Agency in Business Transactions

Business Law and Practice > Agency in Business Transactions

Your MD orders £350,000 of equipment. The board capped her authority at £200,000. The supplier has no idea—and has dealt with her before. Is the company locked in? Get this wrong in SQE1, and you'll lose marks on apparent authority every time. This guide dissects actual authority, apparent authority, ratification, and agent liability with the precision examiners demand.

What is Agency in Business Transactions in SQE1?

An agency relationship exists when one person (the agent) is authorized to act on behalf of another (the principal) in dealings with third parties. Understanding the scope of an agent's authority is crucial because the principal is bound by the agent's acts within their authority. For SQE1, you need to master the different types of authority, how apparent authority arises, ratification principles, and when agents are personally liable.

Key Principles for SQE1

• Actual Authority - Express: An agent has express authority when the principal explicitly grants the authority to the agent. This is authority actually conferred by the principal. The authority can be oral or written.

• Actual Authority - Implied: An agent has implied authority to do things reasonably incidental or necessary to exercise their express authority. In Hely-Hutchinson v Brayhead Ltd [1968], the court found implied authority where the agent's role and practice made it reasonable to infer the authority. Implied authority is fact-dependent. Understanding the scope of authority is especially important for Company Management and Decision-Making.

• Apparent (Ostensible) Authority: An agent has apparent authority when the principal represents to a third party (by words or conduct) that the agent has authority, even though the agent does not actually have that authority. The third party relies on the representation and alters their position.

• Freeman & Lockyer v Buckhurst Park Properties [1964] Test: Apparent authority requires: (1) a representation by the principal (not the agent) that the agent has authority; (2) the third party relies on the representation; and (3) the third party alters their position in reliance. The representation is often inferred from the agent's position or previous dealings.

• Ratification: The principal can retrospectively adopt an act done by an agent who lacked authority at the time. Ratification is a form of consent made after the fact. For ratification to be valid: the principal must have existed at the time the agent purported to act; the agent must have purported to act for the principal (not for themselves); and the act must not be void (though voidable acts can be ratified).

• Undisclosed Principal: An agent may act without disclosing the principal's identity. Once the principal is revealed, the principal can intervene and take the benefit of the contract. However, the undisclosed principal is subject to certain limitations (e.g., if the third party insists on credit to the agent personally). In partnership contexts, see Partnerships and LLP Regulation for how partners act as agents of the firm.

• Agent's Duties: An agent owes duties to the principal: to act within the scope of authority; to exercise reasonable care and skill; to account for money received on behalf of the principal; to avoid conflicts of interest; and to act in good faith. Breach of these duties may lead to liability and termination of the agency. For company directors acting as agents, see Directors' Duties and Liabilities.

• Agent Liability - Disclosed Principal: If the principal is disclosed (or ratified), the agent is generally not liable on the contract. The contract is between the principal and the third party. The agent is only liable if they exceed their authority or if they guarantee the principal's performance.

• Agent Liability - Undisclosed Principal: If the principal is undisclosed, the agent is liable on the contract (the third party contracted with the agent, not knowing the principal). Once the principal is disclosed and intervenes, the third party can pursue either the agent or the principal (but not both to recover twice).

• Agent Liability - Breach of Authority: If an agent enters into a contract without authority (actual, implied, or apparent), the agent may be liable to the third party for breach of warranty of authority. The third party can sue the agent for damages (typically the difference between what was contracted and what was actually received).

• Authority Does Not Exist: If an agent acts without any authority and the principal does not ratify, neither the principal nor the agent may be bound. The third party's remedy is against the agent for breach of warranty of authority.

Exam tip

Examiners love testing the Freeman & Lockyer test in multi-part scenarios. Always check all three elements—representation, reliance, and alteration of position—and explain why each is or isn't satisfied on the facts. Partial application costs marks.

Quick Summary

• Actual authority: express (explicitly granted) and implied (reasonably incidental to express authority)
• Apparent authority: principal represents (by words or conduct) that agent has authority; third party relies; Freeman & Lockyer test applies (all three elements required)
• Freeman & Lockyer [1964] test: (1) principal's representation; (2) third party reliance; (3) third party alters position
• Ratification: principal can adopt agent's unauthorized acts if principal existed when agent acted, agent purported to act for principal, and act not void
• Undisclosed principal: agent is liable on contract until principal is revealed; third party can then pursue either agent or principal (not both for double recovery)
• Breach of warranty of authority: agent liable to third party if agent lacked authority; this is the third party's remedy when principal doesn't ratify

How This Appears in SQE1 Questions

Scenario: A company's MD has express authority to bind the company to contracts up to £200,000. The supplier knows this from previous dealings. The MD orders £350,000 of equipment and neither the board resolution nor the supplier's standard terms disclose the limit. Is the company bound?

You'll encounter scenarios asking you to:

• Identify the type of authority: Did the principal expressly authorize the agent? Are there facts suggesting implied authority (Hely-Hutchinson test: position, practice, necessity)? Does the principal's conduct suggest apparent authority (Freeman & Lockyer test)?

• Apply the Freeman & Lockyer test: Is there a representation by the principal (not the agent)? Does the third party rely on it? Does the third party alter position? All three must be satisfied—this is where students lose marks.

• Determine whether the principal is bound: If the agent acted within authority (actual or apparent), the principal is bound and cannot escape the contract. If the agent exceeded authority, the principal is not bound unless ratification applies.

• Address undisclosed principal: Is the principal disclosed? If undisclosed, the agent is liable. Once disclosed, can the principal intervene?

• Advise on breach of warranty of authority: The agent may be liable to the third party for breach of warranty if the agent did not have authority. This is an alternative remedy for the third party. For related issues on company authority limits, see Company Formation and Constitution.

Common Mistakes Students Make

• Confusing actual authority with apparent authority: Actual authority is granted by the principal (express or implied). Apparent authority does not require actual authority—it requires a representation by the principal that the agent has authority. They are distinct concepts.

• Forgetting that apparent authority requires a principal's representation: Students assume apparent authority arises from the agent's conduct or position alone. Wrong—the principal must represent the authority. An agent cannot create their own apparent authority.

• Applying Freeman & Lockyer incompletely: Students check whether the principal represented authority but forget to check whether the third party relied and altered position. All three elements are essential.

• Assuming ratification is always available: Ratification requires the principal to have existed when the agent acted, and the agent to have purported to act for the principal. If the agent acted for themselves or the principal did not exist, ratification is not available.

• Overlooking the undisclosed principal limitation: If the third party insisted on credit to the agent personally (not the principal), the undisclosed principal may not be able to intervene. This is a qualification to the undisclosed principal rule.

• Missing breach of warranty of authority: If the agent lacked authority and the principal does not ratify, the third party's remedy is against the agent for breach of warranty of authority. This is a key exit route for the third party.

• Confusing agent liability with principal liability: If a disclosed principal is bound, the agent is not liable (unless the agent exceeds authority). These are alternatives, not cumulative liabilities.

Want to test this now? Try a few SQE1-style questions below before moving on.

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Related Topics

• SQE1 Business Law and Practice: Complete Guide
• Types of Business Organisations
• Partnerships and LLP Regulation
• Company Management and Decision-Making
• Directors' Duties and Liabilities
• Company Formation and Constitution

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