
If the principal was undisclosed (i.e. the agent did not tell the third party that they were acting as an
agent) and the third party subsequently becomes aware of the existence of the principal, the third party
has the option of enforcing the contract against either the principal or the agent (but not both). The third
party must choose between the principal and the agent reasonably promptly, and is not entitled to change
their mind.
Even if the principal was undisclosed the principal will still be able to enforce the contract with the
third party,23
unless:
•• the agent did not have authority to act on behalf of the principal at the time,
•• the agent has expressly told the third party that they are not an agent, or
•• the existence of an undisclosed principal is inconsistent with the terms of the contract — for example,
because the third party clearly intended to contract only with the agent.
Said v Butt [1920] 3 KB 497
Butt was the managing director of the Palace Theatre. Said was a theatre critic that Butt had banned
from attending the theatre. Said arranged for a friend to purchase a ticket on his behalf, but when Said
tried to attend the theatre with the ticket he was refused entry. Said (the undisclosed principal) sought
to enforce the contract. The court decided that he was not entitled to do so because at the time the
contract was formed the intention of Butt (the third party) was not to contract with Said.
Why should an agent who fails to tell the third party that they are an agent be personally liable to the
third party?
23 Keighley, Maxsted & Co v Durant [1901] AC 240.

Breach of warranty of authority
The agent will be personally liable if they represent themselves as having authority to act on behalf of
the principal and they do not in fact have any such authority. They will be liable to the third party for
breach of warranty of authority.
The agent may also be liable to the third party in the torts of deceit or negligence, as well as for
breach of s 18 of the Australian Consumer Law.
CHECKLIST
An agent will be liable to the third party for breach of warranty of authority if all of the following require-
ments are satisfied.
◼◼ The agent claimed that they were making the contract on behalf of the principal.
◼◼ The agent did not in fact have authority to act on behalf of the principal.
◼◼ The third party relied upon the agent’s representation, and would not have entered into the contract
in the absence of the representation.
Vicarious liability of principal
The principal will, of course, be personally liable under any contracts created on their behalf by an agent
acting within the scope of their authority. Whether the principal will also be liable for any torts or crimes
committed by their agent depends on the extent of the control exercised by the principal over the agent.
If the agent is an independent contractor and not subject to direct control by the principal, the prin-
cipal is unlikely to be liable for the agent’s actions. But if the agent is an employee of the principal, the
principal is more likely to be held vicariously liable for the agent’s torts and crimes, provided they were
committed by the agent while carrying out the principal’s instructions.
Century Insurance Co Ltd v Northern Ireland Road Transport Board [1942] AC 509
The driver of a petrol tanker lit a cigarette while delivering petrol to an underground tank. The lit cigarette
caused a fire. The court had to decide whether the employer of the driver was liable for the damage. The
employer argued that the driver was not permitted to smoke while delivering petrol. The court decided that
the employer was nevertheless liable, because at the time the driver was carrying out an authorised task.
Deatons Pty Ltd v Flew (1949) 79 CLR 370
A barmaid at a hotel got into an argument with Flew, a customer at the hotel, about his continued use
of bad language, and threw a glass of beer at Flew’s face. Flew commenced legal proceedings against
Deatons, the owner of the hotel, claiming that Deatons was vicariously liable for the actions of the
barmaid. The court decided that the barmaid was not acting within the scope of her employment at the
time of the incident, and that therefore Deatons was not vicariously liable for her actions.
Hollis v Vabu Pty Ltd (2001) 207 CLR 21
Hollis was injured when he was knocked over by a bicycle courier who worked for Vabu (which traded as
‘Crisis Couriers’). Hollis could not identify the individual courier who injured him but he recognised the cou-
rier’s uniform so he commenced legal proceedings against Vabu for compensation. He argued that as the
courier’s employer, Vabu was vicariously liable for the courier’s actions. Vabu argued that its couriers were
independent contractors. The court referred to the fact that the couriers were not skilled workers engaged
in an independent enterprise, that the couriers wore a Crisis Couriers uniform, and that payments to the
couriers were set by Vabu rather than negotiated. The court decided that the courier was an employee rather
than an independent contractor and that Vabu was therefore vicariously liable for the actions of the courier.

REVISION QUESTIONS
10.29 When will an agent be personally liable under a contract made with a third party?
10.30 Why is it important that an agent disclose to the third party that they are acting as an agent?
10.31 What is ‘breach of warranty of authority’?
10.32 When will a principal be vicariously liable for the torts and crimes of an agent?
10.6 Concluding the agency
LEARNING OBJECTIVE 10.6 How can the principal–agent relationship be brought to an end?
There are many ways in which the principal–agent relationship can be brought to an end.
Termination by the parties
The authority of the agent to act on behalf of the principal will be brought to an end if any of the
following occur.
•• The agent completes the tasks they were appointed by the principal to complete.
•• The duration of the appointment established by the principal (if any) expires.
•• The principal and the agent agree to terminate the relationship.
•• The principal dismisses the agent because they have breached the contract between them or otherwise
breached any of the duties owed by the agent to the principal.
•• The principal revokes or limits the authority of the agent to act on their behalf.
If a principal revokes the authority of the agent to act on their behalf, will the agent have a legal remedy
against the principal?
CAUTION!
Even if the principal–agent relationship has been brought to an end by one or both of the parties, the
agent may still have apparent authority to act on behalf of the principal. In a commercial context where
the agent has been acting on behalf of the principal on a regular basis it is important that the principal
takes the time to inform potential third parties, both directly and by placing an advertisement, that the
agent no longer has authority to act on the principal’s behalf.
Automatic termination
The authority of the agent to act on behalf of the principal is automatically brought to an end in the
following circumstances.
•• The death of either the principal or the agent. Note, however, that the power of attorney legislation
in each jurisdiction provides that if an agent under a power of attorney acts on behalf of the principal
after the principal has died but before the agent has been informed, the agent’s actions will bind the
estate of the principal and the agent will not be personally liable.
•• The loss by either the principal or the agent of the capacity to contract. For example, if the principal
loses the capacity to contract due to a loss of intellectual incapacity such as mental illness, the agency
relationship will automatically come to an end. An important exception, explained earlier, is where the
agent was appointed using an enduring power of attorney.

•• The bankruptcy of either the principal or the agent.
•• The subject matter of the agent’s appointment becoming illegal. For example, if a 19-year-old agent is
appointed to purchase alcohol on behalf of the principal and the law is subsequently changed to make
it illegal to sell alcohol to any person under the age of 21, the agent’s appointment will automatically
terminate.
•• The frustration of the contract between the principal and the agent. For example, if the agent was
appointed by the principal to sell the principal’s car, and the car is accidentally destroyed by fire prior
to it being sold, the agent’s appointment will automatically terminate.
REVISION QUESTIONS
10.33 What are the five ways by which the principal–agent relationship can be terminated by the
parties?
10.34 In what circumstances will the principal–agent relationship be automatically brought to an end
by operation of law?
10.35 In what circumstances will an agent still have authority to act on behalf of the principal despite
the termination of the principal–agent relationship?
In conclusion
•• An agent is a person authorised to make statements, contracts and payments on behalf of a principal
when dealing with a third party.
•• The principal will be legally responsible for statements, contracts and payments made by their agent
as long as the agent is acting within the scope of their authority. If the agent does something they are
not actually authorised to do, the principal will still be legally responsible for the agent’s actions if the
agent was acting with apparent authority.
•• An agent owes a range of duties to the principal, including a duty to follow instructions, a duty to act
personally, a duty of care and a duty to act in the best interests of the principal.
•• All agents are entitled to be reimbursed for expenses and liabilities incurred in acting on behalf of the
principal. The principal and the agent may also agree that the agent will be entitled to remuneration
such as payment of a commission.
•• As a general rule the agent does not incur personal liability when acting on behalf of the principal.
The agent will incur personal liability if that is what the parties agree, or if the agent does not tell the
third party that they are an agent, or if the agent breaches their warranty of authority.
•• The principal–agent relationship may brought to an end by the parties or may terminate automatically
by operation of law.
JOHNNY AND ASH
[Ash and Johnny still sit together on the plane. The flight is underway.]
Johnny — Okay, I think I understand, although I am not sure I agree with the law. If my agent Cathy
ignores my clear instructions this week and goes ahead and hires new staff, I will still be responsible
for what she does and still be locked into an employment contract with the new staff member.
Ash — Yes, if she is shown to have acted with your apparent authority. By leaving her in charge for
2 weeks it could be argued that you are ‘holding her out’ as having authority to make decisions
associated with the business on your behalf, including hiring new staff. If the new employee relies
upon that holding out and reasonably assumes that Cathy is authorised to hire them, the new
employee will have a contract with you.

Johnny — But that is so unfair! Cathy will have done something I specifically told her not to do! Why
should I still be legally responsible for what she does?
Ash — Look at it from the point of view of the third party, the new employee. They have applied for
a job, been interviewed by the person you have left in charge of the restaurant, and been offered a
job by them. How could they possibly know that you told Cathy not to hire anyone new? From their
point of view they have done nothing wrong, so why should they be penalised just because of a
disagreement between you and Cathy?
Johnny — So I am stuck with a new employee and there is nothing I can do about it?
Ash — Not true. By disobeying your instructions Cathy has breached one of her duties as an agent.
Johnny — The duty to follow instructions, right?
Ash — Yes. Which means that you are entitled to bring a legal action against Cathy seeking
compensation. You are probably also entitled to dismiss her, but more about that later.
Johnny — I’m unlikely to sue Cathy. She doesn’t earn enough money to make it worthwhile. I suppose
I will just have to trust her to do the right thing.
[Their conversation is interrupted by a member of the flight crew serving a meal to the passengers.]
Johnny — Hey! I ordered the vegetarian meal! What kind of restaurant is this?

QUIZ
1 An authorised agent may be entitled to make which of the following on behalf of the principal?
(a) Statements.
(b) Payments.
(c) Contracts.
(d) All of the above.
2 Which of the following is least likely to be X’s agent?
(a) X’s stockbroker.
(b) X’s employer.
(c) X’s real estate agent.
(d) X’s partner.
3 An agent with broad but restricted authority to act on behalf of the principal is referred to as a
(a) universal agent.
(b) special agent.
(c) general agent.
(d) mercantile agent.
4 Which of the following is the distinguishing feature of a del credere agent?
(a) They guarantee performance by the principal.
(b) They guarantee performance by the agent.
(c) They guarantee performance by the third party.
5 Which of the following is NOT a type of authority?
(a) Implied actual authority.
(b) Express apparent authority.
(c) Express actual authority.
(d) Ostensible authority.
6 How does an enduring power of attorney differ from a general power of attorney?
(a) It is only used between family members.
(b) It is in writing and signed by both the principal and the agent.
(c) The agent is reimbursed by the principal.
(d) It does not automatically expire upon the principal losing contractual capacity.
7 Authority for the agent to act on behalf of the principal may be implied
(a) in order to give business efficacy to a contract.
(b) to permit the agent to complete the task given to them by the principal.
(c) if the agent has been granted such authority in the past.
(d) all of the above.
8 Which of the following is NOT a requirement that must be satisfied in order to establish the
existence of apparent authority?
(a) The third party knew that the agent did not have actual authority.
(b) The principal ‘held out’ the agent as having authority to act on their behalf.
(c) The third party relied upon that holding out, and reasonably assumed that the agent had actual
authority.
(d) None of the above.
9 Which of the following is the best example of apparent authority?
(a) X appoints Y as his partner.
(b) X appoints Y as his agent under an enduring power of attorney.
(c) X dismisses Y as his employee but does not tell his suppliers.
(d) Y acts to protect X’s property in circumstances where X cannot be contacted for
instructions.

10 An agency of necessity will not exist if
(a) the agent can contact the principal to get express instructions.
(b) the property of the principal is under threat.
(c) the agent acts in good faith to protect the property of the principal.
(d) the agent has possession or control of the principal’s property.
11 An agent owes duties to the principal under
(a) equity.
(b) the law of torts.
(c) the law of contracts.
12 If an agent disobeys the principal’s lawful instructions
(a) the agent breaches their duty to the principal.
(b) the contract between the principal and agent is automatically terminated.
(c) the agent has no authority to act on behalf of the principal.
13 In what circumstances can an agent delegate to another person responsibility for carrying
out the principal’s instructions?
(a) When it is permitted by the terms of the contract between the principal and the agent.
(b) When the agent has the principal’s permission to do so.
(c) When the agent conducts a business and the delegated task is of an administrative nature.
14 If an agent does not tell the principal that the agent is related to the third party with whom
the agent has been authorised to negotiate a contract, the agent will be in breach of
(a) the duty of care.
(b) the duty to disclose conflicts of interest.
(c) the duty to follow the principal’s instructions.
(d) the duty to account.
15 If an agent is discovered to have received a secret commission from the third party, the
principal may be entitled to
(a) refuse to pay a commission to the third party.
(b) terminate the contract with the agent.
(c) recover the secret commission from the principal.
(d) terminate the contract between the agent and the third party.
16 A ‘commission’ is a type of
(a) indemnity.
(b) reimbursement.
(c) remuneration.
(d) liability.
17 A ‘lien’ is
(a) a right to withhold property belonging to another.
(b) a form of payment.
(c) a right to be reimbursed.
(d) a remedy available to the principal in the event of breach of duty by the agent.
18 In what circumstances will the agent NOT be personally liable to the third party?
(a) The agent discloses the fact that they are an agent but does not disclose the identity of their
principal.
(b) The agent does not disclose the fact that they are an agent.
(c) The agent does not disclose that they are acting without authority.
(d) The agent signs a written contract as principal.

19 In order to establish breach of warranty of authority the third party must show that
(a) the agent claimed that they were making the contract on behalf of the principal.
(b) the agent did not in fact have authority to act on behalf of the principal.
(c) the third party relied upon the agent’s representation, and would not have entered into the
contract in the absence of the representation.
20 The principal–agent relationship is automatically terminated if
(a) the agent breaches the contract between the principal and the agent.
(b) the third party is declared bankrupt.
(c) the principal loses the capacity to contract and the agent was not appointed under an enduring
power of attorney.
(d) the principal’s car is destroyed.
EXERCISES
EXERCISE 10.1 — APPOINTMENT OF AGENT
Johnny’s elderly grandmother, Pam, has recently moved into a nursing home. She finds it difficult to
leave the home to attend to her banking and other business affairs. She has asked Johnny to look after
her affairs on her behalf. What steps should Pam and Johnny take to formalise Johnny’s appointment?
EXERCISE 10.2 — APPARENT AUTHORITY
In addition to being part-owner of The Lame Duck restaurant, Maria is the sole owner of a real estate
business. She sells the business to one of her senior managers, Joey. Joey does not change the name of
the business, and neither Maria nor Joey tell anybody that ownership of the business has changed. After
becoming owner, Joey is given $1 000 000 by Haji, one of the business’s regular clients, to hold on
behalf of Haji until Haji pays the money to settle the purchase of a house. Joey takes the $1 000 000 and
leaves the country. Can Haji recover the money from Maria?
EXERCISE 10.3 — APPARENT AUTHORITY
Pearl is the owner of an antique store. Ahmed has been employed by Pearl as the store manager and
principal salesperson for the past 2 years. One day Ash is shopping for furniture and finds a particular
red leather antique armchair amongst the many chairs in Pearl’s store. She starts negotiating with Ahmed.
Ahmed has been instructed by Pearl to sell the armchair for at least $3500. Nevertheless, after 30 minutes
of bartering, Ash manages to persuade Ahmed to sell the chair to her for only $2500. The next day, upon
discovering that Ahmed had disobeyed her instructions and sold the armchair to Ash for only $2500, Pearl
immediately calls Ash and insists that she return the armchair. Is Pearl legally entitled to do this?
EXERCISE 10.4 — AGENCY OF NECESSITY
Cathy is employed by Johnny and Maria as the manager of The Lame Duck restaurant. One evening
when she closes the restaurant and goes home she accidentally leaves a candle burning on one of the
tables at the front of the restaurant. Later that night the candle burns down and sets the tablecloth on
fire. Fortunately, Geoff is walking past the restaurant on his way home from work and sees the fire.
He picks up a brick, uses it to smash the plate glass window at the front of the restaurant, and bravely
reaches through the hole to grab the burning tablecloth and yank it outside where he stamps out the fire.
A potential disaster is averted. Maria is, however, considering whether or not to sue Geoff for trespass
in order to recover compensation for the cost of replacing the window. How can Geoff avoid liability?
EXERCISE 10.5 — AGENT’S DUTIES
Ash agrees to buy a used car from Terence on the condition that the car is approved as mechanically
sound by her mechanic Ng. After inspecting the car, Ng tells Ash that the car is fine and Ash buys the
car from Terence. One month later, Ash learns that the car needs a new engine because the existing one

was so poorly maintained. She also finds out that Terence had paid Ng $500 to certify the car as mechan-
ically sound. What are the legal consequences of Ng’s actions?
See the facts of exercise 10.5. Ash has, perhaps foolishly, forgiven her mechanic, Ng, for his actions. She
asks him to try to sell the used car on her behalf, instructing him to get ‘the best possible price’. Ng says
he will buy the car from Ash himself for $1000. Ng knows of someone who is willing to pay $1500 for
the car, and Ng plans to buy the car from Ash and sell it to this buyer in order to make a $500 profit. If
Ng proceeds with this course of action, what will be the likely legal consequences?
Ash’s niece, Gaia, is backpacking overseas. She unfortunately runs out of money. She telephones her
flatmate, Emily, and asks her to raise some extra money by selling Gaia’s computer system on her
behalf. Gaia tells Emily that she can sell the computer components separately or together, but that she
has to get at least $500 for the lot. Emily is also to deposit the money into Gaia’s savings account. Two
weeks later, Gaia is surprised to discover that only $250 has been deposited into her account. When
Gaia asks Emily about this, Emily explains that she sold the CPU to one person, the monitor to another
person, and the printer and scanner to a third person; that she thought she got quite good prices for the
CPU and the monitor, but she only got $50 for the other components; that this is not her fault because
she got her friend Annie to sell them for her; that she couldn’t sell the keyboard because someone at a
party spilt wine all over it and now it doesn’t work properly; that someone else at the same party stole
the mouse; and that she is not completely sure if the $250 is the right amount, because when she col-
lected the money from the buyers it ‘kind of got mixed up’ with her own money. Which duty or duties
owed by an agent does Emily appear to have breached?
EXERCISE 10.8 — AGENT’S ENTITLEMENTS
See the facts of exercise 10.7. Assume that Emily has complied fully with Gaia’s instructions. Emily
now insists that she is entitled to (1) a reasonable commission for the sale of the computer system and
(2) reimbursement of the money she spent placing advertisements online. Is Emily correct?
EXERCISE 10.9 — LIABILITY OF AGENT AND PRINCIPAL
Johnny is approached by Anastasia, a wedding planner. Anastasia tells Johnny that she is acting on behalf
of Brangelina, a local celebrity who is known to be getting married next month. Anastasia explains that
Brangelina wants to book The Lame Duck restaurant for the wedding. Johnny accepts the booking and
informs his regular customers that the restaurant will be closed for a private function on the night of
the wedding. The day before the wedding Johnny learns that his restaurant was just one of a number
of restaurants approached by Anastasia, and that Brangelina has decided to use a different restaurant.
Anastasia apologises, explains that she made a mistake and that Brangelina never authorised her to book
The Lame Duck. Can Johnny insist that he has a contract with Brangelina with which Brangelina must
comply? If not, can Johnny recover compensation from Anastasia?
EXERCISE 10.10 — LIABILITY OF AGENT AND PRINCIPAL
See the facts of exercise 10.9. If Anastasia was in fact authorised to act on behalf of Brangelina but told
Johnny she wanted to book the restaurant for herself, could Johnny enforce the contract against both
Brangelina and Anastasia?
KEY TERMS
agent A person who acts on behalf of a principal who is legally responsible for the actions of the agent.
apparent authority Authority conferred upon an agent unintentionally when the principal holds the
agent out as having authority and the holding out is relied upon by a third party. Also known as
‘ostensible authority’ or ‘authority by estoppel’.

bankruptcy A statutory process whereby the assets of an insolvent individual are sold and used to
repay their creditors.
breach of warranty of authority A representation by an agent that they have authority to act on
behalf of the principal when they do not in fact have any such authority.
broker A mercantile agent who does not have possession of the principal’s property when selling it.
contract An agreement between two or more persons that is legally enforceable.
conversion A tort committed when one person wrongfully deals with the goods of another in a way
that is inconsistent with their ownership or rightful possession.
del credere agent An agent who has agreed to indemnify the principal in the event of non-performance
by the third party.
director A person who is responsible for the management of a company.
doctrine of the undisclosed principal The principle that an agent who does not tell the third party
they are acting as an agent will be personally liable to the third party.
enduring power of attorney A power of attorney set up to take effect in the event something happens
to the principal such as illness, old age or accident that results in the principal being unable to make
their own decisions. Also known as an ‘irrevocable power of attorney’ or a ‘living will’.
equity The category of case law rules and remedies based on fairness and justice, developed to
supplement the common law.
exclusive agency An arrangement with a selling agent according to which the agent has the exclusive
right to sell the property.
factor A mercantile agent who is given possession of the principal’s property in order to sell it.
fiduciary A position of trust and confidence held by a person such as an agent, trustee or partner.
frustration The termination of a contract due to unanticipated impossibility or extreme difficulty of
performance.
general agent An agent with broad but not unrestricted authority to act on behalf of the principal.
independent contractor A person who is contracted to provide services, but who is not an employee.
lien A right to retain possession of property belonging to another until a debt payable by the property
owner is paid.
mercantile agent An agent appointed to sell the property of the principal.
multiple listing An arrangement with a selling agent according to which the agent is a member of a
network of different agents who all work together to try to sell the property.
negligence A tort committed when one person fails to exercise reasonable care and causes harm to
another person.
open agency An arrangement with a selling agent according to which the agent shares the right to sell
the property with other agents.
power of attorney A formal written grant of express authority to an agent.
principal A person represented by an agent and who is legally responsible for the actions of the agent.
ratify To approve or adopt something retrospectively.
retrospective Something that is deemed to have commenced before it was actually created,
e.g. retrospective legislation.
secret commission A payment made to a person who owes a fiduciary obligation (e.g. an agent) by a
third party and without the knowledge of the person to whom the fiduciary obligation is owed.
secretary The company officer who is primarily responsible for ensuring compliance with the
administrative requirements of the Corporations Act.
sole agency An arrangement with a selling agent according to which the agent is the only agent with
the right to sell the property but if the client finds a buyer themselves no commission is payable to
the agent.
special agent An agent with limited authority to act on behalf of the principal, e.g. in relation to a
single transaction.
third party A stranger to a transaction or relationship.

tort A harmful act, other than a breach of contract, giving the victim a right to sue for compensation,
e.g. trespass, negligence, defamation, nuisance and passing off.
trust account A bank account maintained by an agent or other fiduciary in which they hold funds on
behalf of the principal or client.
universal agent An agent with unrestricted authority to act on behalf of the principal.
vicarious liability Liability for the conduct of another.
ACKNOWLEDGEMENTS
© LifetimeStock / Shutterstock.com
QUIZ ANSWERS
1. d 2. b 3. c 4. c 5. b 6. d 7. d 8. a 9. c 10. a 11. d 12. a 13. d 14. b 15. b 16. c
17. a 18. a 19. d 20. c

LAWS1100 Nickolas James Business law 4_e_----_(chapter_10_contract_law_working_with_agents)

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