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Balancing Control Trust A Dealing With Risk

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A corporation has been accorded with the status of a corporate person having a separate legal entity of its own. The status of separate legal entity empowers the corporation with the legal powers and capacity of an individual, which includes the right of the company to enter into contracts on its own behalf. This legal capacity is exercised through an agent who is granted the authority to enter into a contract on behalf of the company[1]. If the corporation does not grant authority to the agent, any contract entered into by such agent becomes void. The corporation may grant either an actual authority or an ostensible authority on the agents, which is discussed in the essay.

The directors of the company are the agents of the company who are entitled to act on behalf of the company known as the principal. The function of the agent is to enter into contracts with third parties on behalf of the company[2]. The directors being the agent of the company are obligated to act in good faith and in the best interest of the company. In case of a breach committed by an authorized agent, the principal shall be entitled to compensation for the loss suffered for such breach. The directors must ensure that the business activities and the financial transactions of the company are debarred of any financial risks.

The agency relationship may arise in respect of employer and employee as well where the employer is the master and the employee is the servant and is entitled to act on behalf of the master in good faith. In the agency relationship between the employer and the employee, an employee must be authorized to bind its employer for his actions or omissions[3]. An agent may be conferred with either actual authority or an ostensible authority. An actual authority includes an express authority and implied authority to be granted to the agent. The express authority is when the principal expressly authorizes the agent act on its behalf either verbally or in writing. An implied actual authority is when agents performs activities that is necessary and incidental to the duty conferred upon him as was observed in Hely Hutchinson v Brayhead Ltd[4]. In this case, the agent was appointed to manage a business had an implied authority to enter into contracts that any manager in his position would have entered into.

If the conduct or words  of the principal is such that it makes a representation before the third party that the agent is authorized to deal with the third parties on behalf of the principal, when in fact, the agent is not authorized, the agent is said to have an ostensible or apparent authority[5]. If the third party rely on the representation of the principal and enters into a contract with the agent, the principal shall be bound by the contract as was ruled in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd[6]. In Armagas Ltd v Mundogas SA[7], the court ruled that when the agent does not have any authority to enter into transactions but falsely represented to be authorized before the third parties, the principal shall not be bound by the conduct of the agent. As per the general rule of agency, an agent cannot bind its principal for acts done outside their authority unless the principal has ratified such act as an act done within the authority conferred upon the agent by the principal.

The first issue arising in the given scenario is what legal relationship Lena shares with Rowan and Cole. Lena and Rowan are the directors of the ‘Glasshouse Enterprises’ and gives rise to the agency relationship where the company is the principal and Lena and Rowan are agents, who must act in good faith and in the best interest of the company[8]. The company being the principal shall be liable for the acts or omissions of the agents that is Lena Rowan. The agency relationship arises between Lena and Cole as he has been employed as salespersons for securing new cleaning contracts. Here, Lena and Rowan is the master and Cole is the servant who shall act on behalf of the actual express authority conferred upon him by his master[9].


Cole was authorized to enter into cleaning contracts and he enters into a contract with ‘Pristine Clean’ who was providing special offer to supply goods to the Glasshouse business. He entered into the contract on behalf of the company in good faith with the purpose of saving business money. However, he failed to read the contract where Pristine Clean had incorporated a clause according to which Glasshouse Enterprise shall purchase cleaning product from Pristine for next 10 years and have doubled the price of the goods.

Here, Cole has acted within the express actual authority when he entered into the cleaning contract with Pristine Clean. Besides, the he had entered into the contract in the best interest of Glasshouse Enterprise as he believed the offer would save the business money. Hence, hence, as per agency relationship between Lena and Cole, where Lena is the Master and Cole is the servant, she is bound by the acts of Cole done within the authority of the employment.

Further, since Lena and Rowan are the agents of the Glasshouse Enterprise company, the company being the principal is bound by the actions or omissions of the agents. Rowan and Lena had an implied actual authority to engage in activities that is necessary to perform their duties as was held in Hutchinson’s case[10]. Therefore, appointing Cole to obtain cleaning contract for the Glasshouse company to expand the business which amounts to the best interest of the company, falls within their implied actual authority. Under such circumstances, as Rowan and Lena is bound by the conduct of Cole, similarly, Glasshouse Enterprise shall be responsible for the contract entered into with the Pristine Clean and shall pay off the debt of $15,000 that it owes to Pristine Clean under in the context of agency relationship.

However, Cole being the servant/employee who is expressly authorized to obtain cleaning contracts on behalf of Glasshouse, cannot bind his master for any of his conduct or omission that is done outside his authority. Here, Cole started a marketing mop which he designed for the customers and retained 95% of sale proceeds that he obtained from selling the mops. Lena Rowan were not aware of the marketing of the mops which clearly establishes that Cole was acting beyond his authority. The sale proceeds that earned from the sale of the mops were usurped by him and were not for the company.

As per the agency relationship, an agent has fiduciary duty to act in the best interest of the company and his personal interest must not prevail over the interest of the company[11]. Furthermore, an agent is prohibited from making personal profits using the position of agent as it would amount to a breach of agent’s fiduciary duty and the principal shall be entitled to compensation from such agent[12]. On the facts here, Cole is liable for committing a breach of his fiduciary duty of using his position to earn personal profits and acting without any authority and he is liable to Glasshouse Enterprise because he has been entering into contract on behalf of the company acting as a regional manager/agent. Being the principal the company is not legally bound by any act of agent done beyond authority.


Reference List

Allen, William T., and Reinier Kraakman. Commentaries and cases on the law of business organization. Wolters Kluwer law & business, 2016.

Appleman, John Alan, Jean Appleman, and Eric Mills Holmes. Contract Concerns: Reinsurance Contract Formation, Validity, And Judicial Construction. Vol. 14. Appleman on Insurance Law and Practice, 2016.

Armagas Ltd v Mundogas SA [1985] UKHL 11

Bennett, Howard. Principles of the Law of Agency. Bloomsbury Publishing, 2014.

Dunn, William A. An examination of the principal-agent relationship in the pre/post Proposition 13 era. California State University, Fullerton, 2015.

Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1962] 2 QB 480

Hely Hutchinson v Brayhead Ltd [1968] 1 QB 549


Singleton, Susan. Commercial agency agreements: Law and practice. Bloomsbury Publishing, 2015.

Wigmore, John Henry. Wigmore on evidence. Wolters Kluwer, 2016.

Zardkoohi, Asghar, Joseph S. Harrison, and Mathew A. Josefy. "Conflict and Confluence: The Multidimensionality of Opportunism in Principal–Agent Relationships." Journal of Business Ethics(2015): 1-13.

Zwikael, Ofer, and John Smyrk. "Project governance: Balancing control and trust in dealing with risk." International Journal of Project Management 33.4 (2015): 852-862.


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