Fiduciary duties and authority in agency law

ASHLEY MABHIGINYE AND FUNGAI CHIMWAMUROMBE

Agency is one of the most practical areas of contract law because almost all business is done through other people.

The basic idea is simple and is captured by the old Latin maxim qui facit per alium facit per se, which means “he who acts through another acts himself”.

In other words, when an agent acts for a principal, the law treats it as if the principal acted personally. But for this to work, we must understand how agency comes into existence, how it ends, what each party owes the other, and who is liable when things go wrong.

Agency can come into existence in several ways. The most obvious is by express agreement.

This can be in writing, verbally, or by a formal document such as a Power of Attorney.

Here the principal clearly tells the agent what authority he has. However, not all agency is so formal. Sometimes agency is implied from the conduct of the parties. If a person consistently allows another to act for him and accepts the benefits, the law will imply that an agency relationship exists.

the law also creates agency by operation of law in special situations. One example is agency of necessity.

This arises in an emergency where an agent cannot get instructions from the principal but must act to protect the principal’s property.

The classic illustration is Lapraik v Burrows. In that case a ship’s captain found his vessel was unseaworthy and in danger of sinking with the cargo on board. He could not contact the owners, so he sold the ship to prevent a total loss.

The court held that he was an agent of necessity and his sale was valid because he acted in good faith to protect the owner’s interest.

Agency can also be created by ratification. This happens when a person acts without authority, but the principal later approves what was done.

Ratification works backwards, as if authority existed from the beginning. For example, if Tapiwa buys goods on credit for Nhamo without permission on 10th January, and on 20th January Nhamo tells the supplier that he will pay, that is ratification. But ratification is only valid if four conditions are met.

First, the agent must have purported to act for the principal at the time, so the third party knew there was a principal involved. Second, the principal must have full knowledge of the material facts. Third, ratification must happen within a reasonable time. Fourth, you cannot ratify an illegal act such as forgery.

A further basis is agency by estoppel.

This is based on fairness and representation. If a principal, by his words or conduct, represents to the public that a person is his agent, and a third party relies on that representation to his detriment, the principal will be prevented from denying the agency.

In Zimbabwe, the key issue is whether the principal made a representation and whether the third party actually relied on it. Mere internal authority is not enough. There must be something said or done that would lead a reasonable person to believe an agency existed.

An agency relationship can come to an end in two broad ways. First, it can end by operation of law. This occurs automatically upon the death of either the principal or the agent, upon the mental incapacity of either party, or upon the bankruptcy of either party.

It also ends if the subject matter of the agency becomes illegal or impossible to perform. For example, if an agent is appointed to sell specific goods and those goods are destroyed by fire, the agency ends.

Second, agency can end by agreement. The parties may mutually agree to terminate. The purpose of the agency may be completed. The principal may revoke the agent’s authority.

Or the principal may dismiss the agent for breach of duty. Where the agency is for a fixed term or for a particular transaction, it ends when that term expires or that transaction is completed.

Zimbabwean law classifies agents according to their function. A mercantile agent has general authority to buy, sell, or raise money on the security of goods. A factor is a mercantile agent who has been given possession of the goods and therefore has wider powers, including the power to sell in his own name and to pledge the goods. A commission agent buys and sells in his own name for a commission but does not usually have possession of the goods.

A del credere agent is a commission agent who, for additional remuneration, guarantees that the third party will perform the contract. If the buyer does not pay, the del credere agent must pay the principal. A broker is different. A broker’s only job is to bring buyer and seller together. He does not take possession of goods and earns a brokerage fee when a deal is concluded.

Once agency exists, the agent owes the principal strict fiduciary duties. The first duty is to follow the principal’s instructions. An agent who departs from instructions will be liable for any loss that results. The second duty is to exercise reasonable care, skill, and diligence.

The standard expected is higher for a paid professional agent than for someone acting without reward. An agent must not be negligent and must seek to obtain the best possible result for the principal within the scope of authority.

The third duty is that an agent must perform the task personally and must not delegate discretionary functions without the principal’s consent. The reason is that the principal chose that particular agent for his skill and judgment.

The fourth duty is the duty to avoid conflict of interest and not to make secret profits. Any benefit or profit that an agent obtains in the course of the agency must be disclosed and accounted for to the principal.

An agent cannot use his position to make a private gain at the principal’s expense. The fifth duty is to keep the principal’s information confidential. Information acquired during the agency must not be disclosed to outsiders or used for the agent’s own benefit.

This duty continues even after the agency ends. The sixth duty is to keep proper accounts. The agent must keep the principal’s money and property separate from his own and must be ready to account at any time.

The principal also has duties to the agent. Unless the contract excludes them, the principal must pay the agreed remuneration.

If no amount was agreed, the principal must pay a reasonable amount based on trade usage.

The principal must indemnify the agent against all liabilities and expenses that the agent properly incurs in carrying out the agency. Finally, the agent has a right of lien. This means the agent may retain goods or documents belonging to the principal that are in the agent’s possession until the principal pays what is owed.

Regarding liability to third parties, the general rule in Zimbabwe is that where an agent discloses that he is acting as an agent and names the principal, the contract is between the third party and the principal.

The agent drops out and is not personally liable. However, there are important exceptions. An agent is personally liable if he contracts in his own name without disclosing that he is an agent.

An agent is also personally liable if he contracts on behalf of a principal who does not yet exist, such as promoters contracting before a company is registered. In addition, an agent who signs negotiable instruments like cheques or bills of exchange without indicating that he signs as agent may be personally liable.

Zimbabwean law also recognizes the doctrine of the undisclosed principal.

Where an agent contracts without disclosing the existence of a principal, the principal may later intervene and enforce the contract, provided the agent had actual authority.

At the same time, the third party may hold either the agent or the principal liable, but not both. Finally, if a person acts as an agent without authority, he is liable to the third party for breach of warranty of authority.

The third party is entitled to be put in the position he would have been in if the agent had had authority.

In summary, agency law in Zimbabwe seeks to balance the interests of the principal, the agent, and third parties. It provides flexible ways for agency to be created, clear rules for how it ends, and strict fiduciary duties to protect the principal, while also protecting outsiders who deal with agents in good faith.