PART 4 – FORMS OF BUSINESS
ORGANIZATION

Chapter 15 – Law of
Agency
Prepared by Douglas H. Peterson, University of
Alberta
Copyright © 2004 McGraw-Hill Ryerson Limited
1
LAW OF AGENCY







The Role of an Agent
Historical Development of the Law of Agency
The Nature of the Relationship
Ratification of Contracts by a Principal
Third Parties and the Agency Relationship
Liability of Principal and Agent to Third
Parties in Tort
Termination of the Principal-Agent
Relationship
Copyright © 2004 McGraw-Hill Ryerson Limited
2
THE ROLE OF AN AGENT

Relationship that arises between 2 parties



How it arises


Principal – a person on whose behalf an agent
acts
Agent – a person appointed to act for another,
usually in contractual matters
Expressly, by conduct, by necessity
Three parties


Principal, agent, third party
Agent acts for principal in relationship with third
party
Copyright © 2004 McGraw-Hill Ryerson Limited
3
THE ROLE OF AN AGENT

Agent acts on behalf of another (the
Principal)


May have authority to bind principal in contract
or simply responsibility to assist principal to
achieve some business objective
Governed by common law rules and, in some
cases, by statute
Copyright © 2004 McGraw-Hill Ryerson Limited
4
HISTORICAL DEVELOPMENT



Required with the growth of trade and the
rise of the mercantile class
Molded by both common law and law of
equity
Traditionally distinguished from employment
law
Copyright © 2004 McGraw-Hill Ryerson Limited
5
NATURE OF RELATIONSHIP


Agent is one who is employed to act on
behalf of another
Agent can bind principal



If done within scope of agent’s authority
General rules of contract apply to agency
relationship
Capacity of agent

Agent can be minor and bind a principal if the
principal is an adult
Copyright © 2004 McGraw-Hill Ryerson Limited
6
CREATION OF AGENCY

Methods of creating an Agency relationship

Express agreement



Written or oral
By conduct or estoppel
By operation of law

Agency by necessity
Copyright © 2004 McGraw-Hill Ryerson Limited
7
AGENCY BY EXPRESS AGREEMENT

Methods



Written agreement
Oral agreement
Agency by conduct – an agency relationship
inferred from the actions of the principal (agency
by estoppel)
Copyright © 2004 McGraw-Hill Ryerson Limited
8
AGENCY BY EXPRESS AGREEMENT

Contractual in nature



Normal rules of contract for formation and
performance
If over a year must comply with Statute of
Frauds
Must comply with requirements of formal
contracts if applicable

E.g. land transactions
Copyright © 2004 McGraw-Hill Ryerson Limited
9
AGENCY BY EXPRESS AGREEMENT

Oral


Advantages of written is duties of parties set
forth
Written contracts not required for simple tasks


Employee purchase materials from hardware store for
employer
Contracts – 2 distinct


Contract between principal and agent
Contract between principal and third party
Copyright © 2004 McGraw-Hill Ryerson Limited
10
AGENCY
CONTRACTUAL RELATIONSHIPS
EXAMPLE:
Copyright © 2004 by McGraw-Hill Ryerson Limited.
PRINCIPAL
AGENT
Authority to Enter into Contract
on Behalf of Principal
(Contract Usually Between
Principal and Agent)
THIRD
PARTY
RESULT
PRINCIPAL
Negotiation of
Contract on Behalf of
Principal (Within
Scope of Authority)
AGENT
THIRD
PARTY
Copyright © 2004 McGraw-Hill Ryerson Limited
11
DUTIES OF THE PARTIES

Duties of Principal


Fulfill obligations set forth in agreement
Pay the agent


Indemnify agent for reasonable expenses and
liabilities incurred in carrying out agency duties
Principal may be relieved of obligation if
agent acts illegally or in breach of agency
agreement
Copyright © 2004 McGraw-Hill Ryerson Limited
12
DUTIES OF THE PARTIES

Duties of Agent




Fulfill duties set forth in agreement
Follow lawful instructions of principal
Not disclose confidential information
Keep in contract with principal and inform
principal of developments

Notice to agent is deemed notice to principal
Copyright © 2004 McGraw-Hill Ryerson Limited
13
DUTIES OF THE PARTIES

Duty of Care

Reasonable care in performing duties



Subagents


Special skills or competence
Duty to maintain standard
Agent may not delegate without consent of
principal
Duty to account


If authority to accept funds or goods must
account to principal
Usually done through trust accounts
Copyright © 2004 McGraw-Hill Ryerson Limited
14
DUTIES OF THE PARTIES

Fiduciary Duty – duty to act in utmost good faith in
the best interests of principal






Seek best price, best deal
Not act for own interests
Disclose information relevant to principal’s interests
Not profit from information or opportunities that arose
out of agency
Not compete with principal
Agent’s duty to principal not third parties


May not act for both without consent (conflict of
interest)
May not receive commission from third party
Copyright © 2004 McGraw-Hill Ryerson Limited
15
AGENCY BY CONDUCT (ESTOPPEL)

Agency is by authority


Real or actual – by express agreement
Apparent – by actions


Person may be their actions convey impression that
they have authority to act on behalf of another
If person allows and agent enters into contract,
may not be permitted to later deny it

Will be estopped
Copyright © 2004 McGraw-Hill Ryerson Limited
16
LIABILITY OF PRINCIPAL

Principal liable for agent if acting with either
real or apparent authority



Restrictions in authority of agent must be
brought to attention of third party
Even if agent exceeds actual authority
Implied authority – agent has authority based on
conduct and what is normal in the industry

Salesperson in retail authority to sell but in auto
industry is not
Copyright © 2004 McGraw-Hill Ryerson Limited
17
AGENCY BY OPERATION OF LAW

Circumstances require person to act as an
agent for another





Emergencies – common law concept of agency
by necessity
Ship master dump cargo to save ship
Must show no ability to communicate with
proper party
Need pre-existing legal relationship
Rare today with modern communication
techniques
Copyright © 2004 McGraw-Hill Ryerson Limited
18
RATIFICATION BY PRINCIPAL


“Agent” purports to enter contract on behalf
of principal but without authority to do so
principal wishes to take advantage of
contract and ratify it

Contract binding just as if agent had authority
Copyright © 2004 McGraw-Hill Ryerson Limited
19
RATIFICATION BY PRINCIPAL

To be effective

Principal in existence at time contract was made






Pre-incorporation contracts – allowed in some provinces
Principal identified in the contract
Principal has ability to enter into and perform contract
Ratification within reasonable time after contract signed
Must be of the whole agreement, not favorable parts
Agreement effective at time of signing not
ratification
Copyright © 2004 McGraw-Hill Ryerson Limited
20
THIRD PARTIES

Agent signing on behalf of principal


Per ABC Corporation
Per = per procurationem


“On behalf of another” “by his agent”
Disclosed versus Undisclosed principal


Disclosed – agent has revealed to third party
acting on behalf of principal
Undisclosed – agent has not revealed to third
party acting on behalf of principal
Copyright © 2004 McGraw-Hill Ryerson Limited
21
DISCLOSED PRINCIPAL

Principal alone is liable



Agent has no rights or duties with respect to
third party
Agent may not claim benefits flowing to principal
Agent may


Enter into agreement in own name; or
Enter into agreement as agent for unnamed
principal
Copyright © 2004 McGraw-Hill Ryerson Limited
22
UNDISCLOSED AGENT



Agent not disclose acting as agent
Third party may assume agent acting as
principal
If agent





Hold self out as a principal
Describe self
Signs as principal; and
Agreement is in writing
Agent alone is liable and personally
responsible for performance
Copyright © 2004 McGraw-Hill Ryerson Limited
23
FICTITIOUS PRINCIPAL


If agent acts for fictitious or non-existent
principal or;
Acts for principal agent did not have
authority to act for; then:



Third party may sue agent for breach of
warranty of authority
Agent is NOT liable on contract
Agent liable for damages to third party possibly
also tort of deceit
Copyright © 2004 McGraw-Hill Ryerson Limited
24
NEITHER PRINCIPAL OR AGENT

Contract negotiated by agent where agent
does not describe self as agent or principal



Principal may come forward and enforce
agreement
Third party can bring an action against principal
for any breach
Third party has to choose


May sue principal or agent but not both
Exception: not apply to contract under seal
Copyright © 2004 McGraw-Hill Ryerson Limited
25
UNDISCLOSED PRINCIPAL

Agent describes self as agent but does not
disclose acting for principal





Agent not personally liable
Third party was aware of a principal, even
though undisclosed
If principal reveals identity after, liable
Principal takes place of agent
Any third party defenses against agent may be
effective against principal
Copyright © 2004 McGraw-Hill Ryerson Limited
26
AGENCY
RIGHTS OF THIRD PARTIES
DISCLOSED PRINCIPAL
Right of Action
PRINCIPAL
Authority
AGENT
Contract on Behalf
of Principal
THIRD PARTY
UNDISCLOSED PRINCIPAL
Right of Action Against Agent or Principal
PRINCIPAL
Authority
AGENT
Contract on Behalf
of Undisclosed
Principal
THIRD PARTY
Cont’d
Copyright © 2004 McGraw-Hill Ryerson Limited
27
LIABILITY TO THIRD PARTIES


General rule – principal liable for tort’s
committed by agent in ordinary course of
carrying out agency agreement
Fraudulent misrepresentation (Deceit)




If in ordinary course of business both agent and
principal liable
Outside scope of agent’s employment, agent
alone is liable
Same rules as vicarious liability
Innocent misrepresentation

Third party may repudiate contract
Copyright © 2004 McGraw-Hill Ryerson Limited
28
AGENCY
RIGHTS OF THIRD PARTIES, cont’d
AGENT HOLDING SELF OUT AS PRINCIPAL
Right of Action
PRINCIPAL
Authority
AGENT
Contracts as
Principal
Copyright © 2004 McGraw-Hill Ryerson Limited
THIRD PARTY
29
TERMINATION


In accordance with agency agreement
By notice



For particular period or task



At end of period or completion of task
Incapacity of either party


As required in agreement
Implied – if not set forth in agreement
Death, insanity
Bankruptcy of principal
Principal must inform third parties of termination or
risks continuing liability for agent’s actions
Copyright © 2004 McGraw-Hill Ryerson Limited
30
SUMMARY


Agency arises by expressly or implicitly
Expressly


Authority






By conduct or necessity
Real or actual
Apparent
Within scope or outside scope of authority
Agent acting for self
Disclosed and Undisclosed Principal
Termination

Various methods
Copyright © 2004 McGraw-Hill Ryerson Limited
31