2.01  The agreement between a principal and his agent may be either express or implied.¹ The great majority of agency agreements will in fact be contractual. Yet, even in the commercial setting, this is not exclusively the case. As Colman, J pointed out in Yasuda Fire & Marine Insurance Co of Europe Ltd v Orion Marine Insurance Underwriting Agency Ltd:²

(p. 42) For this reason, Colman, J held that non-contractual duties borne by an agent, such as the fiduciary duty to account to the principal,⁴ may continue to bind the agent even after the agency contract has been terminated or bind even if the agency is gratuitous ab initio. What is required, however, is that the parties should have consented to the agency.

2.02  In the case of contractual agencies, (i) consideration must be present, and (ii) the agent will be under an enforceable obligation to do what he has promised and, in likelihood, the principal will be under an accompanying obligation to pay the agent remuneration. This is not to say, however, that gratuitous agents have no rights and obligations. As we shall see, gratuitous agents may incur liability for faulty performance of their agency.⁵ Equally, they may possess rights against their principals, notably the right to be indemnified for losses and expenses incurred in the course of their agency. The right to an indemnity is a normal incident of agency and exists independently of any contract between principal and agent. As Lord Wright, MR explained in Brook’s Wharf and Bull Wharf Ltd v Goodman Bros:

2.03  If the parties have entered into a contract, the terms of the contract will govern their relationship. However, the fact that the parties have described themselves as ‘principal’ and ‘agent’ in that contract does not necessarily mean that the court will treat them as principal and agent if this is not the reality of their relationship.⁷ Similarly, the parties’ omission to use these terms will not preclude a court from holding that in law they are in fact principal and agent. As Lord Pearson emphasized in Garnac Grain Company Inc v HMF Faure & Fairclough Ltd:(p. 43)

2.04  In Garnac Grain Lord Pearson considered what evidence a court might look at in order to determine whether the parties could be taken to have consented to an agency. In the main, it will be a matter of looking to what the parties have said and done at the time of the alleged creation of the agency. Earlier words and conduct can afford evidence of a course of dealing in existence at the relevant time. They also furnish an historical background. The parties’ subsequent words and conduct may have a bearing on the question, too, although these are likely to be of less significance.⁹

2.05  A two-man Court of Appeal, in Targe Towing Ltd v Marine Blast Ltd,¹⁰ considered the appropriate test for determining whether an agency agreement had arisen by implication. Adopting Bowstead’s analysis, Mance, LJ accepted that the correct approach is to imply an agreement only ‘where one party has conducted himself towards another in such a way that it is reasonable for that other to infer from that conduct consent to the agency relationship.’¹¹ This principle applies to both contractual and non-contractual agencies. Mance, LJ quoted verbatim, with approval, Lord Wilberforce’s comment that:

In Targe Towing itself the Court had to decide whether N was, by implication, a party to a towage contract. It analysed the terms of the relevant charterparty, and examined the external, objective circumstances—notably, communications that had passed between the parties and their respective conduct—and emphasized that, in the absence of other indications, no inference of an agency having been agreed could be drawn from N’s silence in response to the offer of a towage contract.¹³ The Court concluded that the circumstances ‘simply [did] not support a conclusion that N ever or in any way consented to the creation of an agency relationship, or consented to MB making all or any part of the towage contract with T on its behalf.’¹⁴

2.06  Broadly speaking, whatever a party may himself do, he may do through the intermediary of an agent. The key element, therefore, is the capacity of the principal. For this reason a person of full capacity can appoint as his agent a minor who would not himself be capable of performing the mandate. By the same token, a minor can appoint an agent to perform an act for him, provided that the minor himself could have performed that act. As Lord Denning, MR explained in G(A) v G(T):

2.07  More generally, it might be thought that a principal who lacks capacity cannot create an agency. In the Supreme Court in Dunhill v Burgin (Nos 1 and 2),¹⁶ in which the point was raised, Lady Hale alluded to, but declined to treat, the argument that since intervening incapacity automatically terminates an agency, whether or not known to the agent,¹⁷ then logically a contract of agency cannot be created if the principal is incapable. Were this argument to be accepted, the rule in Imperial Loan Co Ltd v Stone,¹⁸ to the effect that a contract made by someone who lacked capacity is not void, but can be avoided provided that the other party to the contract knew (or ought to have known) of the incapacity, does not apply to a contract made by an agent on behalf of a principal who lacks capacity. (Similarly, apparent authority cannot apply if the principal lacked capacity at the time of making the initial representation as to the agent's authority, again regardless of whether the other party knew of this.)

2.08  Since the focus is placed upon the capacity of the principal, it is agreed that an agent need not have capacity to perform the acts that he performs on his principal’s behalf and that, generally speaking, the basic requirement that the agent needs to fulfil is to be of sound mind. Thus, minors and those who lack contractual capacity may act as agents. In Norwich and Peterborough Building Society v Steed Scott, LJ invoked this principle in a case where the donor of a power of attorney sought to escape the consequences of having appointed as his donee his mother, who may have lacked ordinary competence and capacity when she was tricked into transferring his house to his sister and her husband:

2.09  On the other hand, as we shall see, it is open to an agent to contract in such a manner as to acquire rights and to engage his personal liability, alongside that of the principal, on the contract he has concluded on the principal’s behalf. If the agent lacks capacity to contract on his own behalf, ex hypothesi he cannot acquire rights or incur personal liability on such contracts.

2.10  In the case of natural persons, the law presumes prima facie that everyone enjoys the capacity to contract. For this reason, the burden of establishing lack of capacity will fall upon the party who claims it: ‘where exemption from liability to fulfil an obligation is claimed by reason of want of capacity, this fact must be strictly established on the part of the person who claims the exemption.’²¹ The position, however, is altered where the question is whether a transaction or other act is within the objects of a legal person. As Andrew Smith, J noted in Crédit Suisse International v Stichting Vestia Groep,²² whereas a contract is generally voidable at common law if it is made by a natural person without capacity, ‘at common law, if a corporation purports to make a contract that is outside its capacity, it is void ab initio, and cannot be ratified.’²³ Viewed as no more than the application of the maxim ei qui affirmat non ei qui negat incumbit probatio, in cases involving the capacity of legal persons the (p. 46) onus of proof will rest upon the party asserting the positive case.²⁴ Such an approach is said to be in line with the position where an agent's authority is challenged²⁵ and, additionally, tallies with the old rules of pleading.²⁶

2.11  Subject to certain limited exceptions, even if an agent is to perform an act on behalf of a principal that is required by law to be in writing or evidenced by writing, there is no requirement that the agency itself must have been created in any particular manner. Notably, appointments of agents by corporations follow precisely the same rules as apply to individuals. Thus, s 43(2) of the Companies Act 2006 provides:

An agency, therefore, may be created by deed, by writing, or orally; it is entirely as the parties wish. In Heard v Pilley,²⁷ for example, it was held that a contract for the purchase of land made on behalf of a principal by an agent would be enforced even though the agent had been appointed orally. The agent’s attempt in this case to take the personal benefit of the principal’s contract therefore failed.

2.12  There are two important statutory exceptions to the general principle of informality. Under the Law of Property Act 1925 interests in land may be created or disposed of by an agent, and dispositions of equitable interests may be effected by an agent, only if that agent has been authorized to do so in writing.²⁸ Under the Trustee Act 1925, s 25, a trustee wishing to delegate the execution or exercise of all or any of the trusts, powers and discretions vested in him may only do so by executing a power of attorney.²⁹

2.13  Regarding real property, the creation and disposal of interests has to be distinguished from contracts to sell or dispose of real property, which are governed by s 2 of the Law of Property (Miscellaneous Provisions) Act 1989. The need for a written appointment in the case of transactions involving the creation and disposal of interests in real property was considered in McLaughlin v Duffill.³⁰ The (p. 47) trial judge having found that the vendor had orally authorized her estate agent to sell her house, the Court of Appeal determined that there is nothing in s 2(1) and (3) of the Law of Property (Miscellaneous Provisions) Act 1989 to suggest that the authority to conclude a contract for the sale or other disposition of an interest in land, which ‘can only be made in writing’, can only be performed by an agent if the latter’s authority, too, is conferred in writing.³¹ Contracts for the disposition of an interest in land under the 1989 Act have to be distinguished from actual dispositions of interests in land under s 53(1)(a) of the Law of Property Act 1925. The 1925 Act specifically stipulates that ‘no interest in land can be created or disposed of except by writing signed by the person creating or conveying the same, or by his agent thereunto lawfully authorised in writing …³² As Sir Andrew Morritt, C explained, historically:

Whilst for most practical purposes such a contract, coupled with an order for specific performance, may resemble a conveyance in that it confers on the purchaser an immediate equitable interest in the property and effectively functions as a disposition of an interest in land, which would be governed by s 53(1)(a) of the 1925 Act, Sir Andrew Morritt, C stressed:

2.14  It is also well established that if an agent is required to execute a deed on behalf of his principal, the agent’s authority must also have been conferred by deed.³⁵ As Abbot, CJ remarked in Berkeley v Hardy, a case in which the agent’s authority had been granted in a writing not under seal:

If an agent is appointed by deed, in likelihood the agency will have been created by execution of a power of attorney. Section 1(1) of the Powers of Attorney Act 1971, as amended, provides: