LEGAL VIEWPOINT: Nature of Agency

By Dr AbdelGadir Warsama, Legal Counsel

Asia 728x90

13 July 2023

Many commercial or non-commercial transactions are undertaken or performed through agency relationship by agents representing others (principals). Agency relationships are, usually, formed by contracts (agency contract), although they may be found in the absence of a contractual agreement. An agency, may be either written or oral. Herein, we refer to the “equal dignity rule”, that is to say if an agency has been formed and such agency contract must be in writing, then the agency formed must also be in writing.

The agency is either compensated or uncompensated. In fact, in many instances, Courts find that there is an agency relationship even though the parties have expressly agreed that they do not intend to create one. For example, a manufacturer may control the selling activities of a franchised retailer so closely that the retailer is treated as the agent of the manufacturer. Even statement in the franchise agreement declaring that the retailer is not an agent of the manufacturer is not binding on the Court.

An agency results from any indication of consent by the principal that the agent may act on the principal’s behalf and under his control. This can be proven not only by direct evidence between the parties but also by surrounding circumstances such as the words and conduct of the parties.

Generally, a person can do any thing through an agent that he could legally do personally. The legal effect of the agent’s action on behalf of the principal is usually the same as if the principal had done the act. For example, minors and insane persons are bound in their contracts made by their agents only to the extent that they would have been bound if they had taken the action in personThe duties of the agent to the principal are normally mentioned in the agency contract. However, even if the contract is silent there are other duties implied by law. They include, duty of loyalty, duty to obey instructions, duty to exercise care and skill, duty to communicate information and duty to account for funds and property.

The most important of the above duties, is the fiduciary duty of loyalty. A fiduciary is the one who is trusted to act in the best interests of another rather than pursuing his own interests. Very important to say that, above implied legal duties can be reduced or eliminated by contract between the concerned parties, however, the duty of loyalty can not be eliminated by the parties.

The implied duty of loyalty requires complete honesty from the agent to the principal in all dealings. Further, the duty requires either avoidance of conflict between the interests of the agent and those of the principal or full disclosure of any such conflict to the principal. If after such advance disclosure, the principal is willing to continue the agency relationship the agent is shielded from liability for breach of the duty of loyalty.

Such disclosure should include notification of all compensation that the agent expects to receive in the course of fulfilling the agency functions because the agent is not permitted to make a secret profit from the agency. Any thing of value that comes to the agent because of the agency relationship belongs to the principal. Suppose an agent was given secret gifts or kickbacks from the clients, here, the principal is entitled to get them unless he agrees to give to the agent. This is very important point, however, most agents are not doing so and normally they keep for themselves, however, as I see, this constitutes clear breach of the duty of loyalty.

Also, agents breach their duty of loyalty by buying for the principal from themselves even if they charge fair price, The duty of loyalty demands that the agent to avoid even the appearance of impropriety. Such purchases are permissible only when the agent has informed the principal in advance of the potential conflict of interest and fully discloses other pertinent facts. Moreover, the same is true in sales to the agent, and the agent is not permitted to enter into any business in competition to the principal in any sort whatsoever.

This is briefly, the duty of loyalty and it seems a very big responsibility on the shoulder of any agent. Can agents take such heavy duty as required, or we need to look for people from Mars or other planets? The answer is difficult.