A source of far more angst than you would expect amongst the professional classes. An agent is one fellow who represents another fellow.
Don’t shoot the messenger
When it comes to entering a contract, an agent enters legal relations on behalf of his principal and, in general terms, tries not to take on any personal responsibility himself. The contract remains between the principal and the third party.
But you soon encounter a thicket of confusion from which you may never emerge and which you will almost certainly regret ever entering. What if the agent doesn't tell the third party who the principal is? What if the agent doesn't even let on that she’s an agent?
It takes three to tango
The problem is that a contract, by well-trodden legal theory, depends upon the state of mind of two people, whereas where an agency exists, the necessary parts of that consensus can live variously between the minds of three. A may have appointed B, without C knowing. B may have represented to C without A knowing. C and A might not know about each other at all.
At least two
From time to time resourceful structurers might try to overcome an accounting problem, or a booking issue between two desks, by interposing an agency arrangement in the middle of a transaction which, otherwise, has the same entity at either end of it. Won’t work. It won’t work even if the agent is a third party — legally, it just vanishes — and it certainly won’t work if the agent is the same entity as the principal. Nemo agens in causa sua, as the JC likes to say.
An agent must, of course, be duly authorised by the principal, but how will the third party know this, without the principal being there to confirm it? You will hear much talk of ostensible authority.
An agent has a special relationship with a principal
An Intermediary acts as True Agent if, acting on Buyer’s behalf, it agrees the purchase of an Asset from Seller by Buyer.
- True Agent acts at all times on Buyer’s behalf and never in its own capacity.
- A True Agent will not record the Asset in its own trading books at any time.
- There is never any contract with respect to the Asset either
- between True Agent and Seller, or
- between True Agent and Buyer.
- Buyer pays True Agent a Commission calculated on the contract between Buyer and Seller.
Asset managers and unallocated trades
A legal conundrum that arises in the context of bulk agency orders placed by an asset manager with a broker-dealer on behalf of several clients. Typically the agent will place the order first without naming the principals, only to advise the broker to which principals it should allocate the securities later in the day.
This convenient outlook — I mean, they would say that, wouldn’t they? — provokes more questions that it answers: if the agent isn’t responsible for unallocated trades, then, until they’re allocated, who is? The broker doesn’t know who the principal is, so it can hardly take up matters with it directly. On the other hand, asset managers will hotly deny any kind of personal liability, appealing to their regulatory status, meagre capitalisation, or sheer importance as a valued client in intimating that this risk ought to be the broker's problem.
But denying principal responsibility, in the eyes of the common law, is a rather optimistic disposition. An agent who has not disclosed its principal must perform, unconditionally, on its principal’s behalf. This the agent might not characterise as a principal obligation, but against the rest of the world, it may as well be. The counterparty’s interest is to be paid; it does not care by whom. Nor, under the common law, can agent the shed that responsibility even by naming the principal: the counterparty now has a choice against whom to enforce —- though this the parties may vary by agreement.
Representations by agent on principal’s behalf
“But I cannot,” she might say, “for I do not know if this is true unless the principal has told me it is true. I cannot assume personal liability for my principal’s obligations. I am but an agent.”
You must answer this firmly, along the following lines:
- No-one is asking you to assume personal liability for your principal’s obligations. We are asking the principal to assume liability for them. It is the principal’s responsibility under the contract. Ordinarily, of course, we would ask the principal directly, but it didn’t show up, and sent you instead. So, we are asking you to communicate these representations on your principal’s behalf.
- Now, you might say you don’t know whether these representations are true, or that you are not sure whether you are authorised to make them on your client’s behalf. But think twice before admitting that because, really, you should have asked or, better still, explained to your client that a condition of signing master trading agreements is that you will have to make uncontroversial representations about your own capacity, authority, competence and sanity.
- If you are still not comfortable proceeding, the answer is not to do without the representations: it is to do without the master trading agreement
- So, what’s it going to be, punk?”
- Riskless principal
- Undisclosed agent (a.k.a. knave)
- Undisclosed principal
- executing broker
- You might think about leaving that last line out, but 10/10 for style if you do decide to use it.