Agency is a widely used term when applied to organisations. The legal definition of an agent is a person acting for another person. Thus an agency is where an agent is acting for a principal (the term given to “another person” as defined).
Since we provide Corporate Services our interest is with companies rather than humans, acting as agent or principal. Other entities, for example partnerships, trusts, and funds have a legal status as “persons” in the above definition.
Principal and Agent
Essentially an agent performs a service to the principal in return for fees or commissions. Those fees represent the agents income and the basis for any tax that is due after expenses have been deducted. The agent does not share in the profits from the business that he may support.
The role of principal and agent is very important to the inclusion of agencies in an international structure for business. In particular it provides the basis to determine the purpose, function and operating roles of companies in different jurisdictions when acting as principal and agent.
The concept of an agent operating for an undisclosed principal is embodied in English law and this has important features for international operations that require confidentiality or the projection of image.
Agencies as the “face” of the principal
Since there are two parties to the role of principal and agent there are reciprocal rights and liabilities between each party that reflect legal and commercial realities. The formation of an agency gives attention to these
For example since a company is a fictitious legal person, it can only act through humans. Thus the law requires at least one human to act as a director and/or company secretary. For an UK company that is owned from outside of the UK, those human agents are often not active in business operations. They have a nominee role primarily to discharge requirements for registration and compliance in the UK. To carry out business operations the company needs to either employ people, and organise all related infrastructure, or engage an agent to act for it in a contracted way. Those agents may be provided by another company. That agent may also provide a cost effective alternative to investment and infrastructure for operations in the UK.
A commercial reality is that the principal is bound by the contract entered into by the agent, so long as the agent performs within the scope of the agency. Moreover in commercial dealings a third party may rely in good faith on the representation by a person who identifies himself as an agent for another. In short the agent becomes the face of the principal and thus responsible for the image of his commercial operations in the UK. The principal remains ultimately responsible for the commercial consequences of those operations contracted from the agent within that image.
Types of agency
There are three broad classes of agent.
- Universal agents hold broad authority to act on behalf of the principal in all matters. When applied to persons, for example a professional like a lawyer or accountant, or key service provider like a shipping agent, they may hold a power of attorney mandating such universal involvement in all matters. In terms of international business structures a company operating in this way is close to being a full branch of a foreign parent company with little distinction from being a subsidiary.
- General agents hold a more limited authority to conduct a series of transactions over a continuous period of time. A company operating in this way would be seen to be operating supporting or ancillary services to a principal. They would not be directing or managing the business. They may undertake similar agency roles for others. We have developed experience of this type of agency. Indeed it has become central to the Business Management services that we provide.
- Special agents are authorised to conduct either only a single transaction or a specified series of transactions over a limited period of time. For example the purchase of manufacturing equipment for export and installation in another country might be best served by an agent in the country of manufacture.
Why are these definitions of agency important?
In terms of determining an international structure it is the implications for taxation that are important by these classes of agency. This relates to the degree to which the interests of a foreign business are established in the UK. In what are complex matters, having a fixed place of business through which the business is carried out, or how far an agent habitually exercises conclusions on contracts, becomes important.
Agencies and Corporate Structures
We recommend that agencies are considered as an International Business Structure is developed. That can define how a new UK company is to be used. It can also determine the level of investment that will be needed to operate from a new location as agencies are a lower cost solution.
This concept is important and is explained by a short story.
Mr White and Mr Black lived next door to each other in similar houses. Mr White told Mr Black that if it ever became available, he would buy his house. After some years as friends Mr White and Mr Black argued. They were no longer friends. Mr Black declared that he would never sell his house to Mr White. True to his word, and despite Mr White’s offer being repeated, Mr Black did not sell his house to Mr White. He sold to Mr Brown. Mr Brown then gave the house to Mr White.
In this story Mr Black did not know that Mr Brown was working as an agent for Mr White as an undisclosed principal. Mr Brown had a duty only to Mr White. He had no duty to tell Mr Black who he was working for.
Within an international business structure there might be agents working for an undisclosed principal. This is particularly useful to support an alternative face to business.
Agencies and Business Management
The support services we provide as Business Process Outsourcing are often based on the concept of agency. That covers support to clients operating through an UK company. The company will operate as a general agent providing some, but not all, functions of the business.
Accordingly it is important for clients to appreciate the following technical aspects of the relationship between principal and agent.
The term authority appears in all three classes of agency. “Authority” refers to the power passed to the agent by the principal. Thus provided that an agent acts within the scope of the authority given by a principal, it follows that principal is bound by the obligations created by the agent against third parties. In other words within the agency relationship the principal cannot simply say “I did not agree”, if the agent reasonably carried the tasks actually authorised by the principal.
Actual authority can be of two kinds. Either the principal may have expressly conferred authority on the agent, or authority may be implied. This is another complex area but our advice is to bring clarity with an agency agreement that clearly sets out what a principal requires to be done by an agent.
The liability of an agent to a third party and to the principal, and the liability of the principal to the agent are other matters which are best recorded in agency agreement.
Any consideration of agencies within an international business structure should recognise that the agent owes the principal a number of duties. These include:
- a duty to undertake the task or tasks specified by the terms of the agency (that is, the agent must not do things that he has not been authorised by the principal to do);
- a duty to discharge his duties with care and due diligence;
- a duty to avoid conflict of interest between the interests of the principal and his own (that is, the agent cannot engage in conduct where stands to gain a benefit for himself to the detriment of the principal).
- a duty of confidentiality
An agent must not accept any new obligations that are inconsistent with the duties owed to the principal. An agent can represent the interests of more than one principal, conflicting or potentially conflicting, only after full disclosure and consent of the principal.
An agent also must not engage in self-dealing or otherwise unduly enrich himself from the agency. An agent must not usurp an opportunity from the principal by taking it for himself or passing it on to a third party.
The principal must make a full disclosure of all information relevant to the transactions that the agent is authorised to negotiate and pay the agent either a prearranged commission a reasonable fee established after the fact.