Law Of Agency: Fiduciary Relationship Essay


Discuss about the Law of Agency for Fiduciary Relationship.


Law of Agency is a special kind of contract where the agreement between principal and agent are legally binding. In an agency agreement, the principal is the primary authority who confers powers on the agent to make contracts on his behalf with a third party (Beaupert, Steele & Gooding, 2017) . In general cases of contract, there is an agreement which is a pre-requisite for entering into a contract but in cases of agency, there might be an exception of an absence of an agreement. Agency contracts are lawful even when there is no lawful agreement between the parties. Again, in cases of general contract, there is a consideration without which contracts are void ab initio but in cases of agency, there is no requirement of consideration and agency contracts can be non-gratuitous, that is, without any consideration. A contract should have a minimum of two parties but since agency contract is a special kind of contract, it has three parties-the principal, the agent and the third party. Though the agent works under the authority of the principal, in cases of any liability, it always arises between the principal and the third party and never between the agent and the third party.

Undisclosed principle is the when a relationship exists between the principal and the third party even when the agent has not disclosed the relationship of agency that exists between the agent and the principal (Garcia, Rodriguez & Fdez, 2015). Doctrine of election happens when the third party has the right to choose from whom to demand performance. Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199 ahs laid down the principle that when the third party believes that the agent is acting on his behalf and based on a particular skill has demanded a particular job, the third party will demand that performance from the agent and not the principal.

Under the Law of Agency, the duty of the agent is to follow the principal’s directors and strictly adhere to them. In cases of breach of fiduciary relationship by the agent, he is liable to the principal because it is his duty to act in good faith and exercise skill and judgment, as has been laid down in the case of Watteau v Fernwick. Therefore, the duty of the agent is to strictly adhere to the instructions of the principal. Ostensible authority is when by implied conduct of the party, the 3rd party is made to believe that there exists a relationship of agency between the agent and the principal and the agent is working under the authority of the principal. Freeman & Lockyer v Buckhurst Park Properties [1964] 1 All ER 630, it was held that when the 3rd aprty believes that agent has an authority to deal with him, the principal is stopped from denying his authority. Ostensible authority is an exception to the termination clause of agency. It was also held that, the key to fixing liability to the principal is to see if the principal has done anything that gave the 3rd party the notion that the agent was acting under the authority of the principal.


Under the laws of agency, Terrence is the principal and Sara is the agent who works under his authority. Applying the rule of Undisclosed principle, Sara did not notify Gabby that she was working under the authority of Terrence and had taken the order. Gabby was unaware of the agency relationship that was existing between Terrence and Sara. Gabby has the power to elect who will perform the duty in the present case (Stout & Blair, 2017).

Terrence instructs Peter to buy silver and not gold but Peter does not fulfil his fiduciary duties that exist under agency law and breaches the contract. Unhappy with the defiance of Peter, Terrence fires him but keeps his business email active from where Peter makes a deal with Gordon. Applying the rule of ostensible authority, Gordon thought that Peter was still an agent of Terrence and that he was dealing with Terrence.


Gabby can elect who she wants to design the elephant brooch for her and Sara has not breached any contract.

Peter is bound by fiduciary relation to follow the instructions of Terrence and there he is liable for breach of contract. Terrence has to pay Gordon because by keeping the business email of Peter active, he has given the impression to Gordon that the agency relationship between Terrence and Peter exists and that Gordon is dealing with Peter.


The present case deals with the laws of company incorporation and business ethics. The concerned parties are the shareholders of a company and the issue is whether the failure to pay an amount of 2000000 will lead to a breach of contract. Another issue pursuant to the present case is regarding the Commonwealth legislations’ authorities regarding cancelling the application of license for explosives manufacturing.


Initially, when the commonwealth had the power to legislate in matters regarding to companies by virtue of section 51(xx) of the Constitution, it only had jurisdiction of New South Wales and the power only was limited to the incorporation in New South Wales and not the whole of Australia (Hannigan, 2015). Australia follows common law principles and the laws of the United Kingdom and therefore the laws followed are those of the United Kingdom. The Commonwealth is enabled to make laws under the Corporations Act, 2001 and that there is a national Companies Act that governs all business laws in Australia. All corporations in Australia are regulated by the Australian Securities and Investments (Commission) and the ASIC is governed by the Australian Securities and Investments Commission Act 1989. The ASIC has various roles to play and it acts as the guardian of the company protecting the rights of the shareholders, directors and investors (Coffee, Sale & Henderson , 2015). The ASIC has both criminal and civil jurisdictions and also has the power to fix damages in cases of breach of contract. the ASIC can attach pecuniary penalty in cases of a company breaching the principles of the Corporations Act. Under S. 1311, if a company fails to do anything which a company should do in the regular course of its business, penalty is attached for breach. The penalty is imposed by the company under section 1317 of the Corporations Act. In cases of contravention of the principles of the company as under Section 1317L, the company can recover the same by compensation through the provisions of section 1317G. A company can be made liable as a natural person under the Corporations Act after its incorporations (McQueen, 2016). 50 of the ASIC Act help to protect the rights of the shareholders and acts as a shield against malfeasant directors. Corporate veil as a concept applies when a company under the veil of a company acts in unlawful ways. In the case of Solomon v Solomon Co Ltd [1897] AC 22, it was held that the company was separate from its shareholders and that in case a company intends to defraud, the company will be held liable (Chen, Ramsay & Welsh, 2016).

The Commonwealth legislation gives power to the ASIC to reject the application for license of any company if it has any criminal record. In case, the director or the shareholder of the company has any conviction record, the Corporations Act, 2001 has enough power to cancel the license. By virtue of section 206B of the Corporations Act, license shall not be granted to a company that has a past criminal record. Criminal record in the past will lead to automatic disqualification.


In the current case, the facts point towards a breach of contract by Roger, who owns 92 shares in his company and is the owner of the same. By way of written agreement, a contract was signed between United Chemicals Ltd and Industrial Machines by way of which it was agreed that an amount of $6000000 will be paid in three instalments in three consecutive years, that is 2015, 2016 and 2017. Owing to the downfall in the business Roger, could not pay the last instalment and as a result he was sued. A contract was entered into between the parties and there has been a breach of that agreement due to the failure to pay the sum. A contract is binding and in cases of failure to pay, the director has to pay damages. A shareholder shall exercise due diligence while exercising his duties and in cases of grave breach, he shall be made liable.

The Commonwealth legislations state that anyone with criminal record shall not be given a license for manufacture of explosives. Roger was convicted of theft in the year 2005 and has a criminal conviction report and therefore he was not allowed by the Commonwealth Department of Industry to set up the explosives factory. A high degree of care and duty is put on the ASIC to ensure the safety of the workers and the prime reason behind not granting license to explosive manufacturing factories because the ASIC is duty bound to ensure that the workers and the citizens are safe. In this case, Roger having a criminal record has not been allowed to set up the factory as he was convicted in the year 2005. Under the powers of the Parliament, the ASIC has huge powers to ensure that a company does not indulge in nefarious activities. In case of a company trying to breach the conditions as laid down in the Corporations Act, the ASIC can attach criminal liabilities and fix liabilities for damages. Therefore, combining the two activities of Roger, it can be said that the ASIC has the power to exercise its powers to ensure the rights of the debtors against the unlawful activities of the shareholders. In case of breach of contract, the ASIC can fix liabilities and attach pecuniary relief to the affected debtors. The ASIC under the commonwealth laws have powers to give license to a company as well as cancel applications for license in cases there is a previous mandate that prohibits a company from being incorporated.


Roger has breached the written contract and therefore is liable for breach of contract. Roger has failed to make the payment of $2000000 and is therefore liable to the debtors.

Owing to the Commonwealth legislations, Department of Industry is justified in rejecting the License for the manufacture of explosives.


Beaupert, F., Steele, L., & Gooding, P. (2017). Introduction to disability, rights and law reform in Australia: Pushing beyond legal futures. Law in Context, 35(2), 1.

Chen, V., Ramsay, I., & Welsh, M. (2016). Corporate law reform in Australia: An analysis of the influence of ownership structures and corporate failure.

Coffee Jr, J. C., Sale, H., & Henderson, M. T. (2015). Securities regulation: Cases and materials.

Garc?a, J. A., Rodriguez?S?nchez, R., & Fdez?Valdivia, J. (2015). The principal?agent problem in peer review. Journal of the Association for Information Science and Technology, 66(2), 297-308.

Hannigan, B. (2015). Company law. Oxford University Press, USA.


McQueen, R. (2016). A Social History of Company Law: Great Britain and the Australian Colonies 1854–1920. Routledge.

Stout, L. A., & Blair, M. M. (2017). A team production theory of corporate law. In Corporate Governance (pp. 169-250). Gower.

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