02 March 2012 Written by  Awet Hailezgi and Addisu Damtie

Authority by Virtue of Contractual Agency

Authority by Virtue of Contractual Agency

We have discussed what authority is under the above topics. This topic focuses on authority, which is derived from the agreement of the contracting parties, agent and principal. Hence in reading this topic we shall see it from the perspectives of the common law approach, the civil law and the Ethiopian approach in order to understand it well.

The common Law Approach. (Law of Agency, Am. J: comp. law vol6 1957)

The foundation (theoretical) of the modern concept of agency in the common law is the doctrine of identity of principal and agent, in which this theory is generally expressed in the phrase ‘’qui facit per altrum facit per se’’ [meaning, he who acts through another acts himself]. While adopting this theory, however, no distinction was made between the internal relation of principal and agent on the one hand, and the external relation between principal and agent towards third a party on the other hand. The reason what the common law theory failed to make distinctions between these relations of the principal – agent and a third party was due to the maxim provided above, which involves the contract of only two persons.

In the perspective of commercial life, the central problem in the law of agency is the protection of the rights of the third party, who has transacted business with an agent who was not authorized to transact that business. ‘’The theory of identity in regard to this problem adopts the maxim that the unauthorized acts of the agent does not bind the principal’’ But, owing to commercial needs force in certain conditions, some exceptions are accredited to the theory of identity in order to protect a third party who acts in good faith, with an agent. The theory of identity states as follows:

Where a mercantile agent, with the consent of the owner, is in possession of goods or documents of title, a third party to whom the agent sells pledges or otherwise disposes of the goods or documents in the ordinary course of his business is protected if that third party acts in good faith and has not at the time of the disposition notice that [the agent] has no authority to make the same. In that instance the disposition shall be as valid if the agent were expressly authorized by the owner of the goods to make the same. (F.H Lawson,  1969,p131)

According to these circumstances, the test adopted by the common law pursuant to the doctrine of identity in order to protect a third party accepting in good faith a disposition by the mercantile agent is that ‘’ whether the goods or documents were entrusted to him by their owner’’. ‘’This test operates irrespective of whether the mercantile agent carried out the unauthorized disposition in his own name as will often be the case or in the name of his principal. (F.H Lawson, 1969, p131) An impediment arises, however when an agent is warned by his principal not to sell or dispose unless the latter tells the former to sell or dispose in his name without disclosing his principal’s name. In giving a solution to such a problem the common law theory’’ disregards whether the representative acted in the name of the principal or in his own name as irrelevant and it is the ‘’entrusting’’ of the goods or documents which makes the person a mercantile agent.

The Theory of agency in the common law is classified into three types of agents.  These are

  • · Agents acting for a named principal,
  • · Agents acting for an unnamed principal, and
  • · Agents acting for undisclosed principal

These three agents have a common function. That is, they act as an instrument in order to procure links between the principal and third parties in contractual relations. The major problem that may arise in an agency contractual relationship from the point of view of a contracting third party is to ascertain with whom he has contracted. Nevertheless, it is obvious that in the theory of agency contract, rights and duties arise primarily with the contracting third party and the party with whom he has made the main contract, since the third party may be ignorant of the existence of a principal. However, in order to solve such a problem, as discussed above, the liability test, which the common law agency doctrine has developed for undisclosed agency, provides the necessary principles.

The theory of undisclosed principal corresponds to the indirect agency of the civil law. The theory of liability test of the common law, more over, pays more attention as it was discussed before to the test whether the goods or documents of title come into the possession of the agent by the consent of their owner, and such test does not give any regard to the name test which emphasizes in whose name the goods or documents of title came to the agent which is the concept of the civil law.

Hence, as the common law doctrine of identity avoids the fragmentation typical of the civil law situation, the fundamental distinction that is created by the civil law concerning direct and indirect agency is completely unknown to the common law, since its concept of agency is sufficiently general to embrace both forms of representation. (I.e. A commission agent and commercial agent.)

The Civil Law Approach

The contact of mandate, which emerged with the growth of commercial transaction, served to a considerable degree the practical substitution of agency. The mandatory [agent] in his course of contractual power was entitled to act in the interest of the mandate giver with a third party, but in his acts that he does with third parties, he may not bind his mandate- giver liable to the third party. The mandatory [agent] himself is responsible for the acts or contracts he entered into with the third party.

The theory of mandate demands that each party has certain duties and responsibilities that he should respect while the parties are in the course of the contract of mandate. Based on the above principle, the mandatarius (agent) and the mandator (principal) were bound to the following duties, (William L.Burdick, 1938, pp 193):

He/she had to execute the mandate reasonably in good time. , He/she was also bound not to exceed the mandate, to exercise diligently, to render accounts and to make over to the mandator (principal) all benefits accruing from the mandate including rights of actions against third parties.

However among the duties of the mandator (principal) were to indemnify the mandatarius (agent) against expenses, loss and liability incurred in the execution of the mandate. Besides, he is bound not to revoke the mandate to his prejudice.

The mandate that exists between the mandatory and mandatory’s could also be terminated by mutual consent of the parties, by a unilateral revocation or renunciation of either party or by the death of either party.

The doctrine of agency in civil law legal system was founded in the theory of separation. What is the theory of separation?

’ The most characteristic feature of the theory of agency in the civil law is the strict conceptual separation of the mandate, i.e. the contract between the principal and agent. From the authority, that is the power of the agent to contract for the principal with the third party.’’

We can understand that the emergence of the doctrine of separation in the civil law system has contributed to a considerable degree in discriminating the difference between mandate and authority. The theory of separation, which was, expounded by a German Jurist Laaband, could clearly point out the different aspects of mandate and authority as follows.

’Mandate points to the internal relations between two persons – the mandator and the mandatory, while representation (authority) on the other hand, points to the external aspects of the transaction; the relation of principal and agent towards third parties.’’

Based on the above point the very relevant issue to be considered is that the agent’s power to conclude a contract of mandate. That means the internal contract that is made between the principal and agent in regard to the extent of authority that the principal is giving to his agent is in principle ineffective with regard to a third party. This view implies that the third party does not bother about the contract of mandate that exists between the principal and agent.

Owing to the development of the theory of separation in the civil law legal system, the feature of the various types of intermediary ship is defined to underlying internal relationship between the principal and the agent. . To mention an example, the German civil code provides thirteen types of intermediary ships. In comparison to the German civil code, the French civil code adopted only four main types of intermediary ship. To mention them: (F.H. Lawson, 1969, pp125)

  • ·Independent agent
  • ·Employed agent
  • · Commission agent and
  • ·Broker

With regard to the agency relationship from the view point of a third party, the key problem pinpoints ‘with whom has the third party contracted ‘. The civil law theory to answer this issue, adopts the test that ‘to ascertain whether the agent has contracted in a representative or personal capacity.’

According to the test adopted by the civil law, regarding the ascertainment of whether the agent acted in a representative or personal capacity, is the name test, which is in line with the direct and indirect agency that is a leading doctrine of the civil law.

The above concept implies that

’ If an agent acted in his representative capacity, normally on behalf of his principal, the agency is to be direct, and if he acted in his own name, but for the account of his principal, the agency is indirect. ( F.H. Lawson, 1969, pp136)

Pursuant to the civil law theory of agency, ‘’the direct agent is referred to as a commercial agent and the indirect agent as a commission agent, while in the common law terminology both types of representatives are described as agents.’’  (F.H. Lawson, The Roman law reader, 1969, pp125) with no distinction in between them.

To put it in a   nutshell, under the theory of agency in the civil law legal system, in order to make an agent to be bound by his acts to an unnamed principal, he/she must at least disclose his intention of contracting as an agent or the situations must indicate this. Otherwise, the contract he concludes with a third party is considered as if he/she acted in his personal capacity, and it will not be important that he had the undeclared intention of acting for a principal and was duly authorized to do so or that he acts on the account of his principal.

This method leads to the distinction drawn between direct and indirect agency. Starting from this point of view, the civil and common law legal system adhere to different patterns.

Under the common law legal system, ‘’if an agent was duly authorized, but acted in his own name, without disclosing the existence of his principal to the third party, the principal can nevertheless intervene and sue the third party directly.

Under the above category of agency (under the common law) the named and an unnamed principal corresponds to the direct agency of the civil law, while the undisclosed principal corresponds to the indirect agency, even though their application in commercial transactions is practically different.

Pursuant to the varied patterns, which the indirect and undisclosed agency follows, in the activities of commercial life, the practical effect resulting in the final analysis is completely different.

Hence the civil law follows the following practical application. ‘’In the case of direct agency, (commission) the commercial link between the third party and the principal (commettant) is based on two consecutive contracts. The contract between the third party and the commissioner and between the commissioner and the principal (commetant), and these two contracts is immutable’’. (F.H. Lawson, The Roman law reader, 1969, pp140)

According to the above two-contracts construction in the civil law legal system of direct agency, in principle there is no direct relation between the principal and the third party.

When we see the principle of undisclosed agency, the two –contracts construction is avoided. Accordingly, when we see the practical application of the undisclosed agency in business transactions, the concept lies as follows

‘’If the agent was duly authorized but acted in his/her own name, without disclosing the existence of the principal, the latter can nevertheless intervene and sue the third party directly. And in the case of an agent acting for an undisclosed principal, the third party has a right of election when the existence and the identity of the agent becomes known to him/her later. The third party may either to retain the agent as his/her contracting party, or to treat the principal as such.’’

Pursuant to the above concept, once the third party is aware of the existence of the a principal, a direct contractual relationship shall be established or created between the principal and a third party in which direct rights and duties accrue under that contract between the third party and the principal. Due to the one contract situation, in the Common law agency theory ‘‘no assignment or transfer of property from the agent to the principal is necessary, and as the case of normal direct agency was duly authorized, no liability falls on the agent.’’

To give a summary of the above discussion, in both the civil and common law legal systems, there exists a different approach and practical situation of the agency theory. However, there are certain principles in common. Under this common principle, if a direct agent acts for his principal within the scope of his authority, privity of contracts does exist only between the principal and a third party. Hence in this case, the agent will not be liable to the third party. In addition to this, he will not acquire rights the against the third party. Therefore, under both the civil and common law legal systems, it is admitted if a direct agent acts for the reason that he has no authority or exceeds his authority, in such a case, unless the principal ratifies the unauthorized acts of such an agent, the agent himself shall be held liable for the third party unless the principal knew or ought to have known the defect in the authority. Under such cases, the French code provides the third party with a claim for indemnity. The German law, in such cases again permits the following right.

A third party has a right of election as against the agent, and therefore, he/she can claim specific performance or damage, but if the agent was aware of his/her lack of authority he/she is only liable for the damages that the third party actually suffered in the consequences of the main contract.

Last modified on Wednesday, 02 May 2012 13:05