Agency is a legal relationship that takes a variety of forms and is common to transactions in business and commerce. At the centre of the agency relationship is a contract between the principal and the agent, by which the agent is authorised to act and undertake tasks on behalf of the principal. Agency is a common feature of commercial activity because it allows parties to engage others to represent them and negotiate on their behalf.

An agency relationship may be distinguished from, and compared with, employment and independent contractor relationships. Agents are also commonly compared with, and distinguished from, trustees.

The authority with which an agent acts on behalf of the principal will determine the extent of the principal’s liability to the third party. In general, a principal will be bound only to the acts done by the agent within the scope of their authority. Authority may be actual (whether express or implied) or apparent (arising where the principal’s acts or words lead a third party to believe that a person has authority to act on their behalf).

See Nature of agency.

Agents may generally be classified as universal, general or special, depending on the nature of the agency and the extent of the authority with which they have been imbued.

Agencies may be created in a number of ways, which will often determine the type of agency that has been created. An agency may be created expressly by principal and agent, and in some cases the creation must be evidenced in writing by statute. Special provisions exist where the agent is to be authorised to execute deeds on behalf of the principal. An agency may be created by implication on the facts and circumstances of the case. An agency may also arise by estoppel, or where the principal holds out that a person is their agent. Another way in which an agency may arise is by operation of law, such as where it is created through emergency or necessity to protect the principal’s interest. It is also possible for an agency to be created by the subsequent ratification of the agent’s acts by the principal.

There are types of agencies that are common in commercial contexts, and each may have its own specific requirements. The agencies that are considered are auctioneers, real estate agents, mercantile agents, del credere agents, brokers and members of a partnership.

See Types of agency.

The duties that agents owe to principals arise from the contractual nature of the relationship as well as the fiduciary obligations that are implicit in the confidence and trust that the principal is entitled to have in the agent. Most of the principles have arisen from the common law, although many have been supplemented by statutory provisions that are particular to the type of agency involved.

The main duties of agents that are considered specifically are duties that mandate that agents must:

• follow the principal’s instructions;

• act in person;

• exercise due care, skill and diligence;

• act in good faith;

• maintain confidentiality; and

• keep separate accounts.

They also must not:

• receive secret commissions; or

• make secret profits.

See Agent duties.

There are a number of recognised common law rights that agents may exercise against their principals, in addition to any rights that emanate from the contractual nature of the agency relationship. The rights must also be considered in light of specific statutory provisions that govern the work that agents do in the relevant jurisdictions. The main rights that agents are entitled to exercise and that are considered specifically are agents’ rights:

• to remuneration;

• to reimbursement and indemnity;

• of lien; and

• to stop goods in transit.

See Agent rights.

The nature of the agency relationship is such that liabilities may arise for both agent and principal in relation to third parties.

As a general rule, the agent will generally not incur contractual liability where a contract is validly formed between the principal and a third party. However, agents may, in some cases, be liable in contract to a third party who enters into a contract with the agent’s principal. The agent may be liable to the principal where the agent has breached the terms of the agency agreement or has acted negligently. The agent may also be liable to the third party in a number of situations, some of which may depend on whether the agent has disclosed the existence of the principal to the third party.

Where an agent breaches the contractual agency arrangement, the principal may take legal action against the agent.

In addition to the above liabilities, an agent may be liable for their tortious acts (such as negligence) if they fail to act within the scope of their actual (whether express or implied) or apparent authority.

See Liabilities of agent and principal.

The agency contract between principal and agent may be terminated by agreement, revocation or operation of law. In all cases, steps should be taken by the principal to notify third parties of the termination of agency.

The parties to an agency relationship may terminate it by mutual agreement. Furthermore, both the principal and agent may take unilateral steps to terminate the agency relationship, although in such cases care must be taken to assume and, in some cases, avoid liability for the revocation. Subject to precautionary steps that should be considered, an agent may revoke the agreement to serve the principal and the principal may also revoke the authority that had been granted to the agent without the consent of the agent.

In some cases, an agency agreement will be terminated by operation of law because it can no longer function for reasons that are commonly outside the control of the parties. This may be in cases involving the death of a party, frustration of contract, bankruptcy or insanity.

Finally, the principal and agent may need to take certain steps upon the termination of the agency to avoid incurring further liability to third parties. Most of the steps involve the giving of due notice to relevant parties.

See Termination of agency.