In what scenarios is the agent personally liable to third parties to the contract?
As agent is only a connecting link between his principal and third party. He cannot, as a rule, personally enforce the contract entered into by him on behalf of his principal, nor can he be personally liable of such contracts in the absence of a contract to the contrary.
But there are circumstances under which the agent incurs personal liability. These are:Where the agent expressly agrees : If an agent, while contracting with a third party, expressly agrees to be personally liable on the contract, he can be held personally liable for any breach of contract.
When the agent acts for a foreign principal: Where an agent contracts for the sale or purchase of goods for a merchant residing abroad, he is presumed to be personally liable.Where the agent acts for an undisclosed principal : Where an agent does not disclose the name of the principal, he is personally liable. But when he contracts for an unnamed principal there is only a presumption of his personal liability.
When the agent acts for a principal who cannot be sued: An agent ,incurs personal liability when he contracts on behalf of a principal, who though disclosed, cannot be sued. Thus, an agent who contracts for a minor, the minor being not liable, becomes personally liable.
Where the agent acts for a non-existing principal: When an agent enters into a contract on behalf of a fictitious or non -existing principal, in such case, the agent is personally liable on the contracts. No agent can bind a non-existent principal.Where an agent receives or pays money by mistake or fraud: When an agent pays some money by mistake or fraud, he has a right to recover it back from the receiver. Similarly, when a third party pays to an agent some money under mistake or fraud, the agent can be sued for refund of the amount.
When an agent has an interest in the subject matter of the contract: Where an agent himself has an interest in the subject-matter of the contract, the agent is personally liable to the extent of his interest in the subject-matter.
When the agent exceeds his authority : When an agent exceeds his authority or represents to have a kind of authority which he in fact does not have, he commits breach of warranty of authority and is personally liable to third party for any loss caused to him by reason of acting under the false representation.Trade usage or custom: In certain cases, the trade usage or custom of trade provides that the agent shall be personally liable for his acts. In such cases agent is personally liable.
Where the agent signs a contract or a negotiable instrument in his own name: Where the agent signs a negotiable instrument or a contract without making it clear that he is signing on behalf of the principal, the agent will be personally liable in that case.
This article will endeavour to examine the English law approach to the problems which arise when an agent or broker appoints a sub-agent or sub-broker.
The question arises as to whether the contractual chain is as outlined by the unbroken arrows in the above diagram, or whether the contractual chain is as shown by the broken arrow. In this article where the terms "Principal", "Agent" and "Sub-Agent" are used with capital letters it is a reference to the parties shown in this diagram.
Looking at it from the Sub-Agent's point of view sometimes they will want to prove that they were in fact the agent of the principal, for example where the Agent has gone into liquidation and the Sub-Agent is owed money arising out of activities performed in connection with the Principal's vessel. Demonstrating that the Sub-Agent was in fact in a direct contractual relationship with the Principal may entitle the Sub-Agent to arrest the Principal's vessel or at least make a claim against the Principal who remains solvent.
In other cases the Sub-Agent will face a situation where the Principal has gone into liquidation and they will be keen to show that the contractual position was that the Sub-Agent's principal was in fact the Agent and the Agent is therefore responsible for paying the Sub-Agent whether or not the Agent has received funds from the Principal.
2. English Law Approach
Under English law the courts will wish to establish the true contractual position. The key to doing that is to identify in what capacity the Agent made the appointment of the Sub-Agent. Did the Agent make the appointment acting as agent for the Principal and with the Principal's authority, effectively thereby appointing the Sub-Agent as a co-agent, or did the Agent act in its own right as a principal?
To examine whether a party acted as a principal or agent, whether in the context of making an appointment, or in any other context, is a process which has vexed the courts for many years. As a result, the courts have adopted an approach of examining the facts of each case and applying some tests or criteria to see whether on balance the party concerned acted as an agent or principal when carrying out the relevant activity or function.
3. The General Approach
The English law approach was summarised by Judge Bean in the delightfully named case Hair and Skin Trading Co Limited –v- Norman Air Freight Carriers and World Transport Agencies Limited  1 Lloyds Reports when he said
"….. when a Judge has to decided whether a party is acting as a principal or agent, it is very much a matter of impression, what impression the evidence forms."
This approach was endorsed in the case of Tetroc –v- Cross-Con  1 Lloyds Report and most recently in Granville Oils and Chemicals Limited –v- Davies Turner and Co Limited . It is a feature of cases where a court has to enquire as to the capacity in which a person or company undertook activities that the court will examine in detail the communications which passed between the parties and often witnesses of fact will be required to give evidence to the court as to what they said in telephone calls which may have occurred months or even years before the trial date. It is for this reason that this article will recommend that at the outset of a contractual relationship a great deal of time and trouble can be saved if communications are put in writing and care is taken over the exact wording used.
4. Some General Propositions
In deciding whether a party acted as an agent when making an appointment of a sub-agent or whether the party acted as a principal, the court will have regard to the general rule of law that an agent may not delegate his authority to another person or appoint a sub-agent to do some of the tasks entrusted to him by his principal without either express authority to do so from the principal or implied authority from the principal to do so.
i) Express Authority
If, at the outset of the relationship between the Principal and the Agent, the Agent knows that it will have to appoint a sub-agent (for instance in those ports where it does not have its own office) thought should be given to recording in an exchange of communications how work for the Principal will be dealt with in those ports and whether a company or individual appointed in that port is being appointed as sub-agent to the Agent or as the Principal's agent in that port, albeit that the communication of the appointment and the routing of communications thereafter may be dealt with via the Agent. Such an exchange of communications would be evidence of express authority from the Principal to appoint the Sub-Agent.
ii) Implied Authority
Implied authority to appoint a sub-agent may arise where
a) the principal knew at the time of the agent's appointment that the latter intended to appoint a sub-agent and raised no objection to this;
b) where delegation of authority or the employment of a sub-agent is the normal practice in the trade in question and is not inconsistent with the express terms of the agency agreement;
c) where, from the circumstances of the case and from the conduct of the parties to the original contract of agency, it may reasonably be presumed that the parties intended that the agent was to have power to delegate his authority;
d) where the act to be done by the sub-agent does not involve the exercise of any discretion but is purely ministerial;
e) where, in the course of the agency, unforeseen circumstances arise which make it necessary for a sub-agent to be appointed.F
It will be readily apparent that, for the Agent to establish that he had implied authority in a circumstance where perhaps the Principal is denying that implied authority, a very careful examination of the facts and state of knowledge of each of the parties will have to be undertaken by the court and this will necessarily involve conflicts of evidence and witnesses having to recall detailed events which may have occurred months or years earlier. Again any documentary evidence created at the time will be of the utmost importance in this situation.
5. Appointment of Sub-Agent without Authority from the Principal
If it is established that an agent appointed a sub-agent without authority from his principal to do so, the following consequences may arise: -
i) The Agent would be liable to the Principal for breach of his duty not to delegate and may also be responsible to the Principal for the acts or omissions of the Sub-Agent.
ii) No contractual relationship will arise between the Principal and the Sub-Agent unless the Principal ratifies the appointment or it can be implied that the Principal has ratified it.
6. Appointment with Authority
Where the Sub-Agent has been appointed with the Principal's authority or the Principal subsequently ratifies the appointment of the Sub-Agent, normally the acts of the Sub-Agent will bind the Principal and the court may well find that the Sub-Agent is in a direct contractual relationship with the Principal provided that there is clear evidence that the Agent appointed the Sub-Agent whilst acting as agent for the Principal.
This brings us back to the question of examining whether when the appointment was made, the Agent acted as an agent or as a principal in his own right.
7. The Five Tests
In considering whether a party acted as agent or principal in carrying out any particular function the courts have developed five criteria which assist the court in forming an impression as to whether a party is acting as a principal or agent (per Judge Bean) see above.
The five criteria are as follows:
i) The terms of the particular contract including the nature of the instructions given.
ii) Any description used or adopted by the parties in relation to the contracting party's role.
iii) The course of any dealings, including the manner of performance – at least so far as it throws light on the way in which the parties understood their relationship.
iv) The nature and basis of any charging (in particular whether an all in fee was charged, leaving the contracting party to make such profit as he could from the margin between it and the costs incurred).
v) The nature and terms of any [CMR note] [shipping document] issued.
These tests were developed by Mance J in Aqualon –v- Vallana  I Lloyds Report 669
Looking at each of these criteria briefly in turn
8. The Terms of Particular Contract Including the "Nature of the Instruction Given"
If there is no express contract drawn up between the parties it may be that one or other of the parties may be able to rely on the incorporation of its trading conditions provided that it can demonstrate appropriate incorporation of the conditions has taken place. Certain conditions such as the BIFA terms expressly enable the Agent to sub-contract the whole or any part of the services it is providing (clause 5 of the BIFA 2000 conditions). The ICS conditions (2002) contain a more positive statement as follows:
"(7) The Company, with the consent of the Principal, shall have authority to appoint sub-agents to perform services on behalf of the Principal, including such services as may be subject to these conditions, remaining at all times responsible for the actions of the sub-agent."
Furthermore the same ICS conditions provide that in relation to the Company's transactions with the Supplier the following condition applies
"(9) Unless otherwise stated in writing, when the Company is acting as a port agent or liner agent or booking agent it acts at all times as agent for and on behalf of the Principal and has authority to enter into contracts with the Supplier as agent for the Principal. The company shall not be personally liable to pay any debt or expense to the Supplier from the Principal."
If the Agent can demonstrate incorporation of the ICS conditions in the relationship with the Principal these clauses will assist the court in deciding whether when appointing the Sub-Agent, the Agent was acting as a principal in his own right or as the ICS conditions suggest, was at all times acting as agent for the Principal.
The FONASBA Standard Liner and General Agency Agreement (approved by BIMCO 2002) permits (in consultation with the Principal) the agent to appoint on the Principal's behalf and account Sub-Agents. (see clause 2.02).
It can immediately be seen that if the Agent takes steps to incorporate and draw the Principal's attention to these institutional conditions, the court will subsequently be assisted in considering whether the appointment of the Sub-Agent was done on behalf of the Principal or on the Agent's own behalf.
In addition to the effect of the institutional clauses referred to above, communications between the parties at the time the appointment was made may be crucial and the parties should therefore consider at that time exactly in what capacity any appointment is being made and should express this clearly in their communications.
9. "Any Description Used or Adopted by the Parties in Relation to Contracting Party's Role"
Although use of the terms "Principal" or "Agent" may be helpful in giving an overall impression of what the parties intended, it is by no means determinative. Simply signing everything "as agent only" will not guarantee that the agent will be regarded as an agent, and on many occasions the courts have concluded that, notwithstanding the agent using such a term, it was in fact acting as a principal.
10. "The Course of Any Dealings, Including the Manner of Performance – At Least so far as it Throws Light on the Way in Which the Parties Understood Their Relationship"
This will involve the court considering how functions were carried out by the parties in question and whether an inference can be drawn as to whether the Sub-Agent was acting for the Agent in carrying out its functions or whether in fact it was acting for the Principal. The degree of direct communication between the Sub-Agent and Principal will be important under this category indeed the knowledge of the identity of the Principal by the Sub-Agent will be an important consideration.
11. "The Nature and Basis of Any Charging (In Particular Whether an “All in” Fee was Charged, Leaving the Contracting Party to Make Such Profit as he Could from the Margin between it and the Costs Incurred)"
Again the invoicing route can often be a very important factor in the court's mind. If the Sub-Agent invoices the Agent and the Agent then invoices a global sum to the Principal, a global sum building into it a profit margin between the invoice it has received from the Sub-Agent and the cost it is charging to the Principal, this will tend to suggest that there was no direct relationship between the Sub-Agent and the Principal. This may be counter balanced by express agreement between the parties, for instance where the Principal has indicated that rather than receiving invoices from various Sub-Agents it would prefer to receive a single invoice from the main Agent or by the sorts of clauses referred to in the FONASBA agency agreement (see above). Nonetheless the invoicing route is something which agents should consider carefully when making an appointment of a sub-agent as was said by Hobhouse J in Elektronska –v- Transped  I Lloyds Reports.
"This is a typical contract and sub-contract situation and would need very clear evidence to make it reconcilable with an agency role contended for by the Defendants"
In that case the sub-contractor invoiced the contractor who then issued a global invoice to the Principal.
12. The Nature and Terms of Any [CMR note] [shipping document] Issued
This heading is only relevant where shipping documents have been issued by either the Sub-Agent or the Agent and may throw some light on whether, in issuing those documents they did so as agent for the Principal.
When acting as the Agent one should consider at the outset of the relationship with the Principal whether any of the functions being performed by the Agent will have to be delegated to a third party, for instance in a port where one does not have one’s own office. If this is likely to be necessary, the Agent should consider whether it would be prepared to make this appointment on the basis that the Sub-Agent so appointed enters into a direct contractual relationship with the Principal or not. If the Agent appoints the Sub-Agent as a principal, then the Agent will be liable to pay the Sub-Agent's remuneration (regardless of whether it has itself received payment from the Principal) and the Agent will also be liable to the Principal for the acts and/or omissions of the Sub-Agent. The Agent will want to charge a global fee and will be free to decide the profit margin within commercial limits. If this is the desired arrangement the Agent should consider excluding the Contract (Rights of Third Parties) Act 1999 by an appropriate clause.
The alternative is for the Agent to record clearly in writing with the Principal and with the Sub-Agent that, in making the appointment, the Agent is acting as agent so that the Sub-Agent will only be entitled to be paid by the Agent once the Agent has received payment from the Principal and, in the event of the Principal's default, the Sub-Agent will have no claim against the Agent. Furthermore this should also mean that the Agent will not be liable for the Sub-Agent's acts or omissions as the Sub-Agent will be carrying out its activities on behalf of the Principal. In reality the term Co-Agent is more appropriate in this scenario than the term "Sub-Agent". It is this type of result that the FONASBA standard agreement seeks to achieve. In this scenario it is more likely that there will be transparency regarding the Sub-Agent's charges and less scope for the Agent to make a profit margin on them.
If these matters are considered at the outset appropriate evidence can be put in place in the form of a bespoke agreement or by reference to institutional clauses so that subsequent disputes can be dealt with relatively quickly and easily and the parties may avoid prolonged litigation or the detailed enquiries which the courts make in these situations.
Our thanks for this article go to Dominic Ward
Partner Andrew Jackson & Co. Hull
When can an agent be liable to a third party?
With such discretion, it may arise on occasion that the agent will act outside the scope of his or her actual authority. If this is the case, the agent will be liable to the third party for breach of the agent´s warranty of authority (see Section 9 below).
Under what situations an agent may be held personally liable?
An agent is not generally liable for contracts made; the principal is liable. But the agent will be liable if he is undisclosed or partially disclosed, if the agent lacks authority or exceeds it, or, of course, if the agent entered into the contract in a personal capacity.
How does a principle become liable to third parties on contracts?
A principal is liable to third parties for contracts that an agent makes if the agent is acting within the scope of the agent's express, implied, emergency, or apparent authority.
How does a principal become liable to third parties on contracts quizlet?
How does a principal become liable to a third party on a contract? Principal becomes liable to third party through the actions of his agent if agent and principal both consent and agent is subject to the principal's control.