It is still a characteristic feature of the French Civil Code and of other codifications following its model (for instance, those of Spain, Portugal, Romania, and Brazil and other Latin-American countries) that agency is not recognized as an isolated institution. These legal systems conceive of agency only as a subordinate instance or external effect of mandate. The result is that they consider the power to act as an agent as a mere part of mandate and do not have a general concept of authorization as a distinct legal institution. In contrast to this approach, the more modern codifications of Scandinavia and of such countries as Germany, Switzerland, Japan, Poland, Italy, and Greece draw a sharp distinction between the unilateral organizational act on the part of the principal authorizing the agent to act and the internal contractual relations between the principal and the agent. This distinction, one of the major achievements of 19th-century European legal scholars, is also followed by modern English and American legal writers, even though the classical concept of mandate is unknown in the common law.

The insight that authority can exist independent of the underlying contract, and even without it, opens several new practical possibilities. For example, it explains the rule that the authorization of a minor can be valid if he is in fact mentally and physically capable of transacting business, even though the minor is not competent himself to conclude the (internal) contract of employment for himself that establishes fiduciary duties. Thus, the minor is not subject to the liabilities ex contractu (from or out of a contract) of an adult agent although he is authorized.

A few countries still prescribe a special form for every authorization. According to the Russian and Brazilian codes, for example, an authorization must be given in written form. This general rule, which has been mitigated to some extent by the courts, is influenced by a distrust of informality and by a concern “to protect the individual and to be better able to examine the lawfulness of a legal transaction.” The opposite tendency is followed to the extreme by the German Civil Code. It not only adopts the general principle of “freedom of form”—with the rare exception that a special form is required in those cases where a statutory article expressly prescribes it—but even states that the granting of authority need not be in the form prescribed for the judicial act to which the agency power relates. In spite of this express statutory language, German courts do require compliance with formalities in certain extreme situations under pressure of practical necessity, in order to avoid frustration of the aim of the formal requirement in the principal contract. This attitude thereby approaches the English rule according to which, in most cases, no particular formalities are required, even if the agent is to make an agreement for the sale or lease of land, an agreement that must be in writing. More attention to the connection between the authorization and the act of the agent appears in provisions like that of the Greek Code of 1940, which says that the authorization must take the form required for the legal transaction for which the authority is issued unless the particular circumstances lead to a different solution. Other modern codes like those of Poland and Italy do not even contain the “unless” clause and prescribe only that an agent’s power of attorney must be granted with the formalities prescribed for the contract that is to be entered into by the agent.

The internal agency contract

The internal bilateral relationship between principal and agent—apart from agency of necessity—rests upon what is commonly termed a “contract of agency.” This term encompasses all sorts of contracts of employment including gratuitous services (in those cases in which the agent is willing to render a friendly favour).

This internal relationship between principal and agent must begin with an agreement, since otherwise the principal would have no rights against the agent—even the right to beneficial service presupposes the agent’s consent to serve. The consent of the principal may be given expressly by a written power of attorney or implied by his conduct, such as an established course of dealing. Generally, the formation of the contract of agency requires no formal ritual. Moreover, in many cases the obligation to act as agent is only a part of the greater complex of duties that forms a person’s job, profession, or office (for example, those of factors, bailiffs, attorneys, or brokers).

The basic principle of agency is that the agent, in fulfilling his obligation, concludes legal transactions on the part of his principal. When these transactions result from the authorized legal acts of the agent, the result is that only the principal is bound by them. The competent agent himself remains outside the contractual relations with the third party (but compare “undisclosed agency” above) provided he has not also contracted for himself at the same time—for example, when the third party is not content with the principal’s credit and insists upon having the agent’s liability in addition to the principal’s; in such a case the agent binds both his principal and himself. This general rule that the agent does not become involved may change in the exceptional case of an authorization conferred for the benefit of the agent. Thus, such an agent has been held personally liable by German courts for mistakes made in the course of contract negotiations (culpa in contrahendo).

Rights and duties between principal and agent

Continental European codifications generally do not treat the contract of agency as a separate type of contract. The standards governing the principal–agent relationship must therefore be derived from the general legal rules governing the mandate, the contracts for performing work, employment contracts, and partnership contracts, together with the more specific rules (e.g., of the commercial codes) regulating particular agency relations and the individual transaction at hand.

Differing from this general approach, the common law has recognized a number of more specific rights and duties between principal and agent. The principal must provide the agent with a regular opportunity for service under the contract of employment and has a positive duty to aid, and not inhibit, the agent’s performance of such service. He must compensate the agent for his services, provided they are not gratuitously rendered (the agent’s right of remuneration), and must account for those amounts due to the agent, including indemnification for economic loss suffered by the agent on account of the agency relationship (right of indemnity and right of lien by way of charge on the principal’s goods in his possession). The principal also has the more abstract duty to conduct himself so as not to harm the agent’s reputation.

The primary duties of the agent to the principal are those of care, obedience, and loyalty—similar to those of a trustee. More specifically, the agent must act solely for the interests of his principal and therefore must account for any financial benefit (“secret profit”) he might derive from a transaction. It follows that it is a violation of an agent’s fiduciary duty to his principal to have unrevealed interests adverse to those of his principal. He must not compete with his principal and may not use or disclose confidential information except for his principal’s benefit. If an agent has received money or other property from or for his principal, he must account for it. An agent also may not normally delegate his task to a subagent, since the principal is assumed to have placed his confidence in the person of the agent and not in a subagent. Finally, the agent also has the abstract duty of conducting himself so as not to bring disrepute upon the principal.