A Supreme Court Ruling Turns Representation to Self-Enrichment

May 2 , 2026. By Yehualashet Tamiru ( Yehualashet Tamiru (yehuala5779@gmail.com) is a partner at Ethio Alliance Advocates LLP. )

Agency law is built upon the foundation of fiduciary responsibility and the exclusive representation of the principal’s interests. The recent judicial findings suggest a shift where the formal scope of a document outweighs the evident purpose for which it was granted. By treating agency authority as a free-standing power rather than a tool for the principal’s objective, the legal system faces a challenge to maintain the integrity of a relationship that relies entirely on the avoidance of divided loyalty, argued Yehualashet T. Tegegn (yehualashet.t@ethioalliancelaw.com), partner at Ethio Alliance Advocates LLP.

A recent case before the House of Federation (acting like a constitutional court in many other countries) demonstrated how easily the trust a principal could bestow upon an agent can be crossed.

A principal granted a power of attorney to an agent, including the authority to sell a property to a third party. The mandate had an evident purpose. The agent was to dispose of the property in a way that served the principal. Instead, the agent mortgaged the property to a bank to secure a loan for a sole proprietorship business the agent owned and operated.

That decision changed the character of the authority granted. The agent did not use the property to complete a sale for the principal. He used it as collateral for personal financial gain. The principal’s property was placed at risk of foreclosure for obligations that had nothing to do with her.

An agent’s authority under the Ethiopian law may come from a contract or directly from the law. But its source does not change the basic rule. An agent must act only for the principal and in the principal’s best interests. Such a duty is not a formality but the foundation of agency law, and once it is weakened, the relationship loses its legal meaning.

The same principle requires an agent to avoid conflicts of interest. The agent must put the principal’s interests ahead of personal gain and any third party’s interests. The law does not wait for actual harm before it becomes concerned. The possibility of divided loyalty is enough to threaten the relationship's integrity. An agency works because the principal trusts another person to act within delegated authority for a defined purpose. When the agent acts outside that purpose, the authority itself loses its legal foundation.

In the case before the House of Federation, the principal sued both the agent and the bank, seeking to invalidate the mortgage. The Federal First Instance Court ruled in favour of the defendants, finding that the agent had sufficient authority and that the mortgage contract was valid. The Court appeared to give decisive weight to the formal scope of the power of attorney, rather than to the purpose for which the power had been granted or the manner in which it was used.

Judges at the Federal High Court reversed the decision on appeal. Their reasoning reflected a more careful understanding of agency, arguing that an authority cannot be assessed only by asking whether a power exists on paper. Courts should ask whether the power was exercised for the principal’s benefit.

However, this ruling did not last. Justices at the Federal Supreme Court reinstated the First Instance Court’s ruling, and the Cassation Bench dismissed the principal’s petition, finding no basic and fundamental error of law.

The legal basis for upholding the mortgage rested mainly on Article 3049(2) of the Civil Code. The provision states that a person may mortgage property only if that person is entitled to dispose of it for consideration. The Court reasoned that because the agent had authority to sell the property, he also had authority to mortgage it. In this view, the power to dispose of property was broad enough to include both sale and mortgage.

At first glance, the argument appears to have a certain logic. A sale is a final and permanent transfer. A mortgage may be seen as a lesser form of disposition. From a narrow and strictly formal point of view, the power to sell could be read to include the power to mortgage. But that reasoning misses the central question.

For whose benefit was the mortgage created?

Addressing this question is indispensable. Agency authority is not a free-standing power. It is a tool given to achieve the principal’s objective. An agent may use granted powers to advance the principal’s interests. The same powers cannot be used to advance the agent’s private interests. Mortgaging the principal’s property to secure a loan for the agent’s own business is a direct conflict of interest. It is a breach of the agent’s duty of loyalty.

The conduct cannot be saved by invoking implied authority. Implied powers exist to make the principal’s mandate effective. They do not allow an agent to expand the mandate beyond its purpose. Treating the authority to sell as the power to mortgage the property for the agent’s personal business stretches implied authority beyond recognition. It converts representation into self-enrichment.

The Federal Supreme Court’s ruling, later reinforced by the House of Federation, therefore appears to dilute core principles of agency law. Agency is built on trust, loyalty and exclusive representation. The agent must not act against the principal’s interests or derive undisclosed and unauthorised benefits from the relationship. By validating the mortgage, the ruling risks normalising the conduct that agency law is designed to prevent.

The bank’s role was also  problematic. Financial institutions dealing with agents under a power of attorney are expected to exercise due diligence. A transaction that appears to benefit the agent personally, rather than the principal, should raise immediate concerns. If those concerns are ignored, the problem is not only private misconduct. It may point to weak institutional safeguards or a preference for transactional convenience over legal integrity.

Comparative legal practice often takes a stricter view of self-dealing by agents. Transactions in which an agent benefits personally are commonly treated as presumptively void or voidable unless the principal has given fully informed consent. The reason is practical. Conflicts of interest create risks too serious to be left to assumption or after-the-fact rationalisation. Against this standard, the approach in this case looks unusually permissive.

Yet, the implications extend beyond a single dispute over a mortgage. Agency relationships perform an important economic function. They allow people who cannot act in person due to time, distance, or capacity to transact through someone else. In Ethiopia, this is especially important for members of the diaspora, who often rely on agents to manage, lease or sell property in the country.

If agents can use delegated authority for personal financial gain, principals will become more hesitant to delegate. Trust will decline. Transactions that could have taken place efficiently may be delayed or avoided. Over time, this could create a transactional “lock-in,” where property owners avoid agents even when representation would serve their interests.

That would defeat the purpose of the agency. The institution exists to bridge practical gaps between principals and the transactions they seek to complete. If the law weakens the safeguards protecting principals, the agency becomes less useful and potentially harmful.

The case also warns against reading statutory provisions in isolation from broader legal principles. Agency law is not only a set of technical rules. It rests on equity, good faith and fiduciary responsibility. A court that asks only whether an agent had abstract authority, while ignoring the purpose and limits of that authority, risks weakening the coherence of the legal system and public confidence in judicial reasoning.

The issue was not simply whether the agent could mortgage property in some technical sense. It was whether the agent could mortgage the principal’s property to secure the agent’s own loan. On that point, the ruling is difficult to reconcile with loyalty, good faith, and fidelity to purpose.

Legal authority should carry responsibility. Without that link, an agency cannot function as intended. When loyalty is compromised, the consequences do not stop with one principal, one agent or one bank. They spread across the legal and economic system, making delegation less trusted and commercial dealings less secure for principals.

PUBLISHED ON May 02,2026 [ VOL 27 , NO 1357]