Authority of Agents
1. Object and purpose; terminology
For representation to take effect, an agent needs to have the power to enter into a legal transaction (juridical act) on behalf of a principal. This power is called ‘authority’ (pouvoir de représentation, Vertretungsmacht, potere di rappresentanza, vertegenwoordigingsbevoegdheid). The authority defines when and to what extent an agent can affect the legal position of his principal. The requirement of authority thus protects the principal’s interest to be bound only by acts that are in accordance with his will.
Depending on their origin, different categories of authority can be distinguished. On the one hand, authority can be granted by consent of the principal (représentation conventionnelle, gewillkürte Vertretung). The present entry will focus on this type of authority. The question whether a contract between the principal and the agent is required or a unilateral declaration by the principal is sufficient to confer authority remains of theoretical interest. Anyone who does not want to become an agent simply need not make use of the power unilaterally conferred upon him. On the other hand, authority can also be bestowed by law and without regard to the principal’s will. Several continental legal systems apply the rules on representation also to this kind of ‘statutory representation’ (représentation légale, gesetzliche Vertretung) either directly or at least by way of analogy where there are no special rules in the statute conferring the authority. Important examples are parents acting on behalf of their minor children, the intervener acting on behalf of the principal by way of management of another’s affairs without a mandate (negotiorum gestio), or a company’s ‘organs’, eg its directors, acting on behalf of the company (although there is some dispute as to whether an ‘organ’ is really a ‘representative’ of the company). In English law, however, there is no such general notion of statutory representation. Parents have no general power to act on behalf of their minor children. Transfer of property to minors, for instance, may entail the creation of a trust; likewise, special rules have evolved to enable a child to participate in court proceedings (see capacity).
The rules on representation in the Principles of European Contract Law (PECL) and the UNIDROIT Principles of International Commercial Contracts (PICC), as well as in the Geneva Convention on Agency in the International Sale of Goods (which still awaits entry into force, representation), are limited to authority granted by a principal. The Draft Common Frame of Reference (DCFR), on the other hand, also covers many, but—owing to the general restrictions of its intended scope (Art I.-1:101)—not all cases of statutory representation.
2. External and internal relationship distinguished
When the natural lawyers (natural law), the ‘discoverers’ of direct representation on the Continent, developed their new concept, they required the intermediary to have been mandated by the principal. They did not, however, distinguish between a grant of authority and the mandate. Consequently, the Prussian Allgemeines Landrecht für die Preußischen Staaten (ALR), the French Code civil, and the Austrian Allgemeines Bürgerliches Gesetzbuch (ABGB) do not contain a chapter specifically devoted to representation, but instead provide for the rules required in the context of mandate. Hence, French law generally does not make a distinction between what his internal relationship with the principal allows an agent to do (quod licet) and what in his external relationship with the third party the grant of authority enables the agent to do (quod potest). Both relationships can only diverge if the desire to protect third parties’ expectations has led the legislature to define the scope of an authority by statute—as is, for example, the case in company law as a consequence of the First Company Law Directive (Dir 68/151, as codified by Dir 2009/101). The idea that both relationships have to be distinguished (principle of separation) and, what is more, may exist independently from each other (principle of abstraction) is owed to legal scholarship of the 19th century (Rudolf von Jhering; Paul Laband). Since then, both principles have made an ‘unprecedented triumphal progress’ (Wolfram Müller-Freienfels) and, beginning with the German Allgemeines Deutsches Handelsgesetzbuch (ADHGB) and Bürgerliches Gesetzbuch (BGB), characterize how representation is dealt with in modern codes, where one finds separate chapters on representation and on mandate respectively. Admittedly, the principle of abstraction is hardly ever strictly adhered to and does not lead to fundamentally different results. However, keeping both relationships separate enhances flexibility and clarity as third parties only have to be concerned with the external relationship and, moreover, mandate without representation or representation based on an underlying contract other than mandate (eg employment) can be explained easily. Where codes still follow a unitary concept, legal doctrine has separated both relationships. In French textbooks one will find a section on représentation and another on mandat. All important drafts for a reform of the French law of obligations (1924/27, 1947, 2005 ff) contain chapters devoted to représentation.
All these issues have remained largely continental phenomena. Of course, it is also possible to discern and distinguish the two relationships in English law. The all-embracing notion of ‘agency’, however, includes both.
In European private law, external relationship and internal relationship are separated. Both the Principles of European Contract Law (PECL) and the UNIDROIT Principles of International Commercial Contracts (PICC) expressly exclude the internal relationship between principal and agent from their scope. They follow a limited principle of abstraction (eg reverting to a causal concept in the context of termination of authority). The DCFR, too, keeps both relationships separate by providing rules for the external relationship under the heading ‘representation’ (Arts II.-6:101 ff) and (partly diverging) rules for the internal relationship under the heading ‘mandate contracts’ (Arts IV.D.-1:101 ff). The mandate contract is designed as a specific kind of service contract, whose object it is to initiate, facilitate or conclude a contract, or to perform any other juridical act on behalf of a principal. Contrary to first drafts, the Commercial Agents Directive (Dir 86/653) restricts itself to the internal relationship between the commercial agent and the principal. Also the Markets in Financial Instruments Directive (Dir 2004/39) only deals with the internal relationship.
3. Problems regulated and approaches adopted in European private law
The rules to be found on the agent’s authority in the Principles of European Contract Law (PECL) and in the UNIDROIT Principles of International Commercial Contracts (PICC) are largely similar though not identical; the Draft Common Frame of Reference (DCFR) leans towards the one set of rules in some cases, towards the other in others. Moreover, its rules on authority have been changed in some respects compared to the Interim Outline Edition. In the national legal systems, the authority of the agent is, unlike the effect of representation, approached without much divergence.
Authority can be granted expressly or impliedly so that it is inferred from the circumstances. Such inference can mainly be drawn when a principal appoints another person to a position which generally involves the conclusion of transactions on behalf of the principal. Many legal systems (eg Austria, Germany, Italy, Nordic countries, Switzerland) have specific statutory provisions on this kind of authority.
While no formal requirements for the grant of authority exist in the European and international model rules, exceptions to the freedom of form can be found in some national legal systems. If a legal system provides that the grant of authority has to abide by the same form requirement as the transaction to be eventually carried out by the agent, it seeks to prevent the circumvention of the latter form requirement (eg Austria, France, Italy, Portugal, in many cases also Germany despite a statutory provision to the contrary). In addition, particular kinds of authority may require a form. Even though the Consumer Credit Directive (Dir 2008/48) does not demand such a rule, German law provides that all pre-contractual information required before the conclusion of a consumer credit agreement have to be stated in the document whereby the authority is granted; this effectively renders the negotiation of a consumer credit agreement by means of an agent impossible. In countries where evidence of a transaction calls for a certain form, the same requirement is extended to the proof of the authority (eg France).
Third parties have a vivid interest in knowing the scope of the authority. Generally, this is a matter of interpretation from the perspective of the person to whom the grant of authority was declared. In addition, the PECL, the UNIDROIT PICC and the DCFR assume an implied authority to perform all incidental acts that are necessary to achieve the purposes for which the authority was granted. In many legal systems statutory provisions define the scope of authority in certain typical commercial situations, so that third parties need not embark on bothersome enquiries as to the exact powers of the agent (eg mercantile agent, Handlungsbevollmächtigter, Prokurist). Two other distinctions existing in some countries, especially those in the tradition of the Romanistic legal family but also, for example, Austria, have not found their way into the European and international model rules because of the casuistic nature of their approach. A grant of authority can be confined to one particular transaction (mandat spécial) or allow a number of transactions (mandat général). Furthermore, under a grant of authority in general terms (mandat conçu en termes généraux) an agent may only perform acts of management whereas a specific grant (mandat exprès) also permits dispositions. Where these distinctions are accompanied by a restrictive rule for interpretation of the grant (France), they bring about a relatively strong protection of the principal.
The requirements of commerce may often call for a (further) delegation of authority by the agent (sub-agency). The response of the PECL, the UNIDROIT PICC and the DCFR is a clear rule that, even without an express authority to this effect, an agent is impliedly authorized to appoint a sub-agent and to delegate authority for all tasks which the agent may not reasonably be expected to carry out himself. In many national legal systems this rule can only be inferred indirectly where the relevant rules generally do not permit a delegation of authority (eg Austria, England, the Netherlands, Scotland) or provide that the agent can be held liable for an unauthorized delegation of authority (eg France). If authority has been validly delegated, the rules on representation apply to the acts of the sub-agent.
While the PECL list the grounds of (partial or full) termination of authority, the DCFR chapter on representation only regulates the effects of a termination. When authority comes to an end is seen as a matter of the underlying internal relationship between the principal and his agent. The DCFR thus contains detailed provisions on the termination of contracts in general and of a mandate contract in particular. The UNIDROIT PICC also confine themselves to provisions on the effects of termination. The grounds of termination are left to the applicable national law. The drafters of the UNIDROIT PICC justify this self-restraint with existing differences among national legal systems.
On more careful inspection, however, these differences do not seem to be too marked. As a general rule, an authority comes to an end together with the underlying contract, irrespective of whether it is, in principle, accorded a causal or an abstract nature. Other generally accepted grounds of termination include revocation by the principal, renunciation by the agent, or expiry of the period for which the authority had been granted. Apart from that, national legal systems differ, but only in details: commonly, the authority comes to an end if one of the parties dies, or becomes incapacitated or insolvent. Of course, there is the important exception of an authority granted by the principal to be effective also after his death.
As the grounds of termination may be completely internal, the authority continues in relation to third parties unless the third party knows or ought to have known of its termination. This rule is found in the European and international model rules as well as in the national legal systems (in France and Switzerland, termination is ineffective until the third party has actual knowledge of the termination, but it can be assumed that the model rules also do not want to impose a duty of enquiry upon third parties). The PECL and the DCFR add that where the termination of authority is communicated or publicized in the same way as the granting of authority was originally communicated or publicized, third parties are deemed to know of the termination (this rule exists, for example, also in German law).
While the PECL and the UNIDROIT PICC are silent on this point, the DCFR addresses the question of irrevocability: only if the principal is under an obligation not to terminate the authority is the termination not effective. The majority of national legal systems (with the exception of Switzerland) allow an authority to be made irrevocable by the principal, even impliedly if the authority is granted also to serve the agent’s interest (eg England, France, Italy). However, an irrevocable authority may still be revoked if there is a good reason (Germany, iusta causa in Italy); sometimes (eg France) even a revocation without good reason is effective but makes the principal liable.
It is not always easy for third parties to verify whether the person they are dealing with is authorized at all and acts within the scope of his authority. It can be particularly difficult where the authority is not abstract from the underlying contract, and every limitation in the internal relationship also restricts the powers of the agent vis-à-vis third parties. A third party may, therefore, everywhere reasonably rely on the appearance of authority under certain conditions (apparent authority, mandat apparent, Anscheinsvollmacht, procura apparente). First, the principal must, by his conduct or words, have created the appearance that the agent has in fact authority for the act in question. There is disagreement as to whether the principal must have been at fault in causing the appearance (pro, eg Germany, Italy; contra, eg France). Secondly, the appearance must have caused the third person reasonably to believe that authority had in fact been granted. It is for the courts, balancing all relevant circumstances, to establish whether reliance was reasonable in an individual case. The PECL, the UNIDROIT PICC and the DCFR all contain rules to this effect which do not require fault on the part of the principal.
No similar consensus exists as to the effects of apparent authority: on the one hand, the PECL and the DCFR (as well as, eg, French, German and Italian law) consider it to have the same effects as an authority actually granted by the principal. The UNIDROIT PICC (as well as, eg, English and Scots law), on the other hand, operate with the concept of estoppel and merely preclude the principal from invoking the agent’s lack of authority. However, the difference is rather theoretical in nature because an action by the principal against the third party may be taken to be an implied ratification of the agent’s act.
Actions of a falsus procurator, ie an agent acting without authority or exceeding the scope of his authority and without there being apparent authority, cannot bind the principal. (i) However, everywhere (also in the PECL, the UNIDROIT PICC and the DCFR) the principal may ratify the acts of the person purporting to act on his behalf so that they are considered to have been carried out with authority. Of course, this possibility of ratification may enable the principal to speculate on the development of the market at the expense of the third party. As a consequence, the UNIDROIT PICC and the DCFR allow the third party to specify a reasonable period of time for ratification (this solution is also adopted in Germany, Italy, the Netherlands and Switzerland, but not eg in France; in England a reasonable period of time for ratification runs even without its being specified by the third party). The approach of the PECL is somewhat more restrictive in that the third party may only request a confirmation of authority without delay if the principal has caused reasonable doubts about the authority. This seems to rest on the assumption that without such doubts apparent authority will render ratification unnecessary. If, however, the principal does not react to this request, the PECL treat the agent’s act as having been authorized. According to the UNIDROIT PICC, the DCFR and the national legal systems, by contrast, the principal’s silence cannot amount to ratification; lapse of the period of time therefore counts as a refusal of ratification. Ratification has retrospective effect and relates back to the time of the agent’s act; thus, from a functional perspective it is a type of authority. What will happen to rights of parties alien to the transaction is left by the model rules to the applicable national law (which generally will hold that such rights are not affected by a ratification).
(ii) Until ratification has taken place, many countries grant an innocent third party who was not aware of the lack of authority the right to withdraw from the contract and thus to end the state of ambivalence on his own initiative (eg Germany, Italy, the Netherlands; also England, though with restrictions). While the PECL and the DCFR are silent on this point, the UNIDROIT PICC allow a third party that neither knew nor ought to have known of the lack of authority to reject a ratification in advance.
(iii) Another question is the liability of the falsus procurator failing ratification by the principal. The European and international model rules provide a clear answer. If the third party knew or ought to have known (UNIDROIT PICC, DCFR) or could not have been unaware (PECL) of the agent’s lack of authority, the agent is not liable. Otherwise, he owes damages that will place the third party in the same position as if the agent had acted with authority. This balancing of interests is based on the rationale that somebody who purports to act on behalf of a principal warrants for his being authorized to do so, and that only expectation damages can sufficiently take into account the legitimate interests of the third party. The answers given by the national legal systems, on the other hand, differ. While it is almost unanimously accepted that there is no liability if the third party knew or ought to have known of the lack of authority (shared liability in Switzerland), only some legal systems (eg English and Dutch law) adopt the same approach found in the model rules as to the innocent third party. Several legal systems do not consider the agent’s act to be a warranty of authority, but rather a violation of pre-contractual duties (eg Austria, Italy) or a delict (eg France) and therefore, based on fault, only grant compensation of the reliance interest unless the agent had expressly given assurance of his authority (promesse de porte-fort in French law). Other countries steer a middle course and introduce a further distinction. If the agent did not know of his lack of authority, he only has to pay reliance damages. Otherwise, he is made liable for expectation damages (or, as is the case in Germany, even owes performance of the contract; in Switzerland, payment of expectation damages is a matter of judicial discretion).
f) Conflicts of interest
In the light of divergent approaches in the national legal systems, it is not an easy task for international model rules to react appropriately to potential conflicts that can arise from the agent’s position between the principal’s interests that he is to pursue, on the one hand, and his own interests and those of the third party, on the other. Different approaches exist concerning the prerequisites for a relevant conflict of interest. Is it required that the agent was in fact confronted with a conflict of interest (England, Italy, Switzerland)? Or should a legal system rather look at more formally defined constellations in which a conflict of interest can typically be taken to exist, such as the agent concluding a contract on behalf of the principal with himself in his personal capacity (self-dealing), or concluding it on behalf of one principal on the one side and on behalf of another principal on the other (double representation) (Germany, the Netherlands)? Should a general rule on conflicts of interest also cover other cases of ‘abuse’ of authority, ie breaches of fiduciary duties or a violation of limitations arising from the internal relationship with the principal (while such a violation is primarily imaginable under the principle of abstraction, it can also happen according to the rules of equity and where the scope of an authority is defined by statute)? What if the third party had no knowledge of this abuse? Different approaches also exist concerning the consequences. Does a conflict of interest give the principal a right to avoid the contract (England, Italy)? Or is the act done by the agent void but open for ratification by the principal (Germany, the Netherlands)? Moreover, in some countries it is difficult to make out a clear-cut rule (eg for the contrat avec soi-même in France). However, despite all these differences, one can observe a marked tendency towards a ‘materialization’ of the relevant rules.
This tendency is reflected in the European and international model rules. The principal is protected by a right to avoid an act done by the agent if this act involves the agent in a conflict of interest of which the third party knew or ought have known (UNIDROIT PICC, DCFR) or could not have been unaware (PECL). The PECL and the DCFR complement this basic rule with two rebuttable presumptions of a conflict of interest (self-dealing and double representation). In addition, in its chapter on mandate contracts the DCFR contains detailed provisions on when self-dealing or double mandate are permitted in the internal relationship vis-à-vis the principal; if the act in question is permitted under these rules, the principal may not avoid the act. Moreover, all three sets of model rules exclude the right of avoidance if (i) the principal had consented to the agent’s act, (ii) knew or ought to have known (UNIDROIT PICC, DCFR) or could not have been unaware (PECL) of it, or (iii) the agent had disclosed the conflict of interest to the principal and the principal had not objected within a reasonable time.
4. Uniform law
There is hardly any EU private law on the authority of agents (on the First Company Law Directive, see 2. above). The rules of the Geneva Convention largely correspond to those found in the UNIDROIT PICC. On the private international law aspects, see representation (PIL).
Ulrich Müller, Die Entwicklung der direkten Stellvertretung und des Vertrages zugunsten Dritter (1969); Wolfram Müller-Freienfels, Stellvertretungsregelungen in Einheit und Vielfalt: Rechtsvergleichende Studien zur Stellvertretung (1982); Tony Weir (tr), Hein Kötz, European Contract Law, vol I (1997) 220 ff; Jens Kleinschmidt, ‘Stellvertretungsrecht in Deutschland und Frankreich: Perspektiven für eine Rechtsvereinheitlichung’ (2001) 9 ZEuP 697; Howard Bennett, ‘Agency in the Principles of European Contract Law and the UNIDROIT Principles of International Commercial Contracts (2004)’  Uniform Law Review 771; Stephan Festner, Interessenkonflikte im deutschen und englischen Vertretungsrecht (2006); Danny Busch and Laura J Macgregor (eds), The Unauthorised Agent: Perspectives from European and Comparative Law (2009); Filippo Ranieri, Europäisches Obligationenrecht (3rd edn, 2009) 461 ff; contributions by Reinhard Zimmermann, Danny Busch, Laura J Macgregor, Francis Reynolds, Deborah A Demott and Hendrick LE Verhagen in (2009) 17 ERPL 961; Michael Joachim Bonell, ‘Agency’ in Arthur S Hartkamp and others (eds), Towards a European Civil Code (4th edn, 2011) 515.