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2 Creation of Agency

From: Agency: Law and Principles (3rd Edition)

Roderick Munday

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 07 June 2023

Authority of agent — Creation of agency — Nature of agency — Principal’s liabilities

(p. 41) Creation of Agency

Contractual and Gratuitous Agencies

Agency invariably arises out of an agreement between principal and agent

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

Although in modern commercial transactions agencies are almost invariably founded upon a contract between principal and agent, there is no necessity for such a contract to exist. It is sufficient if there is consent by the principal to the exercise by the agent of authority and consent by the agent to his exercising such authority on behalf of the principal.3

(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.

There are differences between contractual and non-contractual agencies

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:

The obligation is imposed by the Court simply under the circumstances of the case and on what the Court decides is just and reasonable, having regard to the relationship of the parties. It is a debt or obligation constituted by the act of the law, apart from any consent or intention of the parties or any privity of contract.6

Agency that arises as a Matter of Law

The existence of an agency is a matter of law

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)

[The parties] will be held to have consented if they have agreed to what amounts in law to such a relationship, even if they do not recognise it themselves and even if they have professed to disclaim it.8

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

An agency agreement may be implied from the circumstances

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:

While agency must ultimately derive from consent, the consent need not necessarily be to the relationship of principal and agent itself (indeed the existence of it may be denied) but it may be to a state of fact upon which the law imposes the consequences which result from agency.12

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

(p. 44) Legal Capacity of the Parties

The principal must possess the legal capacity to perform the act that the agent performs on his behalf

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):

Whenever a minor can lawfully do an act on his own behalf, so as to bind himself, he can instead appoint an agent to do it for him. Thus, if a minor can lawfully bind himself by a particular contract because it is for his benefit, he can lawfully appoint an agent to enter into it for him.15

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.)

Reliance is placed, in particular, upon a passage in Bowstead & Reynolds on Agency (19th ed, (2010) para 2-009). This argument has led the current editor of that work, Professor Peter Watts, to reconsider and disavow what is there stated. The authorities are indeed in a state of some confusion, as is amply demonstrated by A.H. Hudson at (1959) 37 Can Bar Rev 497. It would be most unwise for this court to express any opinion, one way or another, as to the present state of the law. Fortunately, the issue does not arise.19

(p. 45) In order to act on behalf of a principal, an agent must be of sound mind

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:

The donor of a power of attorney who appoints as his attorney a person incapable of understanding the import of a simple transfer can hardly be allowed, if the donee signs a transfer without any understanding of what he or she is doing, to repudiate the transfer on the ground of a lack of understanding on the part of the donee.20

Capacity, incapacity, and the burden of proof

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


An agency may normally be created without formality

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:

Any formalities required by law in the case of a contract made by an individual also apply, unless a contrary intention appears, to a contract made by or on behalf of a company.

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 writing32 As Sir Andrew Morritt, C explained, historically:

the normal law of agency applies to transactions within s 2 of the 1989 Act. By that law the authority may be conferred orally as well as in writing.33

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:

The existence of the contract is a necessary precondition for an order of specific performance, but it is not itself and without more a disposition of the land, the subject-matter of the contract, or of an interest in it.34

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:

those strict technical rules of law applicable to deeds under seal, which, I believe, are peculiar to the law of England … have been laid down and recognised in so many (p. 48) cases, that I think we are bound to say no action can be maintained by [B]‌ upon the deed in question.36

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:

An instrument creating a power of attorney shall be executed as a deed by the donor of the power.37


1  Agreement, of a sort, may also occur retrospectively if a ‘principal’ on whose behalf an agent has purportedly acted subsequently ratifies the unauthorized acts of his agent: see further, chapter 6.

2  [1995] QB 174.

3  Ibid at 185.

6  [1937] 1 KB 534, 545. See further, paras 9.41–9.51.

7  Just as the courts will not treat a term of the contract as a ‘condition’ merely because the parties have chosen to use that term in their agreement: see Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235.

8  [1968] AC 1130, 1137 (emphasis added).

9  Ibid at 1137.

10  [2004] 1 Lloyd’s Rep 721.

11  Ibid at [21].

12  Branwhite v Worcester Works Finance Ltd [1969] 1 AC 552, 587 (dissenting).

13  N’s ‘silence and conduct is equally, if not more, consistent with ignorance of or indifference to the precise terms of the towage contract, and fulfilment of the charter-party terms’: [2004] 1 Lloyd’s Rep 721 at [26].

14  [2004] 1 Lloyd’s Rep 721 at [31].

15  [1970] 2 QB 643, 652.

16  [2014] 1 WLR 933.

17  Yonge v Toynbee [1910] 1 KB 215.

18  [1892] 1 QB 599.

19  [2014] 1 WLR 933 at [31] per Lady Hale. On this topic, see Watts, Contracts made by Agents on Behalf of Principals with Latent Mental Incapacity: The Common Law Position [2015] CLJ 140. The author argues that, generally speaking, such a principal ought to be able to confer actual authority to contract on an agent so long as the latter reasonably is, and remains, unaware of the principal’s incapacity. On the same basis, an incapax principal can tell a third party that such an appointment has been made, thereby creating apparent authority in the agent.

20  [1993] Ch 116, 128.

21  Chitty on Contracts (2015, 32nd ed), vol 1, para 9-001.

22  [2015] Bus LR D5.

23  York Corp v Henry Leetham & Sons [1924] 1 Ch 557, 573.

24  Joseph Constantine SS Ltd v Imperial Smelting Corp Ltd [1942] AC 154, 174 per Viscount Maugham.

25  See Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549, 593 per Lord Pearson.

26  See Governor and Company of the Copper Miners of England v Fox (1851) 16 QB 229, 235 per Lord Campbell, CJ. See [2015] Bus LR D5 esp at [185]–[187].

27  (1869) LR 4 Ch App 548.

28  Law of Property Act 1925, ss 53(1)(a) and (c), and 54(1).

29  This provision was substituted by the Trustee Delegation Act 1999, s 5(1).

30  [2010] Ch 1.

31  Section 2 of the 1989 Act, so far as relevant provides:

  1. (1)  A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each.

  2. (3)  The document incorporating the terms … must be signed by or on behalf of each party to the contract.

32  Law of Property Act 1925, s 53(1)(a) (emphasis supplied).

33  [2010] Ch 1 at [24].

34  Ibid at [26].

35  ‘It is well-known law that an agent cannot execute a deed, or do any part of the execution which makes it a deed, unless he is appointed under seal’: Powell v London and Provincial Bank [1893] 2 Ch 555, 563 per Bowen, LJ. This is subject to the Law of Property (Miscellaneous Provisions) Act 1989, s 1(3).

36  (1826) 5 B&C 355, 359.

37  As Lewison, J observed, ‘At common law a power of attorney is an agency created by deed’: In re J (Enduring Power of Attorney) [2010] 1 WLR 210 at [4]‌. Section 1(1) has to be read subject to s 1(3).