Welcome to the World of Agency!

In the business world, people can't be everywhere at once. Imagine a CEO trying to sign every single sales contract or a property owner trying to meet every potential tenant. It’s impossible! This is where the Agency Relationship comes in.

In this chapter, we focus on the Creation of Agency. We will look at how this legal "three-way" relationship between a Principal (the boss), an Agent (the representative), and a Third Party (the customer/client) actually starts. Understanding this is vital for your HKICPA QP Module 10 exam because most exam scenarios involve a dispute where you first need to decide: "Was there actually an agency relationship here?"

Note: This chapter focuses on how the relationship is formed. For the specific powers an agent has, see the chapter "Types of authority of an agent."


1. Agency Created by Agreement (The Most Common Way)

The simplest way to create an agency is for the Principal and Agent to simply agree on it. This is a consensual relationship.

Express Agreement

This is where the Principal specifically tells the Agent what to do. It can be:

  • Written: For example, a formal "Power of Attorney" or a written employment contract.
  • Oral: A simple spoken instruction, like "Please sell my car for me this weekend."

Implied Agreement

Sometimes, nobody says "I appoint you as my agent," but their conduct and the circumstances make it clear that an agency exists.

Example: If a shop owner allows a person to stand behind the counter, wear the uniform, and handle cash for months, the law may imply that an agency agreement exists based on their behavior.

Key Takeaway: Agreement is based on consent. If both parties act as if there is an agency, the law will usually treat it as one.


2. Agency Created by Ratification (The "Approval After the Fact" Way)

What happens if someone acts as your agent without your permission first, but you actually like the deal they made? You can "ratify" it.

Ratification is when the Principal retrospectively (backwards in time) approves an act done by someone who had no authority at the time they acted. Once ratified, it is as if the agent had authority from the very beginning.

Conditions for Valid Ratification:

For ratification to work in a legal scenario, certain rules must be met:

  1. The Principal must have existed: The Principal must have been in existence when the Agent made the contract. (This is important for newly forming companies).
  2. The Agent must name the Principal: The Agent must have told the Third Party they were acting for a Principal (even if they didn't give the specific name). They cannot pretend they are acting for themselves and then try to "hand over" the contract to a Principal later.
  3. Capacity: The Principal must have had the legal capacity to enter the contract both at the time of the act and at the time of ratification.
  4. Time limit: Ratification must happen within a reasonable time.

Quick Tip: Think of Ratification as a "back-dated permission slip."


3. Agency Created by Necessity (The "Emergency" Way)

This is rare in modern times because of mobile phones, but it still exists in the law. It happens when an "Agent" is forced to act to protect the Principal's property in an emergency.

To prove Agency by Necessity, you need:
  • A genuine commercial emergency (e.g., perishable goods like fruit are about to rot).
  • It was impossible to contact the Principal for instructions.
  • The Agent acted in good faith in the best interests of the Principal.

Common Mistake to Avoid: Don't assume a minor inconvenience is an "emergency." If the Agent could have sent an email or made a call, it is not agency by necessity.


4. Agency Created by Estoppel (The "Looking Like an Agent" Way)

This is a very important concept for the HKICPA exam. It is often called "Apparent Authority" or "Ostensible Authority."

Agency by Estoppel occurs when the Principal (not the agent!) creates an appearance that someone is their agent, and a Third Party relies on that appearance.

How it works (Step-by-Step):
  1. Representation: The Principal represents to the Third Party (by words or conduct) that "Person A" is their agent.
  2. Reliance: The Third Party deals with "Person A" because they believe this representation.
  3. Alteration of Position: The Third Party enters a contract or changes their position based on that belief.

If these happen, the Principal is "estopped" (legally stopped) from later denying that the person was their agent. Even if the Principal never actually gave them authority, they are bound by the contract because they let it look like there was authority.

Case Authority: In the context of Hong Kong real estate and agency disputes, the case of Wong Man Yin v Ricacorp Properties Ltd [2003] highlights how agency relationships and the resulting duties (like the right to commission) are analyzed by the courts.


Summary Checklist for Students

When you see a scenario question about the start of an agency, ask yourself:

  • Did they have an agreement (written or spoken)?
  • Was there an emergency where they couldn't reach the boss (Necessity)?
  • Did the boss approve the deal later (Ratification)?
  • Did the boss make it look like the person was an agent to the outside world (Estoppel)?

Key Term Review:
Principal: The person being represented.
Agent: The person doing the representing.
Third Party: The person the Agent deals with on behalf of the Principal.

Don't worry if the distinction between "Agreement" and "Estoppel" feels a bit blurry at first—in many exam scenarios, they overlap! Just focus on whether the Principal's actions or words gave the impression that the Agent was authorized.