Principal – agency relationship:Things to know

June 10, 2021

FUNGAI CHIMWAMUROMBE /

EBENEZER NOBELA

An agency relationship is a contractual agreement that confers a wide range of rights, duties and liabilities towards the principal.

The above performances are between the principal and the agent in the course of trade with a third party.

The following discussion explores the risks and benefits that face principals where they contemplate to enter into agreements of agency.

Parties

The term principal refers to a proprietor who appoints another person with instructions to act as their representative in transacting with third parties. An agent is a person hired by the principal to conduct business with third parties on their behalf. The agent must therefore act within the scope of the agreement so as to be indemnified from any liability.

Creation of agency

An agency relationship can be created by either actual authority (express, implied) or apparent authority. Actual authority is normally given by a verbal instruction or in writing. Apparent authority on the other hand refers to authority conferred on an agent by force of law to protect innocent third parties who rely on the impression created by the principal that appropriate authority has been conferred on an agent. Such authority may be created through the principal’s silence when a person holds themselves out to third parties as being the principal’s agent. It is also known as ostensible authority.

Benefits for the principal

Firstly, the fact that a principal can have their business interests advanced by their agent in a totally different location is very beneficial in today’s global economy. It can be cost effective when one is engaged in transnational dealings or for those in dynamic business sectors. Moreover, agency can be utilised by the principal when enlisting the services of persons with a better acumen within a particular sphere, for example a real estate agent, or where the principal needs more specialised services as those of a legal practitioner or a stock broker.

The primary benefit accruing to the principal from an agency agreement is the agent’s duty to perform services per the principal’s instruction. This means that the agent must undertake his contractual obligations as prescribed by the principal in dealing with a third party. Such duties incumbent on the agent is akin to those of company directors, such as the duty of care and the duty of loyalty. The courts have decided in many cases that where an agent fails to execute their duties in the manner prescribed by the principal, they can be held liable. In view of this, it is important for an agent to act out in accordance to the instruction of the principal.

Acting within the ambit of the principal’s instruction will help the agent to be indemnified from liability where things go wrong. The principal enjoys the right to be obeyed by the agent in conducting the services of the agency relationship.

A principal also benefits from the agent’s duty to execute tasks in utmost good faith and due diligence. This means that the agent must be selfless in the conduct of business on behalf of the principal such that he is not acting out in malice or to the prejudice of the principal. The principal equally enjoys the right to have all services rendered in good faith and is entitled to full disclosure of all information essential to the conclusion of the transaction.

Additionally, the agent’s duty to keep proper books of accounts for any service rendered is beneficial in safeguarding the principal’s interests. The duty of the agent accrues to the principal as a right to have all transactions made in the course of agency well accounted for.

The agent is also dutybound to ensure that he personally undertakes and completes fully the transactions arising from the agency relationship. This means that the agent should not delegate an assignment which he has been given by the principal. This duty translates into a right of the principal to have all transactions assigned to the agent performed personally and without interference by a third party. This means an agent cannot further delegate duties incumbent upon him in respect of the agency.

Duties of the principal

The principal equally has a duty to pay the agent for services rendered according to the agency agreement. In most established commercial situations like lawyers, brokers and real estate agents, the remuneration will depend on the fees and commissions charged in the particular profession. Similarly, the duty of the principal to remunerate the agent translates into the agent’s right to receive adequate remuneration for services rendered.

The principal has an additional duty to indemnify the agent from any liability that arises in the course of the transaction that the latter carries out for the former. This duty is meant to protect the agent from any form of prejudice that may be associated with carrying out work operations for the principal. It is also to ensure on part of the principal that the agent is exempted from liability only when he acts out within the scope of the agency agreement itself.

This duty operates as a safeguard for the agent from liability by according the right to indemnification from liability for any adverse consequences that may arise in the course of work.

Risks to the principal

The principal is personally liable for any wrong perpetrated by an agent if the principal authorised the agent to do the wrongful act. This is also the case if the act was within the scope of the agent’s employment. Under these circumstances, the principal is held vicariously liable for any misadventures of the agent.

Where the agent breaches a contract entered into with a third party, the principal can be held liable for any such breach. For example, where there is a material defect in property being sold to a third party which the agent has not disclosed, the principal can be held liable and successfully sued for damages. The principal is also liable to a third party for non-performance of an obligation to a third party. 

It is equally important for a principal to lookout for the dangers of conferring apparent authority on an agent. This may occur inadvertently without the intention of the principal and the liability in this regard accrues on the grounds that the principal was quiet when a purported agent was holding himself out to the public as their duly appointed agent. The principal in these cases becomes liable for any prejudice or wrongs by the purported agent to third parties because of the belief that the latter was acting for the former in transacting business.

In view of the above, it is important to note that while an agency relationship confers numerous benefits to the principal, it is significant for principals to ensure that they monitor the manner in which agents conduct themselves when transacting the principal’s business.

This will indemnify principals from liability where the agent acts outside the scope of the agency. It is also good practise for a principal to seek legal advice before entering into an agreement of agency so as to be aware of the potential dangers and come up with legal measures to minimise risk of liability.

Fungai Chimwamurombe is a registered legal practitioner and Senior Partner at Chimwamurombe Legal Practice and can be contacted for feedback at fungai@zenaslegalpractice.com and WhatsApp 0772 997 889.Ebenezer Nobela is a Legal Intern at Zenas Legal Practice. Email address nobelaebenezer@gmail.com

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