INTERNATIONAL UNIFICATION

OF THE LAW OF AGENCY

ALEXEY V. KOSTROMOV

Institute of Comparative Law

McGill University, Montreal

November, IF 99

A thesis submitted to the Faculty of Graduate Studies and Research

in partààl ful@llment of the requirements of the degree of Master of Laws

O KOSTROMOV, 1999

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Acknowledgements

First, 1 would like to thank my supervisor, Professor William F. Foster, for his

outstanding help and invaluable guidance he offered me. Without his assistance and

support the very existence of this thesis would be impossible, In addition, 1 would like to

express my profound gratitude to Mioslava Antonovich for her comments.

1 am also gcatefùl to Giette Van Leynseele, the Executive Secretary of the

Graduate Programmes in Law, for her guidance and assistance and the staff of the Law

Library for their cooperation and assistance.

Last but not ieast, 1 wilI dways be indebted to my fmily for the unconditional

support throughout the years of my studies - this tùesis is dedicated to them.

Abstract

Both the civil and the commun law iegai systems have, as a resuIt of their

historical development, elaborated diffetent conceptions of the Law of agency. Given the

existing divergence in approaches and rdes relating to agency, the intemational

unification of law in this field, although highly demanded by commercial practice, seems

a problematic, but not impossible, task. The decades long efforts of a large number of

States, UiternationaI organisations and individuais to provide uniform rules of

international agency Iaw have resdted in the adoption of two conventions, narnely, the

Hague Convention on the L m Applicable to Agency (1978) aimed at the unification of

the confiict rules of agency, and the IjrNlDROiT Convention on Agency in the

Inrernarional Sale of Gmds (1983) which attempts to provide uniform material rules,

This thesis provides a detailed analysis of the uniform rules set out in both agency

Conventions. The main purpose of this analysis is to assess the extent to which

unifomiity is achieved by these Conventions. However, in arder to reveaI the divergence

of approaches between the civil and couunon law iegal systems and define the "conflict

areas" of international agency, the present study also contains a comparative sunrey of

material and codiict d e s of agency existing in the wo systems.

Pour des raisons historiques, le droit relatif au mandat est différent en droit civil et

en common law. Les différences d'approche et des règles font en sorte que la unification du

droit dans ce domaine, quoique vivement souhaitée par la monde d'affaires, est difficile mais

non impossible à réaliser. Des efforts de plusieurs décennies de la part d'un nombre

important d'États, d'organismes internationaux et d'individus de uniformiser les régies

portant sur le mandat ont résulté en l'adoption de deux conventions, à savoir la Convention

de La Haye sur la loi applicable aux contrats d'intermédiaires et à la représentation ( 1 978)

relatif aux régies de conflit de droit, et la UNIDROIT Convention sur la reprisentarion en

matière de vente internationale de marchandises (1983) relatif aux règles substantives.

Cette thése contient une analyse détaillée des dispositions des deux Conventions,

avec comme objectif principal d'évaluer dans queue mesure elles réussissent à réaliser

l'uniformisation du droit dans le domaine. De plus, elle contient une analyse comparative

des règles du droit civil et du cornmon law dans la matière aiin de dévoiler, dans la mesure

du posaile, tes divergences d'approche des deux systèmes et ainsi de mieux cerner les

points de conflit entre eux.

Table of Contents

........................................................................................................ Acknowledgments i . .

Absmct ......................................................................................................................... t i ..................................................................................................... Table of Contents iv

Table of Cam .................... ,,, ..,. ..................................................................... v i

Chapter I Comparative Survey of Agency in Its Snbstantiai Issues ................... 4

11 nie Notions of Representation and Agency .................................................... 4 1.2 Historicai htmductioa ............................................................................... 8

............................................................................................................ 1.3 Authority 18 1.3.1 German Law .................................... .. ................................................... 22

............................................................................................. 1.3.2 French Law 24 ......................................................................................... 1.3.3 Cornmon Law 26

1.4 Ratification ...................................................................................................... .. 35 1.5 Agent's Liability ............................................................................................... 37 1.6 Agency Relatiouship fiom the Viewpoint of Third Party ................................ 41

. I 6. I Civil Law ................................................................................................ 42 ......................................................................................... 1.6.2 Common Law 44

Chapter II Agency in ConHict of Lam ................................................................. 51

[nb;oductioa ....................................................................................................... 51 The Interna1 Relatiouship .................................................................................. 53 2 . 2 1 German Law ........................................................................................... 54 22.2 French Law .......................................................................................... 56 2.2.3 EngWLaw ....................................................................................... 5 8 2.24 American Law ................ ..........................w............................... ......... 59

......*....**...... .................................................... The Extenial ReIationship .. 6 1 ........................................................................................... 23.1 Gennan Law 62

.......................................................................................... 2.31 FrenchLaw 65 ............................. ..*..~.*.**.............................**............... 2.3.3 English Law .. 67

2.3.4 American Law ..................................................................................... 7 1

Chapter Q I The Process of International Unification of the Law of Agency and Its Outcorne .................................................................................. 75

3.1 Introduction .................................................................................................... 7 5

3.2 Convention on Agency in the international Sale of Goods (1983)

and the Unification of Material Law ............................................................. 82 3.2.1 Historicai introduction ........................................................................ 82

.............................................................. 3.2.2 The Scope of the Convention 86 3.2.3 Establishment and Scope of the Authority of the Agent ..................... 90

.................................................... 3 .2.4 Liability of the Unauthorized Agent 98 ........................................ 3.2.5 The Problem of the Undisclosed Principal 101

3.2.6 Final Considerations .......................................................................... 105 3.3 The 1978 Hague Convention on the Law Applicable to Agency

.......................................................... and the Unification of Confiict Rules 108 ...................................................................... 3.3.1 Historicai introduction 108 ................................................................... 3.3.2 Scope of the Convention 112 .................................................................. 3.3.3 The internai ReIationship 116 ................................................................. 3.3.4 The Extemal Relationship 119

........................................ 3.3.5 The General Provisions and Final Clauses 124 ......................................................................................... 3.3.6 Conclusion 126

Table of Cases

Arthur v . Barton ..................................................................................................................... 3 33 Beldon v . Cumpbell ........................................................................................................................ 33 Britannia Steamship fasurance Association Ld v . Awonio Askmuioni S.pA ..................... ..........69

Charenay v . Brmilian Submarine Telegraph Co ..................... .... ................................... 19, 68 Collen v . Wright ............................................................................................................................. 38 Davk v . Jouganaros ................................... .. ............................................................................... 60

Dtlrham v . Rsser ............................................................................................................................. 28

Edwin F'. Annsmong % Co . v . Ben Pemon. Inc ............................................................................ 60 Gunn v . Roberts ........................................................................................................................... 33 Halbot v . Lens ..................................... .. ............................................ 40 Jacobs v . MomS ........................... .., ........................................................................................ 40 Janreà Propertia L rd. v . Ente Nmonale per il Twismo ..................................................................... 69 Keighley. Matsted & Co . v . Lhrant ......................................................................................... 3 47 Koenigsblan v . Sweet .................... ... .......................................................................................... 36 Leisure Croup. I nc. v . Edwin F . Armstrong & Co ......................................................................... 60

..................................................................................... Lilly. Wilson &Co . v . Srnale s. Eeles & Co 40 Lloydr und Sconish Finance Ltd v . Willimnson ............................................................................. 27 Louis Schlesinger Co . v . Kresge Foundarion .............................................................................. 60 lUarpons y Hennano v . Mildred Goyeneche & Co ............................................................................ 70

Matarese v . Cake ................................. ........, ............................................................................. 60 ........... Panchaud Frerm S.A. v . Esrablissement Generai Gmin Company ......................... .... 17

Parrison v . MilL .............................................................................................................................. 59 Poie v . Lemk .................... .... ...... .. ..................................................................................... 29

....................... ....................................................... . RLFdon iron and Locomotiw Worh v F u m a .. 69 .......................... Rosenbmm v . Belson ............................................... .............*.............................. 32

Ruby Stemnsh* Corp . Lld v . Commercial Union hmce Co ......................... .. ................. 70 Scheer v . Rockne Morors Corporation ........................................................................................... 72

Sinfi R . G . v . S ù i h Lrd ........................................................................................................................ 68 Siu Yin Kwan v . Eastern Insurunce Co . Ltd ................... ... ..... .......... ............................. 46

Tehemn Europe Co . Ltd v . S . t Belron (Tracrors) Ltd ........................................................................ 70 The The& .................................................................................................................................... 33

. ... V/O Rasnoimport v . Cuthrie & Co Ltd 40

Yonge v . Toynbee ............................................................................................................................ 39

Yoerg v . Norhem N . J. Mortgage Assocs .......-....-......................................................................... 60

INTRODUCTION

Agency is a universaiiy recognized legal notion, which is weii-known in ali modem

legai systems as an indispensable part of the exhting social order. It fiilfills the most diverse

hctions in the public and pnvate law of today; in particuiar, it assists in organin'ng the

division of labor in the national and intemational economy. Even in a time when problems

of communication, transportation and payment facilities continue to diminish commerce

cannot fiuiction without the services of agents. Acting in modern market environment, a

(legai or natural) person simply m o t personaily conciude ali transactions related to bis

business. The complexity of trançactions and the number of parties often involved (e.g. in

the case of syndicated loans) rnay also require the use of intermedkies. One may require

the services of someone with special skiIIs such as iinguistic abilities, or with special

knowledge of a particuiar trade (e.g. a comodity broker) or market (e.g. a distniution

agent). One rnay also require the assistance of agents who can provide financial facilities

(e.g. banks, factors and confïrming houses). Many private law theorists agree that, on the

whole, agency is of aimost equai importance to contract as a device facilitating the

development of the modern business.' The needs of commercial exchange, both nationalIy

and internationaliy, have resuited in a wider and more h u e n t use of agency as a mode of

forming contracts and concluding 0 t h juridicd acts.

Al1 this is pdcularly true in respect of international business and finance. Long

distances and special difficulties ~ 0 ~ e c t e d with domg business in foreign markets ofien

make recourse to specialized agents more urgent han when one is involved in domestic

' W. Muller-Freinfels, "Law of Agency" (1957) 6 Am. I. C o q . L. 165 at 165 [hmmaftcr "Law of A k P c y l -

1

trade: "[i]t is obvious thaî international business can only be conducted by the interposition

of intemiediaries between the contracting parties."' This conclusion is con6rmed by the fact

that there exists a wide variety of professional intemiediaries active in international trade

and finance, such as intermediaries involved with the commercial distribution of goods, the

carriage of goods, financing, Uiswance, etc. However, "widespread recourse to agency in

transnational contracts does not mean that di£fïculties do not exist. Because of the Iack of

cmiformity of some of the specific d e s governing different aspects of agency in the various

domestic laws, parties having recourse to agency in their transnational dealings face

occasional uncertainties."'

It follows ûom the function of agency that relationships - those of principal-agent,

agent-third paw, and third party-principal - will ofien be formed and produce results

beyond a single state or Iegal systern. However, different legal systems have elaborated

their own conceptions of agency and the solution to a given problem may not be the same

under different national laws. The existing diversity of theoreticai and practical appmaches

to agency mates some uncertainty for al1 three parties involved in an agency relationship:

the principd, the agent, and, most importantly, the third party. They al1 need a minimum

degree of predictability as to both the formation and the effects of their international

contracts. The desirabIe predictability can be achieved by unification of national matenal

d e s on agency, at least those material d e s that apply to international con'iracts. However.

taking into account the substantial divergences existing in ciiffirent counüies as to

' CM. Schmitthoff, "Agency m Intemationai Traden(1970 1) 129 Recutil des Cours 107 at Il6 [heremafter "International Tradeq. ' G M Ba&, "Agency Unification of Pufateriai Law and of Conflict Ruiesn (1984 I) 114 Recueil des Corn 9 at 19 [a~emaAer "Ag-. Unifïcationq.

principks and concepts of agency, international unincation of materid Iaw seems

exceedingly difficult. Unification of choice-of-law niles is an easier step, but it also is by no

means simple. Both appmaches "have been diligentiy pursued for a long time and the

efforts deployed in this regard have met with some success."" For the last two decades,

some fesults have been reached conceming both the international unincation of substantive

d e s and the formuiation of uniform confiict de s .

This research is mainly devoted to the results of the decades-long efforts aimed at

the unification of the law of agency. Chapter Di of this study contains a detailed andytis of

two conventions that provide the uniform d e s on international agency. These conventions

are the Hague Convention on the L m Applicable to Agency (1978)*, airned at the

unification of conflict niles, and UMDROIT Convention on Agency in the International

Sale of Goods (1983)' which provides the unification of material law. However, in arder

to lay an adequate groundwork for the above analysis, the chapter on international

unification of the law of agency is preceded by two chapters which provide a comparative

survey of "problem areas" in the matenal Iaw of agency (Chapter I) and in conflict of

iaws (Chapter II).

Ibid. at 20. The Hague Convention on the Law Applicable to Agency, 14 March 1978 (cntered hto force I May

1992). The officiai Engiish and French texts are pubiished m Cotfberence de La Haye de droit inrernationale privé, Recueil des Conventions 1951-1977 at 252-263. The EngIish text is aisa reproduced in 26 Ad-CompL. at 438 ff. [hereinafter Hague Agency Convenrion],

Convention on Agency in the International Sole of Goodr, 17 Febmary 1983, IMIDROIT, Fmal Act of the Confierence; 22 LM (1983) at 246-259. The English text is also reproduced m (1983) Uniform Law Review at 144 8: [haemafter üNIDROITAgency Conventionl.

CHAPTER 1 COMPARATIVE SURVEY OF THE MATERLAL LAW OF AGENCY

1.1 TEE NOTIONS OF REPRESENTATION AND AGENCY

Although "[tpe possiiility that someone (the principal) may become Iegaüy botmd

and entitied by the acts of someone else (the agent) is the essentid characteristic of

agency/representation in both the common law and the civil law legal systems,"' one may

come across the different terrns employed by these Iegai systems, namely "agency" and

"representation". Nevertheless, as will be more fully elaborated below, while this

tenninotogical diversity is of rather theoretical importance it does not affect the law

applicable to the various relationships that arise h m agency.

As we will see in the next section (1.2) both civil Iaw theory and practice have been

a greatly influenced by German Iaw which developed a complex theoretical structure during the second haif of the 1 9 ~ cenhuy. It disthguished among the "abstract" conferral of

authority by the principal on the agent, the "intemal" arrangement between thern, the

contract between agent and third party, and the relationship arising between the third parry

and the principal. WhiIe the first - the "abstract" power - prirnarily concerns the third party

and is usually referred to as "representation", the internai contractual arrangement between

principal and agent exists independentlys and belongs to "contract of agency". This

approach was foUowed by the vast majority of the civil law codifications. For example, the

most ment of them - the 1994 Civil Code of the Russian Federation defines representation

'&LE. Verhagen, Ag- in Private International Law (The Hague/Boston/London: Martiuus Nijhoff Pubhhcrs, 1995) at 6. 'Except in the relatively rare cases m which the third party knew or should have howa that the agent acted conmy to his c o n m d obligations.

A transaction concluded by one pason (representative) in the name of another person (person represented) by Wtue of a power based on a power of attorney, specification of a law, or act of an empowered State agency or agency of local self-government shaii directiy mate, change, and terminate civil rights and duties of the person represented9

At the same tirne, according to the Riissian C ' Z C& the t m "agency" refers ody to

contractual reiationship between two parties, where

one party (the agent) s h d undertake to perform certain legal actions in the name and at the expense of the other party (the principal). The rights and obIigations on the transaction perfonned by the agent shaii aise directly with the principal."'

Thus, both definitions ernphasize different sides of the same relationship, although

the notion of representation is a wider than one than that of agency because the Iatter could

be based ody on the principal's (teal or apparent) consent to be represented," whiIe

representation may result h m "specification of law, or act of an empowered State agency

or agency of local self-government." In other words, the distinction between different f o m

of representation is of more practical importance than the terminoIogical distinction

between agency and representation.

In the civil Iaw of representation such a distinction is usually made between

consensual representation and Iegal representation, a distinction based upon the source of

the agent's authority. "in cases of consaisual representation the agent's authority can be

reduced to the principal's (real or apparent) consent to be represented. The agent's power to

The Civif Code of the Russian Federmon, mi82 (the traasIation is taken h m The Civil Code of the Russian Federation, Parts 1&2, ArrnonkMew York, 1997). 'O Ibid. art. 97 1. " However, the common law employs ttrms "agency of necessity" and "agency by operation of hW" to descnbe the situations of non-consensuai representation, and in this respect the terni "agency" equals the

bind and entitie his principal is m principle derived h m an act emanating h m the

principal himself, the a~thorization)."'~ On the other han& instances of legai representation

are based on the fact that the agent's authority is attachai by operation of law, court's

decision or an act of an empowered public institution to certain relationships (e.g. a parental

relationship), without any authorization by the person being represented being required,

There are various categories of cases covered by the notion of legd representation. First of

d l , there are cases where the law responds to the necessity of having representatives for

infants or other incompetent persons who cannot by themselves achieve the ends of their

juridicai iives. Negotiomm gestio (or agency of necessity) is another instance of legai

representation. Because of the urgent and beneficiai character of the spontaneous agent's

act, the law considers the party on whose behaif the act was carried out bound by the said

act and creates between the two a principal and agent relationship. In the commercial sphere

the most important category of cases connecteci with legai representation is the

representation of companies and other legai entities by corporate bodies or officers

(corporate agency).

In the cornmon law, by contrast, the scope of the law of agency is limitecl to

voluntariiy created relationships and th& extensions such as cases of apparent authority and

agency by est~ppel. '~ in the words of the American Resîarement (Second) of the law of

Agency "resuits h m the manifestation of consent, by one person to another, that the other

tenn "hpresentation" as a generic term for all situations when someone acts on behaifof another. '' Vahagea, supm note 7 at 6-7. '' It should be noted, howeva that corporate agency is rcganicd as an integrai pan of the iaw of agency: see F.M.B. Reynolds, Bowstead on Agen% 1S8 ed. (London: Sweet & Maxwell, 1985) at 15 and 292-297 [herrmafter Bowstead].

shall act on bis behalf and subject to his controi, and consent by the 0 t h so to ac~"" This

limitation of the scope of agency may be due to the historiai relationship between the law

of agency and the law of master and servant. It may also be due to the fact that in the

common law agency is primarily a commercial subject. As such it c2n exist only beeween

persons enjoying full legal capacity who are engaged in business and voluntarily create the

relationship and grant and receive the authority. AIthough there are some extensions which

cannot be reduced to the will of the principal (these cases are knom as agency by operation

of law)," Iegal agency as a general institution for the protection of persons without legal

capacity is unknown to the common law.

The scope of the present work is limited to the instances of consensuai agency

(including the civil law concept of consensuai representation), and the expression "agency"

will normally aiso include the civil law concept of "representation". This study deds with

agency as largely a commercial institution, with close links to the law of contract and

commercial law. The tm "agency" refm (unless the context implies otherwise) to the

legal mechanian pursuant to which "the Iegai effects of the juridicai act executed by one

person (the agent) are attniuted to another person (the principal), triggered by the fact that

the agent has authority to execute this juridical act for the prin~ipal."'~ This defuition

excludes other cases of agency where the principal's consent (real or apparent) is irrelevant

(cg. legal representation in the civil law and agency by operation of law ia the common

law). A manifestation of consent made by a person being represented is the main feature of

'' Resralement (Second) of the Law of Agency 5 1 (1958) [àeremafter Restatement]. 1 s This tem may be regarded as a generic terra for cases of agency of necessity, agency from cohabitation, and some other cases provided by statutory law, e.g, Sale of Goa& Act 1979, Mental Health Act 1983, etc. (G-H-L- Friciman, The Lav of Agency, P ed. (London: Battcrwoah. 1996) at 133-151). l6 Verhagen, supm note 7 at 10.

consensual agency, and "[i]t is paaicuiarly this feature which justifies the separate treatment

of consensual agency both for the purposes of comparative and private international law.""

To this 1 would üke to add a more pragmatic reason: the general scope of both conventions

on the law of agency (the Hague Agency Convention and üNlDROIT Agens, Convention)

is l i t e d to the instances of consensual agency. These international instruments - subject to

detailed analysis in the Chapter iII of this study - treat consensual agency as an autonomous legai category, considering its unification as an important contniution to the pmess of

facilitation of international commercial intercourse, Moreover, for the purposes of

international unification of private law, especiaiiy material law, limitation of the scope of

agency to voluntary relationships appears to be more practicable and more directly

responsive to the concem of transnational trade, the area whose needs provide the major

motivation behind the search for uniform material d e s of agency.

Neverthelas, the expression "representation" will occasionaiiy be used in tfiis

study, particularly where it is important to emphasize that one is deaiing with a traditional

civil Iaw mie, or a case of (direct) representation.

l .Z BISTORICAL INTRODUCTION

Agency includes many complicated legai relations and its development is closely

related to the changing needs for division of Iabor, which c d for the deiegation or

distribution of various functions among assistants, cIerks, managers, etc. 'The

complications which arke h m the introduction of an agent affect fundamentai principles

of private law relating to selfdetermination; hence, the development of agency presupposes

an advanced stage of Iegal thmkllig and a developed economic and institutional

ba~kground"'~ This, pmbably, explains why Roman law, in spite of its high scientific level

never developed a complete theory of agency. "The Romans never acknowledged a g e n d

d e in th& private law wbich declared that a person, acting as an mtermediary, shouid be

capable of creating valid contractual or commercial relations between the principal and a

third part~r."'~ Justinian's Digest provides: per Iibermn personam nobk adquiri nihii

p ~ t e s t ? ~ To us, today, agency appears to be an essential device in an any developed and

sophisticated economy which avails itself of the advantages of a division of labor for the

production and dimiution pmcess. How could the Romans do without this device? They

were, afler dt, a nation whose economic and social stnicture~' h m about the t h e of the

hinic wars, was no longer deterrnined so much by agriculture as by commerce, hance and

city Iife. The m e r lies partly in the structure of the Roman economic syçtem, more

particularly in the organization and fùnctioning of the family unit. The reason for the

absence of a general concept of agency was the paûiarchic character of the Roman

economy, an economy economy founded on the family unit in wfiich business was mainly

transacted by slaves andfiliifamiliar. in such an economy there was no need for a fÛUy

developed concept of contractual agency because property acquired by the members of the

househotd automatically accrued to the pater familias. Moreover, in contrast to Egypt and

ludea, Rome was a city whose smali area did not imperatively require representation by fke

" W. Miiner-Ftcienfélç, "Legal Relations in the Law of Agency: Power of Agency and CommerciaI Certainty" (1964) 13 Am. L C o q . L. 193 at 193 [hereidkr "Legai ReIaticmsq. '' ibid. " L. 126 para. 2 D45,l; L IC 4,27. '' Cf. ML Fidey, The Ancienr Econonzy (Berkley University of CaIifomia Ptess, 1973); F-Tenney (cd), An Economic Surve. of Ancient Rome, VOL 1 (1959); M.. Rostovtzeff, The Social and Econumic Histov of the Romun Empire (Oxford: Ciarcndon Press, 1926).

pefsons. in Egypt, on the other hanci, where only few slaves were kept on the country

estates, Heiienic law developed a general concept of direct repfesentation fomded on

contract.

The idea of agency began to emerge in Roman law in the Post-Justiniaa period,

when, intluenced by Hellenic concepts, it mognized the activities of theprocurator and the

imtitor. 'The procurator was a fiee man, oAen a k d slave, who acted as general agent or

bailiff for the interests of a noble family; his was a position of considerable importance. The

isiiior moved on a much Iower social level. He was normaliy a slave who sold his master's

goods in an inn or pedded them h m door to d o ~ r . " ~ But, in spite of some positive

tendencies, the g e n d conception of agency, in the sense understood today, was not

devetoped by Roman Law. "The lack of agency in Rome was due chiefly to the Roman

conception of the personal nature of the obligation as liability."2f In Roman Iaw the fke

man who acted as an agent (pmcurator) became invaRabIy personalIy iiable to the third

Party. The theory was that the contractuai bond existed between those actually contracting,

viz the third party and the agent. Cotl~eql~entIy, an actio adjecticiue qqulitatls existed."

Thus, "Roman law did not advance beyond the view that, where a contract was concluded

by an agent, on principle the contracting party (the agent) and not the principd, was liable,

so that the iiability of the principal was in dl cases a iiability arising h m the mdebtedness

of another p a q (the agent)."2s This theoretical conception is very different h m that

adopted in modern jurisp~dence. In quality the principd's iiability in Roman Iaw is almost

" uIntemationai Traden. supra note 2 at f 18. "Law of Agency", supm note I at 167. - - '' If the agent was an-mniior, e-g., a slave, a direct action was admimi agamst the master, viz. the actio

Mtoria. suInternational Traden, supm note 2 at 119.

comparable to that of a guarantor who is liable for the debt of the main debtor.

Nevertheles, Roman !aw developed a few exceptions to the general nonrecognition of agency in the form of faùly cumbrous substitutes, for instance, by attribut& to a servant's act in taking physical possession the sarne legd effect as to the taking of possession by his master. In the Middle Ages, due to the pressure of mercantiIe needs, the Glossators and Postglossators expanded these exceptions in very niundabout ways26

Until the 17" century, therefore, dogmas, such as no one is bound against his will

and that a moraily conceived legal responsibility cm be established only by one's own act,

impeded recognition of agency- N a W law 6rst introduced a systematic development of

agency, d e r the canonic Code of Bongatiana (1298) had recognized direct agency in

various situations, especially in the conctusion of marriages. But naturai Iaw went further in

developing principles of agency. Hugo Groaus wrote in his De Jure Belli ac Pacis that a

procurator acquired rights directly for his principd, his acts bemg based on the principal's

mandate?' h a dresult, a uniform exphnation was fomd for the acquisition of rights and

duties through agency. Mü1Ier-FreienfeIs corredy comments that [tlhis was a necessary

step in organizing the division of labor which becarne the characteristic feature of modern

society.'"'

Grotius, ihus, laid down the pundwork for the two requirements in respect of

direct representation which c m still be found in the modern laws of representation (agency)

of the civil law countnes, namely 6rst, that the agent should have authority to act; and,

second, that he should act in the name of the princi~d.'~ Grotius' thoughts were so original

" " Legal Relations", supm note 18 at 194. gGrotiusv DeJureBeilia~Pacis~ II, 11.18.

"Legai Relationsn, supra note 18 at 195. " The oniy riifference with the modeni civil cwcept of rcpresmtation is that Grotius considered the agent's power to binà and entitle his principal not to be based on an b k p d e n t act, the anthorization, but regardcd it

and, compared to the constructions of previous jurists, so completely of a diffkrmt uature

that the grneration after him, that of naturai law jurists, did nothing else but examine his

theory for comtness and, where necessary, developed it. This process was rekcted in the

first wave of codifications inspired by nattrraI law and the Enlightenment. Into this category

fdl the Pnissian Allgemeine Landrecht (1794)' the Austrian Allgemeiine Burgerliche (181 11,

the French Code Civif (1804) and some other codifications founded on French tradition

(e-g. the Cid Codes of Louisiana (I 808 and 1825)).

Nevertheless, the early 19" century codifications àid not recognize representation as

an autonomous legal institution; they aii regdateci representation d y in the sections on

mandate. This is most clearly iIIustrated by the Prurrsian Code of 1794, which contains a

chapter on Powers ofMandate (Vollmachtsaufi-age) and provides that the mandate inchdes

a a~thority?~ Thus, the Prussien Code, as well as its contempotaries, did not make a sharp distinction between the contract (mandate) and the authorization of the agent by the

principal. The agent's power to bind his principal was regardeci exclusively as an accessory

consequeme of the contract of mandate. Another exampie of the combination of mandate

and authority is article 1829 of the 1838 Netirerlands Cid Code:

Mandate is a contract, by which someone gives to another the power, and the latter accepts this, to execute a transaction for the mandator, in the Iatter's name?'

This provision was derived h m article 1984 of the French Civil Code, which provides that

- -

as a coaKquence of the contract of mandate itFelf, the m s consent to be represented behg expressed in thiscontract SO Pt. i, s.13, para5 Bug in spitt of the cornbniation of mandate and authanty, these provisions of the PrUFs~un Code were, in faa, progressive since, fi the kt rime. they cecognipd the agency concept. " The aanshtion is taken fian V&age~, supra note 7 at 15.

The mandate or pmuraîion is an act by which a person gives to another the power to do somethuig for the mandator and in his name?'

The h a l step in the development of the modem civilian doctrine of agency

(representation) was taken by the German jurist Paul Laband, who in an article published in

1866 emphasized the need to distinguish sharply between the contract of mandate (Aufirag)

and authority (Vollmacht). This distinction was not a compIeteIy new id=

The necessity of distinguishing between the authorization of the agent, which d t e d in his power of agency, and the underlying contract between the agent and his principal, had been noted earlier in Germany and the Scandinavian counûies. But rnost authors had expresseci this idea o d y obifer, unfil fiering made it one of the centrai points in his doctrine by stating that the mandatory and the agent are two diffefent sides of one and the same legal r e t a t i~n .~~

This doctrine, very soon after its publication, was accepted by German legislation, in

particular it was adopteci by the Common German Commercial Code (Allgemeine Deutsche

a Hmdelsgesetzhch) with respect to Prokura. The Code provideci that the authority of an agent, who had been registered as a Prokz&t, was legaüy predetermined, encompassing

al1 acts which were in the scope of the business to which the agent had been attacheci.

Limitations of the extent of the Prokura had no effect as regards third persomw

However, Laband went further dong the way paved by ihering. He stated that

mandate (Aufirog) and authority (Vollmacht) are by no means the two sides of one and the

same relation, but are two independent autonomous relations which merely overlap in many

cases m their factual occurrences. Moreover, having drawn this distinction, Laband

extended it to its extremes, stating that authority (Vollmacht) enabIes one person to confer

" Ibid. Legai Rciations", supra note 18 at 198.

Mcle 43 of the HandeLrgeseabuch of 1861. The P r o h stüi aim m cuncnt Gennan law (arts. 49 E of the Commercial Code), although some of its rigor has ben modifiai by the dccisions of the Supremc Court of G-Y.

righîs and duties upon another person by legal transactions concluded in the latter's name.

In other words, the reievance of Laband's theory (which received the name ''theory of

separation") is that a limitation of the authority of the agent by the mandate is, on principle,

ineffective with respect to a third party. In the descriptive language of Müller-Freienfels, if

there is a &ction of the agent's authority in the contract between him and the principal,

this indicates only a "ou ought not" to the agent but it does not amount to a "you cannot"

and does not d u c e his pwer.'' If the doctrine of separation is taken to its logical

conclusion it means that the principal cannot rely on a restriction of agent's authority, even

though the third party has notice of that restriction.

The principle that mandate and authority are two different notions and may produce

different legai consequences has had enormous impact on both civil law theory and

legislation. Laband demonstrated the basic diversity between mandate and authority "with

such precision and force of conviction that there were only a few who dard to question his

theory. Thus, Laband's doctrine began its unique ûiumphal mach around the worId."j6 The

theory of separation was accepted by many civilian codifications, among which are the

Gennan Civil Code (BGB) of 1900, the Swiss Code of ObligariUns, the Swedhh Stature on

the Law of Agency, the Itaiian Civil Code, the Greek Civil Code, the Japanese Civil Code,

etc. Further, it has been adopted by the most ment codifications, for example, by the 1992

Netheriands C M Code and the 1994 Civil Code of the Russian Federation.

At the same tirne, "[h]aWlg adopted as basis for its agency concept a theory which

was derived h m purely logicai premises, the civil law was faced with the problem of

lS "Legal Relations ", supra note 18 at 207. " Ibid. at 198.

reconciling tbat theory with the f o m of intermediaryship evolved by commercial

the limitations imposed by the mandate are more relevant than in others based on the theory

of separation. The two diametricaiiy opposed poles of the sa le are the German Ptokuro

where the interna1 limitations of the agent's authority are, on principle, disregarded, and the

authority of the non-commercial agent (in cases of "legal representation", or "agency by

operation of law") who can only act within the powers given by the mandate, and, as a d e ,

does not bind his principal if he exceeds them.

The solution which the civil law systems, founded on the doctrine of separation, have adopted is to anaIyze the various types of intermediaryship found in practice and to define the extent of the authority for each type with the greatest possrile precision. Without such a hgmentation of the agency concept the theory of separation wouId have been unworkable."

That is why a11 civil codes, which have adopted the doctrine of separation, have well-

developed systems of typincation of intermediaryship. For example, the German Civil and

Commercial Codes (BGB and HGB) contain a statutory regdation of 13 different types of

intermediaryship. This detailed and scientific typification was inevitable in order to rnitigate

5 e stnctness d t i n g h m the theory of separation, and to reconcile the latter with

commercial reality.

in contrast to the civil law systems agency did not become an autonomous legal

concept in the common law miil the be-g of the 19"' cenhtry. Moreover, the word

"'agency", as a term of art, remaineci unkuom to the common Iaw until that cenniry.

Nevertheles, the essential characteristic of modem agency, the Iegal power to alter the

"inœmarionalTradew, l p m note 2 at 123. 'a fiid.

principal's legai relations with third parties, was recognked in the 14' century, considerably

earlier than in the civil law. It is ûue that the eady bases were extremely narrow. "Agency

was the exception, not the d e of contracting intercourse. If the principal strayed beyond

narmwly recognized bounds, he was sirnply a stranger to the contract. Even to apply the

terms principal and agent in this period requires some sacrifice of terminologicai accuracy

in the interest of c~nvenience."~~

The first two books on agency were published ody in 181 1 and 1812, in America

and England re~pectively,~ though the auîhors continued to treat agency as simply a branch

of master and servant relationship, whereas today, master and servant is a branch of agency.

But ûade pressures argued strongty and consistentIy for introduction of a broader g e n d

theory of agency. Many of the features of the present iaw of agency, such as the undisclosed

principal doctrine and estoppel as the basis of a principal's liability for unauthorized acts of

his agent, were elaborated in the 19' cenhtry.

As a result of this devebpment the common law has adopted the doctrine of identity

of principal and agent as the theoretical foundation of agency. This doctrine constitutes the

direct antiîhesis of Laband's theory of sepration, sbting that the alter ego of the principal,

the agent, is duly authorized and acts within the limits of his authority.

The doctrine of identity is the cIearest expression of the idea which we found in the pre Laband codifications on the European continent that representation is the consequence of mandate and, in theory at least, inseparable h m it. The common law thus gained a generaI concept of agency, which avoided the complexities of hgmentation typicai of the continental ~ituation.~'

" V.V. Paimer, The History of M t y " (1989) 33 Am. l. Leg. Hist 3 at 28. " S. Livermore, Tteatise on the Law ofRgency (Boston, 181 1); k Paley, Treatise on the Law of Principal and Agent (London, 18 12). " "htunationai Trade", supm note 2 at 129.

Aithough the common law theory of identity is not so doctrinaire in character as Laband's

theory of separation, one cannot deny its considerable value. Moreoyer, the area of conflict

between theoretical bgic and commercial reaiity is smaller in the common law than in civil

law because the theory of identity is more flexible than that of separation. Scbmitthoff

iimits this confiict to the problem of protecting a third party who bas transacted business

with an agent who was not authorized to ûausact that business.

This, of course, is one of the central problems in the law of agency which the doctrine of separation, in principle, seeks to solve by protecting the third party. The doctrine of identity cannot adopt this solution. On the contrary, it seeks to protect the principal and adopt the maxirn that the unauîhorized act of the agent does not bind h i . . q

However, this approach had also to be reconciled with reaIity because commercial

exigency, in certain cases, compels the protection of the third party who acts in good faith-

In English law some concessions to commercial redity were provideci by the Facrors Act,

1889" and by adoption of the doctrine of agency by estoppei.

The hst regdates, inrer alia, transactions carried out by mercantile agents. The Act

provides that

where a mercantile agent, with the consent of the owner, is in possession of goods or documents of title,"' a third party to whom the agent seiis, pledges or otherwise disposes of the goods or documents in the ordinary course of his business is protected if that third party acts in good faith and has not at the t h e of disposition notice that [the agent] has no authority to make the same. in that case the disposition shaii be as valid as if [the âgentj were expressly authorized by the owner of the goods to make the samer"

Ibid- at 130. a Not to be confused with the Factors Act 1890, which mmly extended the Act of 1889 to Scotland. " E-g. bills of ladmg. " "International T h n , s l c p ~ note 2 at 13 1.

The doctrine of agency by estoppel is founded on a generai priaçiple of estoppel by

conduct, which, in the descriptive language of Lord Denning, means "that a man has so

conducted hirnseif that it would be &air or unjust to aiiow him to depart h m a particuiar

state of &airs which another has taken to be settled or correct.'* The resuIt of the

application of the doctrine of estoppel by conduct to the agency situation is tint "a person,

who has not given authority to another but has conducted himself as if he had done so,

cannot later repudiate his conduct and mut accept to be treated as having authorized the

other, if a third party reiied on the apparent authority.'""

13 AüTHORïTY

It is clear h m the previous section, that in spite of different theoretical foundations

both the common Iaw and the civil law legai systems recognize a mechanism by which the

main legal consequences of an act mtended to have legai effect (jtnidicai act) executed by

one person are imputed to another person, with whose real or apparent consent this act has

been executed. The basis of this imputation in both legal systems is the notion of authority.

"It is this authority that gives the law of agency its identity in substantive law and which

distinguishes agency cases b m other instances where legai consequences of acts executed

by one person are attniuted to an~ther."~

A cornparison of the common Iaw rules of agency with those of the civil law shows

that the practical results reached by the two systems do not differ to a great extent. This is

particdarly true with respect to the notion of authority and the distinction between the

a in Pmchaud Freres SA. v. Establ&emenr Ge nerai Grain Company [1970] 1 Lloyd's Rep. 53,57. " "Intematiod Trade", supra note 2 at 133.

18

agent's authority and the imderlying relationship, which binds hÜn to his principal.

The principle of independence is not formulated a s one of the leading principles of the law of agency in the English textbooks. However, when one looks into Bow~tead~~ one wiii see that the editor's views on authority are quite close to the Netherlands and German conception of authority, more close than the approach of, for instance, many French ~riters!~'

indeed, the modem French conception of consensual representation, stiii strongly

infiuenced by the Code Civil:' makes no clear distinction between the contract of mandat

and representation. "The majority of writers d l appear to consider the contract of mandate,

and not an independent authorkation, to be the source of the agent's representation

po~er."~' However, the diakences between the French approach, on the one hand, and

those civil law countrïes which adhere to Laband's doctrine of separation, on the other,

seern to be more of a theoreticai, than a practical, nature. Most of the niles, which are in

0 accordance with the principle of independence can be found in the French law of representation as well. in the doctrine of mandat apparent the most important idea behind

the principle of independence, Le. the recognition that the agent's power of representation

may have a wider scope than his internai authority, is present. For exarnple, Flattet,

describing the difference between the mandatorÿ's d e and i.he agent's mie, states:

The line of demarcation between manciut and agency has to be cleariy drawn. Agency is the technical means for fonning juridical acts on behalf of another and in his place. Mandat is an agreement by which one person promises to

Verhagen, supra note 7 at 13. a "When this is borne in min& common law is not so r i i f f i t as may appear. It has been said that its approach to agency, as outiined above, fa& to make the propcr distinction betwecn the interna1 dation betwecn principal and agent and the externai ~Iat ion between the agent and third parties, but s@Iy denves the one h m the other. But it has aiready becn pointed out tiiat at common iaw the authonty of an agent stems not from any contract between principal and agent (for indeed thete need not be one) but h m the da t e r a1 gram of authority. This rnay occur m pmsuance of a contractuai reiationship; but the conferring of authority is a separate event which may occur a h m othcr cimmsmces." Weriiagen, supra note 7 at 22. '' Arts.1984 E, C. civ. " Verhagen, supra note 7 at 20.

another to form juRdicai acts. But the mode m which those acts are fomed is not necessarily determineci by the ntLfllCiat- The said mode, agency or Iack of agency, resuiîs h m the existence or inexistence of an authority conferrai on the agentin

Authority can thus be descnied as resulting h m a milateral declaration by the principal

which may or may not coincide with a bilaterai retatiouship between him and the agent. 1s it

not similar to German or Netherlands laws which sharply distinguish between the intemal

relationship and the authorization, whete the latter is conceived as an (unilateral) act by

which the principal confers authority upon the agent? At the same time, the Restatement

declares: "Authonty rests on consent rather than c~ntract.'*~ Moreover, in Chatenay v.

Brazilian Submarine Telegraph Co., Lindley J- defined a power of attorney (a formai

authorization, often of a generai nature) as follows: "a one-sided instrument, an instrument

which expresses the meaning of the person wbo makes it, but is not in any sense a

contract.'"' The authorization is cIeariy identified as a separate one-sideci act to be

distinguished h m the contract existing between principal and agent. This is completely in

accordance with the modern civil law concept of authority!

Thus, neither in the civil law couutries nor in the cornmon law couutries is it

necessary that a contract accompany the granting of authority to the agent. There can be

mandate without representation and presentation without mandate. And this paradigm is

m e not ody witù respect to the civil Iaw, but dso regarding both the cornmon Iaw theory

and practice. For instance, Professor Ferson statd6 it to be an unquestioned nile in the

United States that the power of the agent to bind his principal in transactions with third

" G. Flattet, Les contracts pour le compte d'autrui (Park Sirey, 1950) at 70. Restatement, supra note 14, $15.

" Chatmay v. Braziiian Submmgte Tefegraph Co. [1891] I QB. 79 (C.A.)at 82 Deremafter Chatencry].

parties can exist without any contract between this agent and his principal. There are also

cases where an intemal contract exists, but the scope of the authority is much wider with

respect to third parties. Finally, a principal can give secret instnictions, which concem ody

his relations to the agent while not affecthg his authority. The hst case, nameiy the

discrepancy which may exist between instructions given by the principal to the agent in the

context of the underlying relationship and the terms of the authority, raises many questions

in consensual agency in ail legal systems. What if the extent of the agent's powers as

reflected in the authority does not coincide with the extent of those powers as detennined by

the underlying relationship? More specifically, what if the principal gives his agent certain

instructions in the context of their bilateral underlying relationship, which are at variance

with the authonty granted to the agent?

Indeed, authority is often couched in standard Ianguage conferring rather wide

powers, while at the same tirne the principal might limit his agent's M o m of action in

instructions issued to the agent as a party to the underlying internai relation. For example,

the principal gives the agent unlimiteci authority to buy some property, but at the same tirne

the principal instructed his agent to buy the property which wodd meet some certain

requhments (e.g. certain neighborfiood, maximum price, etc.). If the agent buys the

property in a different area or at a higher price be would have contravened the dut'y to

foIIow the principai's instructions as required of him under the terms of the internai

relationship, while at the same time remaining within the bounds of his authority. Wouid

the contract between the agent and the third party be bindhg for the principal in such a

Solutions fomd by the différent legal systems ùidicate the Iimits to which these

systems would go in protection of the third Party.

13.1 German Law

The German law, which had adopted as a basis for its agency concept Laband's

doctrine of separation, occupied the most categorical position with respect to the protection

of third parties. One of the consequences of the doctrine of separation wns that, since a

mandate is a contract, accordhg to the Civil Code it can bind only the two parties ($241).n

From there the obvious decisive step forward was the adoption of Laband's leading

principte: 'The mandate is idevant vis-à-vis the authority." This axiom was further

developed by the Gmman Commercial Code in its provisions on the Prokura, a kind of

authorization with IegalIy fked scope, which cannot be altered by private arrangement

($50).'8 in other words, limitations conceming, for example, the kinds of transactions, the

price level, the line or branch of business, the scope of risk, or the domestic or foreign

character of transactions, are inadmissible. The principal, therefore, may either gram

authority as a whoie to a ProcuriSt (a holder of Prokura) or not at ail.

The entirely inelastic h e of the Prokura is extended very widely and generally by law. The Prokuru empowers the agent "to carry on a cornmerciai enterprise." By this far-reaching authorkation - which has to be entered in the Register of Commerce - the agent is empowered in principle to bind the principal against his actual instructions not only m usual and çustornary acts, but even in somewhat extraordinary acts, provided they are within the scope of the commercial enterprise.lg

YI For English text see The Gemmi Civil Code, hnsIated with an inaoduction by I.S. Forrester, SL-Go~n and H-M Iigen (South Hackensack, New l m y : Fred B. Rotbman & Co., 1975). " For Eaglish text sec Gennm Commmcïat Code, Gemian-EngIish tcxt with an intraduction m English by Dr. MSeltzer, JJ. Doyle, M-T Men, 2* ed, (K In: Vdag Dr. Otto Schmidt, 1983). 59 "Legai Relations ",supra note 18 at 208.

Moreover, even the third party's knowiecige of the restrictions in the principal-agent

relation will not restrict the agent's authority and, thus, the principal is bound even if the

third party knew of the "restrictions" of the Proka.

The Gemian legislation, therefore, is based on consideration that the law should

protect the third party in his reliance on the agent's acting within the scope of his

authorization, and this protection should be extended proportionately as the agent's power is

extended. Nevertheless, the Gennan legislation on Prokura, being derived h m pmly

logical premises, needed some reconciliation with commercial practice to pmmote the

stability of ordinary business transactions. Thus, the strictness of provisions on Prohra has

been rnitigated. Firs, it has been rnitigated by means of judicial interpretation. The Supreme

Court of Gerrnany

decideci in 1934 thai the principal could pIead a limitation of the Prokura against a third party deIiberate1y causing damage to the principal in collusion with the agent, RGZ 145, 315. It M e r held in 1964 that the principal could plead the limitation even against a third party who negligently failed to recognize the abuse of Prokura - a very considerable qualification, MDR, 1964,592; Farn RZ l964,36

Second, German law has elaborated a comprehensive system of different types of agents, or

more precisely - different types of intermediary~hip.~' 'The character of the various types

of intermediaryship, howevm, is dehed by referme to the undaIying internai reIationship

between the principd and the agent. In this manner the strîctness resulting h m the iheory

Although the principle of independence has been accepteci by the vast majority of

uIntemationaI Trade", supra note 2 at t21, b' Not al1 intermediaries that have emerged m the Gemian civil iaw are agents m the le@ sense of this word.

the civil law couutries, many of them, m particdar ment civil law codifications, do not

recognize a commercial institution similas to the R u h a of Gerrnan lawea The principle of

independence, thus, is not applied to its full logical wnsequences in other civil codes. In

particular, Laband's view that the agent has authority even when the third party is aware of

restrictions of authority in the interna1 relationship has not been adopted. For exampIe,

article 1390 of the ltalian C'Nil Code provides that defects of the contractual consent

relating to elements of the contract predetermined by the principal shall render the contract

voidable if the said defects have vitiated the principal's volitional act. Nevheless, with

regard to the effect of the principal's instnictions on the scope of the agent's authority

Article 1396 provides that modificaîion or revocation of the authority must be notified to

third parties by appropriate means and that in the absence of such notification the

modification or revocation of authority may not be invoked against third parties unless it

can be dernonstrated that they had knowledge of such modification or revocation at the time

when the contract was formed. If, therefore, the principal issues instmctions to the agent

which modify the authority by making it m w e r and the third party is without lmowledge

of those instructions, the scope of the authority would remain unchangeci so far as the third

party is concerneci.

13.2 French Law

Contrary to Gennan law, French law does not make a distinction between authority

'' uinternationa.i Trade", supra note 2 at 123, Although, accordmg to Miiiier-FreienfeIs, many 1 P century codifications adopted institutions s d a r to

the Prokura, e.g. the Ausm-an Comm-al Code of 1862 (an 41 et seq.), the Commercial Code of Hungary of 1875 (art. 45 et seq.), Cornercial Code of Bulgmio of 1897, etc. ("Legai Relations", supra note 18 at 208 (foomote)).

and the uuderlying relationship. The French Civil Code, m @cu.iar, still has no gaierai

provisions on agency; it only regdates mundat as a specific contract and article 1984

confuses authority and the underlying datiomhip. This confusion seans surprishg because

the idea of sepration of mandate and authority has appeared in French Iegal science long

be fm Laband. According to Professor MWer-Freidels this idea had been clearly pointed

out by Pothier, who stated in his Trentiw on the Law of Obligations (1 760):

The contract made by my agent in my name would bind me ifhe did not exceed the power with which he was ostensiily invested, and 1 could not avaiI myself of having given him any secret instructions which he had not pursued. His deviation h m these instnictions might give a right of action against hun, but codd not exonerate me in respect of the t h i d petson with whom he had contracted confomably to his apparent authority; otherwise no one couid be safe in contrachg with the agent of an absent person.&

In spite the fact that Pothier's idea had not been ernbodied in îhe C M Code, French lep1

science was aware of the pomiility of splitting the agency relation Uito mandate and

authority for the sake of protecting ordinary business transactions without, however,

recognking the full weight of the distinction It undetstood aIso that secret instructions

could be given within the scope of mandate which wodd not have any effect on the third

party who had no knowiedge of them. Although the concept of apparent authority is only

touched in the Code Civil, French courts developed, not without influence h m the pressure

of growing economic necessities, a comprehensive doctrine of "mandat apparent." in the

last quarter of 19' century îhis doctrine was transformed into the broder theoné de

l'apparence (doctrine of appearance) waich may hold the principal to be liable vis-à-vis the

third party for the agent's unauthorized acts, 'The agent who because of the circumstances

of the case is investecl with apparent powers @orniok q p r e n t s ) directly binds the

principal 'in respect of third parties who could reasonably ignore the fàct îhat the agent's

authority was missing.'* French coirrts stated more or less unanimously that the third

party's lack of knowledge of the agent's abuse of bis authority caused by petty negiigence

could not prevent the incidence of the effects of agency. A third party is protected when he

had "serious reasons to beIieve,'- or when he could "legititnately or necessarily trust.'*'

The third party, however, is not protected if he had no reason to believe that, It is also a

well-settled rule that "the p ~ c i p a l bears the b d e n of proving the third party's collusion or

knowledge of the instnictions which the principal has given to the agent.'*

133 Common Law

The general attitude of the common law towards the discrepancies that may occur

between authority and the underlying relationship is that the third party is only protected if

he has acted in good faith. Cornparing this view with the provisions on Gennan Prokura

one can see that the theones of identity and separation lead to different practical results:

when the comrnon law seeks to pmtect the principal, requiring "good faith" dding of the

third party, in the law of P r o b a , as set out in the G m a n Commercid Code, " g d faith

is not required of the third par@ and he cm claim protection even if he b w s that the

Prokurikt bas exceeded the Limits of his authoritytyl'@ However, the common law makes a

clear distinction between cases where the principal has authorized the agent to perfonn

certain Iegal actions but the agent has exceeded the given authority' and cases where the

The citation is taken h m "Legal Relations", supra note 18 at 347. Verbagen, supm note 7 at 25. Cas. req., 1 t May 1936, S. 1936.1-223.

" Cass. civ., 29 Sanuary 1934, S. 1934.1.181. a "Legal Reiatiom", supra note 18 at 349.

agent has not been authorized at al1 but the principal is bound by what the agent has done as

the result of the application of the doctrine of estoppel, or the Factors Act, 1889.

The fkst situation arises where the principal has authorized the agent to perform

some actions on his (the principal's) b e u but has not authorized the particular

performance, or mode of performance, underraken by the agent. Can the principal argue

that, as the agent has acted outside the scope of his authority, the transaction is one which

can be upset by the principal? The m e r wodd seem to be that the principal will be bound

by what the agent has done, as long as the third person acts in good faith, "without

knowledge of the agent's want of actual authonty to do what he has done."" This is

illustrated by the case of Lloydr and Scottish Finance Ltd. v. ~illiamson." Friciman

describes this case as follows:

... the principal gave a car to the agent, a motor car repairer and dealer, with instructions to obtain offers to buy it. Later, the principal authorized the agent to sen the car at whatever price he could obtain for it. The agent, in fact, represented to the defendant that the car was his to seii. As a result the defendant entered into a cornplex transaction with the agent, involving the sale of the car to the defendant (for r a d e to a third person), so that a debt owed by the agent to X could be partiy paid off by the defendant, Le. by his paying the purchase price for the car to X on the agent's behalf. The defendant and X acted in good faith throughout, When the principal discovered the tmth he sued the defendant in conversion. Tt was held by the Court of Appeal that the defendant obtained a good titie to the car and the principaI could not recover anything. The argument that the d e by the agent was not in the ordinary course of his business as a mercantile agent (which, as wili be seen, might have been relevant under the Factors Act) was not relevant in this sort of situation because there was no doubt as to the bona fides of the defadaut, the buyer h m the agent."

A similar situation, giving rise to the s m e m e r , occurred in a Canadian case in the

@ YInternationai Trade", supra note 2 at 132-133- Fridman, supra note 15 at 279.

" L1oyd.s and SconLsh Fùzance Ltd V. WdIimnson i1965j 1 AD. E X 641, [1965) 1 W L k 404. " Fridman. supra note 15 at 280.

Court of Appeai of Nova Scotia, Durham v. Amern, where a car was delivered to a

mercantile agent to sell at a stated price; the sale at a higher prîce was within the agent's

authonty even though the agent failed to account for what he received and did other

unauthorized acts.

The cases we discussed above are instances of "actual," or as it is sornetimes

termed, '"real authority," efféctive under the ordinary doctrine of agency to deprive the

principal of his property. Actual authority, thus, is the authonty which in fact the agent has

been given by the principal under the agreement or contract which has been made between

them, or (as will be seen M e r ) by Wtue of subsequent ratification, On the other han&

sometimes the agent concludes a transaction with a third party, without having the (express

or implied) permission of the principal to do so, nevertheless the law holds the principal,

under certain circumstances, liable in respect of the transaction concluded by the agent in

the common Iaw literature and case law one sp& of these cases as involving "apparent or

ostensible authonty," which is fbdamentally different h m actuai authority." According to

Bowstead actual authority primarily refers to the interna1 relationsfiip while apparent

authority only refers to the relationship between principal and third party. The ciifference is

that with actuai authonty the consent of the principal is manifested to the agent while, in the

case of apparent authority it is directeci to the third Party. Thus, Bowstead defines apparent

authority as foiiows:

Where a person, by words or conduct, represents or perrnits it to be represented that another person has authority to act on his behalf, he is bound by the acts of such 0 t h person with respect to anyone dealing with him as an agent on the faith of any such representation, to the same extent a s if such other person had

nDurham v. Amer (1968) 67 D L R (2d) 574 (-N.S.CA.). " Bowstead, supra note 13 at 5.

the authority that he was represented to have, even though he had no actual a~thority.'~

According to Bomtead, the doctrine of apparat authority is said to be an

application of the doctrine of estoppeI. 'Vnder the doctrine of estoppel a p a o n who made

another person beliwe that a certain state of a£fâirs existed wniot af€erwards caii upon the

tue state of a£ïairs, whm this would cause some kind of detriment to the other perso~."~~ in

Pole v. Leosk, Lord Cranworth expIained the application of the doctrine to agency:

. . . îhat w h m one has so acted as h m his conduct to Iead another to believe that has appointai some one to act as his agent, and lcnows that that other person is about to act on thai behaif, then., unless he interposes, he will, in grnerai, be estopped h m disputing the agency, though in fact no agency d l y existed. It is, however, necessary to bear in mind the difference between this agency by estoppei, if I may so designate it, and a reai agency, however constit~ted.'~

Thus the essential feature of the doctrine of agency by estoppet is that the principd

has represented, by words or conduct, that the agent has his auîhority. A mere

representation by the agent, unsupporteà by some act or conduct by the principal, wouid be

Wcient . Although the doctrine of estoppel has been criticized on the ground that, "if

strictly applied, it concentrates perbaps overmuch on the fault of the prïncipai, direct or

indirect, whereas the emphasis shoutd rather be on the position of the third p a r ~ l , " ~ but it is

dso firmly established in the cornmon law that nobody shouId be treated a s principal d e s s

he conductecl himself as having given authority to the agent. In other words, the doctrine of

agency by estoppel is

'' Verhagen, suprn note 7 at 26. nPole v. L e d (1862) 33 L. 1- Ch. 155.

preventive rather than punitive in character.. . . It is easily seea that without such preventive des, the third parly wouid be exposed to the greatest danger. For P (with A's help) couid always repudiate a bad bargain merely by alleging that A acted in violation of his authority; indeed, P and A could always prepare some secret instnrctions to support P's excuse that A acted without any a~thori ty.~~

The law of agency, thus, was confi.onted with the necessity of facilitahg dealings between

the principal and the third party, and had to take notice of the fact that the third party has no

irnmediate opportunity of hding out whether or not the agent has a "true" or ''reai"

authority. Under çuch circumstances application of the theory of estoppel to the agency

relationship seerned an inevitable step to protect the third party who acts in good faith. Thus

the application of the doctrine of agency by estoppel has three important consequences with

respect to the principal's liabiiity. The fïrst, is that the third party has an option: he may

choose whether or not he will hold the principal IiabIe. The second consequence is that the

principal is not entitled to sue the third party, although when he himseif is sud by the third

parcy he can make counterclaims. Finaily, the thkd consequence is that the thh i party can

only plead estoppel where he, relying on the principal's conduct, changed his position. The

change of position does not have to be very serious: merely entering into the main contract

by the third party is probably su£ficien~'~

Aithough the doctrine of agency by estoppei is a weii-estabiished and dominant

theory in the common Iaw, authors stili disagree as to the theoreticai aspects of the doctrine,

as welI as about the distinction between actuai and apparent authority. Some authors do not

recognize apparent authority as authority at ali. It is, in the words of Montrose, "reaily

Bowstead, supra note 13 at 254, with reference to SJ. Stoljar, The Low of Agency (London: Sweet & MaxweU, 196 1) at 25-30 [heremafter StoIjar].

Stoijar, ibid. at 30. 80 Bowstead, supra note 13 at 285-286.290-292-

quivaleut to the phrase 'appeacance of auth~rity."~' Bowstead and Fridman have a

somewhat different approach, staîing thai apparent or ostensible authority is a form of

authority 'wssessed by some agents, resuiting h m conduct on the part of the principal

which gives rise to an estappel.'* However, in the Restatement apparent author@ is

distinguished h m estoppel and is regarded as being based on the same principle as the

objective îheory of contracts, namely

that in contracnial relations one shouId be ordïnari1y be bound by what he says rather than by what he intads, so that the contract which d t s h m the acceptame of an offer is that what the offéree reasonably understands, rather than what the offeror means."

Nevertheless, existing scientific disputes conceming the theoretical foundations of the

actual-apparent dichotomy in authority ahost do not affect the common law legd praçtice.

Moreover, in practice, according to Bowstead, actual and apparent auihority nunnally

coincide and it often does not matter on which type of authonty the principal's iiabiiity is

based. An interesthg observation in tbis respect bas been made by Stoljar. According to this

author there are situations in which the 'ieai-apparent dichotomy" does not apply. These

cases arise whea it is not cIear to the agent nor the third party? what is the extent of the

authority conferred by the principal upon the agent. According to Stoljar under such

circumstances the agent and the third party are now "in the same boat" and "the d e s of

interpretation ... are the same whether the dispute is between P and T or between P and

A.'"

IL. Monuose, T h e Ba& of the Power of an Agent in Casa of Adnid and Apparent Authority" (1938) 16 Can. Bar Rev. 757 at 764. sz Friciman, SUPM note 15 at 68.

So fiu it has been established that the principal may be Liable on two distinctive

grounds, namely either actuai or apparent authority. However, many common Iaw writers

authonty make separate mention of a third type of authority, tbat which could be cded

'buai" or "customary authority.'* According to Bowstead such authority can be defineci as

the authority wtiich is usually conferred upon an agent in certain cir~umstances.8~ Fridman

defines it as

the authority which an agent in the trade, business, profession, or place in wbch the particdar agent is being employed wodd usuaiiy, nonnaiiy, or customary possess, unless something was expressly said by the p ~ c i p a l to contradict it. It is the authority which persons dealing with the agent, with the ImowIedge of the trade, etc, would expect him to have?'

The extent of agent's usual, or custornary authority varies considerably with the

nature of the business in which he is employed, and with the trade or other customs and

usages which normally govem and define the performance of his everyday employment.

For exarnple, an auctioneer has customary authority to sign a contract on behaif of both

vendor and purchaser!' A shipmaster, apart h m the authonty conferred on him under the

doctrine of agency of necessity, is aiso investeci with a very wide customary authority,

which extends to the doing of ail thùigs that may be necesçary for the due and pmper

prosecution of the voyage?' Thus, for example, he may render salvage service to a ship in

'O resta te men^ supra note 14 g 8. 84 Stoijar, supra note 78 at 89. '' Nevertheles many authors dl consider customuy authotïty as an instance of apparent authonty-

Bowstead, supra note 13 at 95, with reference to RPoweli, The Lmv ofAgency, 2d ed. (London, 1961) at 37. " Fridman, supra note 15 at 68. "Rosenbarn v. Belson [!900] 2 Ch 267. 89 A h V. hrron (1840) 6 U&W- 138 [hereinafter Arthwj; Beldon v. Campbeil(1851) 6 Exch. 886. in modem times, when communication has iqroved, the customary authority of shipmastas may be of l e s practicai importance.

plecige his principal's credit for repairs and stores thai are reasunabk and

necessary to obtain on credifg' and bomw money on the credit of the owners when

communication with them is impossi'ble and they have no solvent agent on the spot who can

advance the r n o ~ e y . ~

Some customs became so notorious for particular markets and business and, at the

same t he , these customs or usages were so important for the n o d development of

commerce that the common law considered it to be usefui to fix some customs and usages

by statutory provisions. in English law some statutes deal with customs and usages which

belong to an agency relationship. Among these statutes are: the Cawiage ofGao& by Sea

Acr, 1992, the Sale of Goods Act, 1979, the Law of Properiy Act, 1925 and the Facrors Act,

1889. For example, the Factors Act, 188, exclusively deals with legal noms relating to a

category of agents known as "mercantile agents." The Act defines ''mercantile agent" as an

agent who has "in the customary course of his business .. . authority either to sel1 goods or

to con@ goods for the purpose of sde, or to buy goods or to raise money on the security

of goods.'@' The key idea of the Factors Act, 1889, is that where a mercantile agent, with

the consent of the owner, is in possession of goods or their documents of titie, a third p a q

to whom the agent selis, pledges or otherwise disposes the goods or documents in the

ordinary course of his buriness is protected if the third party acts m good faith and, at the

hme of disposition, neither knew nor ought to have hown that the agent had no authority to

make the same. Thus, the Act adopts the power of mercantile agents to affect their

"The The& (1869) L A 2 A8cE 365. ''Gunn v. Roberts (1874) L A 9 CJ. 331. " Arthur, supra note 89 at 138. '' Facmrs Act, 1889,52 & 53 V i a c. 45, S. 1 (1).

p~c ipa l s ' legd position through the exercise of a custornary authority which may be more

extensive than the a c d authority entrusteci to them by their principals. Also, according to

Schmitthoff "[tlhe English Factors Act 1889 is remarkable in severid respect^.'^ First, it

draws a distinction between mercantiie and other transactions. This distinction is well

hown in some civil Iaw countries (for example, France, Germany) which recognize

mercantile law as a specific branch of private law, but this approach is not generally

admitteci by the common law. Secondly, as it has been pointed out by Schmittho&

the main test adopted by the Act for the protection of a thitd party accepting in good faith a disposition by the mercantile agent is that the goods or documents were "entnisted'' to him by their owner. This test operates inespective of whether the mercantile agent canied out the unauthorized disposition in his own narne - as will often be the case - or in the name of his principal?'

Here is a significant difference between the common Iaw of mercantile agency and its civil

law ~ounterpart?~ in the civil law the decisive distinction is whether the representative acts

in the name of the principal or in his own name. In the latter case the rights and duties on

the transaction performed by such a representative (in German law known as

Komrnissionar) aise ody behiveen him and the third party and do not mate legal bonds

between the principal and the third party. Thus, in the civil law, the intermediaries who act

on their own behaif are not considered as agents in the IegaI sense of this word.

in the common law, however, this question is regardeci as helevant and it is the "enûusting" of the goods or documents which makes a person a mercantile agent. This difference reflects accurately the difference m emphasis between the doctrines of separation and identity: the theory of separation has an outward direction and considers as Unportant question in whose name the agent has acted to the third party. The doctrine of identity, on the other hand, pays more

U1 "international Tmde", supra note 2 at 13 1. '' Ibid. at 132. % ïh i s difference, which is one of the rnain problems m internationai uniflcatim of the Iaw of agency, will be more M y elaborami m Section 1.6, below.

attention to an internai event, viz. wheîher the goods or documents of title came into the possession of the agent by consent of their omererm

1.4 RATIFICATI0W8

in the previous section we dealt with situations when the relationsbip of principal

and agent was created before anything has been done by the agent on behalf of the

principd. In instances of real, apparent or customary authority the agent's authority ( r d or

apparent) is granted before the exercise of that authority. With 'Wcation" the position is

reversed. What the "agent" does on behaif of the "principai" is done at a time when the

relation of principal and agent does not exist. The agent, in fat , has no authority (neither

r d , nor apparent) to do what he does at the tirne he does it. NevertheIess, in al1 modern

legd systems the principal, on whose behalf, though without whose authority, the agent has

acted, may subsequently accept the agent's act and adopt it jwt as if there had been a prior

authorization by the principd to do exactly what the agent has done. This subsequent

adoption of the agent's unauthorized acts is known m the Iaw of agency as 'katification."

ui a11 modern Iegai systems the major efféct of ratikation is to treat the parties as

hahg been in the reIation of p ~ c Ï p a l and agent before the agent acted on behalf of the

principal, exactIy as if they had created (expressly or impiiedIy) that reIationship in the

ways explained in the previous section. Both the civiI and common law legal systems adopt

the same approach towards the legai coasequences of the act of ratification. Thus, according

ta the NmhmZands Cnril Code the effect of ratification is that the contract of the agent has

9-1 '.htefnationaI Trade", supra note 2 at 132. Both the civii and common law !egaI systems take aimost