How to prevent a rogue company agent – Australian agency law

When you think of the word ‘agent,’ a 007 Bond type character may spring to mind. However, in the far more textured but mundane corporate world when a company agent goes rogue, the company (‘the principal’) might find themselves liable under contracts they never intended to be party to.

What is a Company Agent?

An “agent” for a company is someone, usually an employee, who has the authority to create legal relationships on behalf of the company with third parties. [1] This is not to say that an agent has unlimited power to bind the company; the critical issue is “where does that limit lie?”. An agent can only bind the company when the agreement in question falls within their ambit of their ostensible authority or their actual authority.[2] An employee is not an “agent of a company” merely because they are an employee, as their “authority” flows from the role the employee is required to perform. There are several ways that an agency relationship can develop, and this includes:

• Express agreements between the company and the employee, conferring actual authority;
• Ratification – When the company sanctions the agent’s actions after the fact, regardless of whether the agent had authority or exceeded their actual authority;[3]
• Estoppel – Is a common law mechanism that prevents companies from avoiding liability for legal obligations simply through denying that the ‘agent’ had the authority. In these scenarios, the company, at the time of the agreement, will have led the other contracting party to believe that the employee had the authority to bind the company in a legal agreement;[4] and
• Necessity[5] – An agency relationship will be created when it is necessary in cases of emergency.

Expressly stating that a person is an agent of a company does not indicate they are in fact an agent (though it does tend to imply that some authority is held), rather, the actual nature of the relationship between the alleged agent and the company will determine whether the person is truly the company’s agent. [6]

The Nature and Scope of an Agent’s Authority

A company will not usually be bound by their agent if the agent enters into an agreement on behalf of the company that is outside their authority.[7] If an agent acts outside of their authority, they may be liable to both the company for a breach of contract and, also, to the third parties of the agreement. An agent can have:

1. Actual Authority – This is where the principal has explicitly given their written or verbal instructions to the agent. This type of authority is limited to the terms of the principal.[8]
2. Actual Implied Authority – This is where the agent has authority to enter into agreements that are incidental to the principal’s express instruction or from the normal function of the agent’s role. For instance, where an agent has been instructed to purchase shares on behalf of the company, the agent will also be expected to hold authority to do everything in the usual course of business to carry out that transaction.[9]
3. Apparent Authority – This is where the company either holds their agent out as having a certain amount of authority or acquiesces when an agent proports to have authority to perform certain actions. Consider the case of Panorama Developments Ltd v Fidelis Furnishing Fabrics Ltd,[10] where a company secretary hired luxury cars for his own personal use. Despite that the principal company had no knowledge of the hire agreement until they were invoiced, the company was liable for the secretary’s expenses, as it was held that a secretary would usually have the authority to hire cars in the course of ordinary business.[11]

In conclusion, it always pays to give good instructions and to clearly set out the boundaries of your employees’ authority to minimize the risk of ‘rogue agents’.  Better still if an agent has limited authority, communicating the limitation (i.e. subject to approval by management) to the “other side” provides the best defence.

Please get in touch with our Business & Commercial team if you have any concerns regarding ‘rogue agents’ or the scope of you business’ liability.

Written by Riley Berry with assistance from Claudia Weatherall.

[1] Clive Turner and John Trone, ‘Australian Commercial Law 31^st Edition’, (Thomson Reuters, 2016) 222.

[2] Collins v Blantern (1767) 2 Wils 341; [1558-1774] All ER Rep 33; (1767) 95 ER 847.

[3] Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68 at 82.

[4] Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd  [1964] 2 QB 480 at 498.

[5] Sachs v Miklos [1948] 2 KB 223 at 35.

[6] International Harvester Co of Australia Pty Ltd v Carrigan’s Hazeldene Pastoral Co (1958) 100 CLR 644 at 652.

[7] Clive Turner and John Trone, ‘Australian Commercial Law 31^st Edition’, (Thomson Reuters, 2016) 226.

[8] Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd  [1964] 2 QB 480 at 502 – 503.

[9] Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 at 583.

[10] Panorama Developments Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 at 717 – 718.

[11] Panorama Developments Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 at 717 – 718.