LAW 603 Week 1 Chapter 19 Agency and Other Methods of Carrying Business Chapter Overview - - An agent is a person who acts on behalf of someone else for a specific purpose; the person being represented is called the principal Agency is the legal relationship between the principal and the agent; a principal may agree to be represented by an agent because the agent can achieve the principal’s business purpose more effectively than the principal on their own Agents do not always have the authority to enter into legal obligations on the principal’s behalf but may represent the principal’s interests in some other way (i.e. real estate agent) Agents are subject to legal of behaviour that are designed to protect principals from the risks to which their agents may subject them; principals have a much more limited set of obligations to their agents Basic Rules of Agency - - - - - Creation of an Agency Express agreement: principal and the agent enter into a contract that sets out the terms on which the agent is appointed, including the scope of the agent’s authority and the agent’s remuneration Agreement must be in writing if - In a province where the Statute of Frauds is still in force; the relationship is to last longer than a year - If the agent is going to have the authority to sign cheques on behalf of the principal A commercial representation agreement occurs when a manufacturer of goods agrees to allow someone to sell its goods on its behalf Actual authority: exists when the principal authorizes the agent to act on its behalf; agents also have implied powers to do what is necessary to fulfill the responsibilities of their position, even though these powers are not expressed anywhere Principal is bound by any obligation created by an agent within the scope of actual authority Apparent authority: exists when the principal creates the reasonable impression that the agent is authorized to act on the principal’s behalf; a contract created by an agent within their apparent authority is just as enforceable as if the agent had actual authority Agency can arise as a matter of law (e.g., partnership) Ratification - A contract is ratified when someone accepts a contract that was negotiated on their behalf but without their authority; for ratification to be effective, it must meet these requirements - It must be clear; ratification can, however, be either express or implies from behaviour - It must occur within a reasonable time after the creation of the contract; what is reasonable depends upon the facts LAW 603 Week 1 - - - - - - - The principal must accept the whole contract or none of it The principal must have been identified by the agent; an agent cannot make a contract, either on their own behalf or on behalf of some person the agent has not yet identified, and then try to find someone to ratify it - The principal must have had the legal capacity to enter into the contract both at the time the agent created the contract and at the time of ratification The agent is not personally liable When Is the Principal Liable? A principal is liable to a third party under any contract that an agent creates within the scope of the agent’s apparent authority just as if the agent had actual authority Apparent authority is not necessarily connected with actual authority but the two may overlap; one form can exist without the other Putting someone in a particular position constitutes a representation that the person has the usual authority for that position A principal will be bound by contracts within the agent’s apparent authority only if the third party relied on that appearance of authority; a third party cannot enforce a contract if they knew, or should have known, that the agent did not have authority When the principal is a business organization – the individual whose conduct constitutes the representation on behalf of the principal that the agent has authority to contract must be someone who is permitted to make such a representation under the allocation of responsibility with the business organization When Is the Agent Liable? An agent can be held liable if they gave the third party the impression that they were the principal; if the third party later discovers that the person they dealt with was only the agent, and if the agent did not have the authority to act on behalf of the undisclosed principal, the third party can hold either the agent or the principal liable, but not both - Undisclosed principal: exists when the agent purports to contract without disclosing that they are acting on behalf of a principal When an agent negotiates a contract purporting to act on behalf of a principal, but knowing they have no authority to do so, the principal is not liable and the agent has acted fraudulently; agents are also liable to third parties for any losses they suffer as a result of the agent’s fraud – even if no losses are suffered, may be liable to third party for breach of warranty of authority; liability arises even if the agent honestly, but mistakenly, thought they has the principal’s authority – third party bears no risk of loss if misled - Breach of warranty of authority: occurs if an agent indicates that they are authorized to act for a principal when they are not so authorized The Agent’s Duties to the Principal An agent must comply with the duties and follow any instructions given by the principal; the agent can be held responsible for not doing so Common law imposes two other types of duties on agent to reduce the principal’s risk - A fiduciary duty - A duty of care LAW 603 - - - - - - - Week 1 Fiduciary Duty A fiduciary duty requires an agent to act in good faith and in the best interests of the principal; precise content of that duty depends upon the facts, but a key requirement is that agents should avoid situations in which their personal interest’s conflict with the best interests of their principals An agent is liable for breach of fiduciary duty whether the principal has suffered a loss or not; this creates a strong disincentive for an agent to every act contrary to a principal’s interests Fiduciary duties - Duty to not be in a conflict of interest unless informed consent granted by all principals - Duty to disclose to the principal all relevant information - Duty to not personally profit from unauthorized use of information or opportunities that arose as a result of the agency - Duty to not compete with the principal - Duty to follow the principal’s lawful instructions, even if you think some other course of action would be in the principal’s best interests Duty of Care The duty of care requires an agent to take reasonable care in the performance of their responsibilities; the precise content of that duty depends on what the agent agreed to do and the circumstances surrounding the relationship between the agent and the principal If the duty is breached, the agent must compensate the principal for any loss that they suffer; the principal may be denied recovery if they knew that the agent was incompetent or unqualified The Principal’s Duties to the Agent A principal must fulfill any obligation that is set out in the agency contract; must also satisfy certain obligations that are imposed by law - A principal must pay reasonable remuneration for the agent’s service unless parties agreed otherwise - A principal has an obligation to indemnify the agent for liabilities and expenses that are reasonably incurred in connection with the agency relationship; a principal is not under any obligation to the agent if an agent acts illegally or in breach of the agency relationship Termination Several ways to terminate agency relationship - Either party gives other notice of termination - An event occurs that results in termination under the terms of the agency contract - The agent is appointed for a specific project, or a particular period and the project is completed, or the period expires, even if the agency contract does not provide for termination in these circumstances - Performance of the agency becomes impossible - The principal loses the capacity to contract as a result of death, insanity, or bankruptcy LAW 603 - - Week 1 In the event of a principal’s incapacity, the agent may be unaware, and a third party may try to hold the agent accountable; the agent may be liable for breach of warranty of authority in these circumstances Because of agency relationships fragility, a reasonable notice period is often required before termination Risk Management Issues - - - - - - Contract Liability A principal is liable for contracts created on their behalf by an agent with either actual or apparent authority; risk of being bound to unwanted contracts is more easily managed with respect to actual authority An agency agreement should be carefully drafted to ensure that it is broad enough to allow the agent to do a proper job, but not so broad as to permit the agent to create unintended liabilities Risks associated with apparent authority can also be managed but not as easily; the principal must carefully monitor how it monitors how it communicates, directly and indirectly, with third parties if a third party dealth with the agent before the agency relationship was terminated but the third party was unaware of the termination, they may be able to enforce any new agreements that the agent purports to enter into against the principal; to avoid this, the principal should notify all of their customers whenever they terminate an agent’s authority Tort Liability If an agent commits a tort, the principal is vicariously liable to the victim if - The agent was an employee - The tort was committed within the course of employment A principal may be liable for an agent’s torts even if the agent was not an employee; if an agent is acting within the scope of their actual or apparent authority, the principal is liable for the agent’s fraud or negligent misrepresentation Business Relationships in which Agency Issues Arise - - - Joint Ventures and Strategic Alliances A joint venture is any arrangement in which two or more parties combine their resources for a limited purpose, a limited time, or both; not a relationship that has a particular legal meaning A strategic alliance is any arrangement in which two or more parties agree to co-operate for some purpose If a joint venture or strategic alliance is purely contractual, the participants are not automatically agents for each other; they may, however, agree to set up an agency relationship Distributorship A distributorship exists when one business enters into a contract to sell another’s product LAW 603 - - - - - Week 1 Most distributorship agreements expressly state that the distributor is not an agent and has no authority to bind the supplier Franchises A franchise is a contractual relationship under which the franchisor gives the franchisee the right to operate its “business system” in return for a set of fees; often includes these major provisions - A license that allows the franchisee to use the franchisor’s trademark - Obligations of the franchisor to assist in the operation of the franchised business (by providing training, uniforms, and so on) - Obligations of the franchisee to maintain certain standards and follow certain rules in carrying on the franchise business and to pay fees based, in part, on the volume of sales A franchise agreement could be set up as an agency relationship, whereby the franchisee conducts business on behalf of the franchisor; typically, the franchise agreement will include a commitment by the franchisee to indemnify the franchisor for any liability that it incurs as a result of the operation of the franchised business by the franchisee Agents Governed by Special Statutes Some kinds of agents are governed by special statutes that are intended to protect the people with whom they deal (lawyers, real estate agents, insurance agents, stockbrokers, travel agents, etc.) LAW 603 Week 1 Learnings Objectives (10) 1. Explain three ways an agency relationship can be created. - Actual authority: a principal granting actual authority to a person to act on the principal’s behalf Apparent authority: a principal representing that a person has the authority of an agent Usual authority: putting a person in a particular position representing that they have the usual authority for that position 2. Distinguish between the actual authority of agents to enter into contracts on behalf of their principals and their apparent authority to do so. If an agent has the actual authority to enter into a contract on a principal’s behalf, it is because the principal has expressly granted the agent that authority. If an agent has the apparent authority to do so, it because the principal represented that the agent has the authority to do so while not expressly stating so 3. Describe situations in which a principal will be bound by a contract entered into by an agent without any authority. A principal will be bound by a contract entered into by an agent without any authority if the principal ratifies the contract 4. Describe situations in which an agent’s fiduciary duty to act in the best interests of a principal and their duty of care protect the principal. 5. Identify the obligations that a principal owes to their agent even if the principal has not expressly agreed to them. 6. Identify events that will terminate an agency relationship. 7. Describe practical and legal strategies that a principal can use to manage the risk that their agent will bind it to obligations that they have not authorized. 8. Explain the circumstances in which a principal may be liable for the torts of their agents. 9. Explain how questions may arise as to whether a person is an agent in several common kinds of business relationships, such as a joint venture. LAW 603 Week 1 10. Describe the special legal requirements imposed on agents working in some areas, like real estate, that are designed to protect people who deal with them. LAW 603 Week 1 Review Questions 1. Why would you appoint an agent to act on your behalf? What are the risks of using an agent? - - An agent may have some particular expertise, contacts, business method or other characteristics, which would make the agent more effective or efficient in achieving some limited purpose than the principal themselves The main risks with agency include the agent entering the principal into obligations that the principal has not authorized; risk exposure if the agent does the job badly; to some extent risk can be mitigated by the fiduciary duty and duty of care 2. Describe three ways that a principal can be held liable for the actions of an agent. - - - Agent acts within the scope of the actual authority given by the principal to the agent created by - Express delegation to the agent - Appointing the agent to a position with that authority (usual authority) - Implication from the circumstances Agent acts within the scope of the apparent authority created by the principal’s representation to a third party, which may consist of the - Principal’s statement or conduct - Principal acquiescing to the agent acting with that authority - Principal appointing the agent to a position that would usually have that authority Agent enters into a contract on behalf of an identified principal but without the principal’s authority, and the principal subsequently ratifies the contract 3. You have a business leasing photocopiers. You are negotiating a contract with Zoltan, who is acting on behalf of Bridgeworks Manufacturing Inc. You have visited Zoltan at the offices of Bridgeworks, and he is listed in the corporation’s directory as the President. This title also appears on his office door. Does Zoltan have authority to lease five photocopiers from you on behalf of Bridgeworks? - 4. 5. The president of a corporation 6. 7. 8. 9. You negotiated a contract with an agent who said they were acting on behalf of a principal, but you later found out that the agent had no authority to do so. Assuming that the principal is not liable, do you have any claim against the agent? LAW 603 - Week 1 There was indication that there was an agreement that the agent would be personally responsible so there is no claim to enforce the contract If the agent honestly but mistakenly thought that they had the principal’s authority, there is a claim against the agent on the basis of the tort of breach of warranty of authority If the agent knew they had no authority, then there may be a claim against the agent for fraud 10. 11. Allan has appointed you as an agent to sell his line of ski jackets to retailers. Another manufacturer asks you to carry its line of ski jackets as well. Can you agree to carry the other line? - - The fiduciary duty prohibits the agent from competing with Allan, the principal – if the other line will compete with Allan’s (deter prospective purchasers from Allan’s line), then the fiduciary duty to Allan is breached If the two lines are not competitors (i.e., different price range), there would be no competition and thus, no breach of fiduciary duty If the line’s are competitive product’s but Allan has granted permission to sell both, the fiduciary duty has not been breached 12. If you were a real estate agent acting on behalf of someone who wanted to purchase a house and the seller told you that the basement was dry but you noticed water stains on the basement drywall, what should you do? - The duty of care would oblige the real estate agent to enquire and verify that the seller was telling the truth or suggest to the buyer that there are some concerns 13. 14. You contracted with Lana to act as your agent in purchasing lumber. That contract does not say that she is entitled to be paid. Are you required to pay her a fee? Are you required to pay her expenses for travelling to visit lumber producers to acquire lumber for you? - 15. The principal must pay reasonable remuneration to the agent, Lana, because the contract does not state otherwise The principal has an obligation to indemnify the agent, Lana, expenses that are reasonable incurred in connection with the agency relationship LAW 603 Week 1 You Be the Judge 19.1 How to Answer Case Study Questions 1. 2. 3. 4. Facts & Issue: read the facts carefully to determine the legal problem Law (Rule): review the law on the legal problem (issue) you identified Apply: apply the law to the facts Conclusion: your application of the law to the facts will lead to your conclusion Case 1 As an agent to Magda, Karl owes her a fiduciary duty which includes avoiding situation in which his personal interest’s conflict with Magda’s. Offering to purchase the painting himself presents a conflict of interest as he is now the agent and the customer which indicates that his fiduciary duty to Magda may have been breached. This would be the case had Magda not accepted his offer which ratified the deal. Therefore, Karl is not liable for breaching his obligations as an agent. The matter of him not making the payment in time makes him liable to breach of contract but not in his capacity as an agent. Termination Case 2 The issue here is that Joe Reston (agent), purported into a second contract on behalf of Corporate Leasing Inc. (principal), with Tatiana (third party), that directly contradicts the initial contract that was put forth by the principal. This puts Reston in breach of his fiduciary duty to Corporate Leasing Inc. and in breach of warranty of authority to Tatiana. As such Case 3 The issue here is that Jennifer (agent) entered into a contract with ForCan Logging Ltd. (third party) on behalf of MB Forest Products Inc. (principal) subsequent to MB going bankrupt. Bankruptcy is grounds for termination of an agency relationship as MB no longer has the capacity to contract, thus, when Jennifer signed the contract with ForCan on behalf of MB, she did not have any authority to do so, therefore, ForCan cannot enforce the contract against MB. However, ForCan may hold Jennifer personally liable for breach of warranty of authority. Case 4 (i) The president has told me that Salim is the manager of sales indicating apparent authority based on the president’s representation, in addition to assuming Salim has the usual authority of a manager of sales. Therefore, I would be able to hold the corporation liable for a contract I negotiated with Salim who is was the agent of the corporation. LAW 603 (ii) Case 9 Case 10 Case 12 Week 1
