Agency is a foundational concept in commercial law, that enables businesses to deploy third parties to act on their behalf. However, it also can creep up as a potential burden, given agency can be implied without the express consent of both parties.

Have I unknowingly created a relationship of agency?

Definition: An agency relationship arises when one party, the agent, is authorised to act on behalf of another, the principal, in dealings with third parties.

Usually, this relationship is formed through clear consent, often in the form of a written or verbal agreement. However, consent doesn’t always need to be explicitly stated. Courts can imply consent based on the behaviour and circumstances of the parties involved.

Example: Let’s say you hire someone as a sales manager at your car dealership. They begin offering discounts to customers, even though you never directly gave them permission to do so. If you become aware of this and do nothing to stop it, your inaction may be interpreted as approval.

Over time, if this behaviour continues unchecked, a court could conclude that you’ve accepted their conduct. So, if that manager later sells a car at a discount and you try to back out of the deal, the court might decide otherwise. Given your prior silence, the manager’s role, and the customer’s reasonable belief that the manager had authority, a court may find that an agency relationship exists and you would likely be bound by the deal.

How Can an Agency Relationship Be Formed?

Agency can arise in several ways:

· Express Agreement: Clearly stated in writing or verbally.

· Implied Agreement: Inferred from the conduct or established course of dealings.

· By Ratification: When the principal later approves actions taken without prior consent.

· By Necessity: In emergency situations where acting without authority is required to prevent loss or harm.

· By Estoppel: When a principal’s behaviour leads a third party to reasonably believe that someone is acting with authority.

If you don’t clearly define the nature and limits of someone’s authority, especially in writing, you risk unintentionally creating a binding agency relationship. This is why it’s essential to set clear terms in your contracts and to promptly address any unauthorised actions.

No Agency, Partnership or Joint Venture Clause

It is standard practice for commercial agreements to include a “No Agency” clause. This clause expressly states that no agency, nor other types of legal relationships – partnership, or joint venture relationship, is intended or created between the parties. Its purpose is to preserve the parties’ intended legal relationship and to provide a safeguard against unintended obligations.

However, it’s important to understand that courts may look beyond the written clause. If your conduct suggests a relationship consistent with agency – such as allowing someone to act or speak on your behalf, then a court may imply an agency relationship, despite what the contract says.

To avoid this, it’s crucial to understand how agency can arise and to ensure your actions consistently reflect the terms of your agreement.

When Agency is Useful

Agency relationships are often used when it’s impractical or impossible for the principal to carry out certain tasks themselves. This can be due to time, location, cost, or expertise. Here are some common reasons why agency might be the right approach:

· Low-cost business expansion. The appointment of a business agent may allow the principal to expand its business, without making a significant further investment.

· Anonymity. The agency arrangements may be of a type that allows the principal to remain anonymous e.g. purchasing property.

· Foreign expertise. Where a business makes a cross-border appointment, it may do so because it is simply not close enough to the foreign territory, or because it lacks sufficient expertise and experience to operate its business in the foreign territory, or because local laws forbid it from doing business in the foreign territory without the involvement of a local national.

In each of these scenarios, setting up a clear agency agreement is essential. It helps define roles, manage expectations, and limit risks – particularly where the agent’s actions could legally bind the principal.

We’ll explore these risks and how to manage them effectively in part 2 of this agency series.

Berry Smith Comments

It is essential for businesses to understand how agency relationships can be formed, especially through implied conduct. Unintentional agency arrangements may expose you to legal obligations you didn’t expect. At Berry Smith, we advise clients to clearly.

define roles and authority in all contracts, and to remain vigilant in their dealings with third parties to ensure they are fully aware of and protected against, all potential risks.