Industry Briefing Paper
Brokers and Agents in the Australian
Grain Industry
The Difference and the Implications
Important Notice:
This briefing paper is not in the nature of legal or financial advice and may not be construed
as such. Readers should seek professional advice based on their individual circumstances
regarding the accuracy and/or applicability of the contents of this paper.
This paper was developed by Jeremy Rosenthal, Principal Solicitor at SBA Law for GTA.
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1.
Introduction
Australian grain growers and other industry participants have a greater choice
than ever before of service providers offering professional advice or assistance in
grain marketing and trading. Those service providers play an important industry
role.
This paper seeks to examine how the legal typification of a service provider’s role
can materially affect the rights and obligations of the service provider and client
as between themselves and in relation to third parties in grain transactions. A
particular focus of this paper is to explain the distinction between those service
providers which are “brokers” under the GTA Trade Rules1 (Rules) and those
which are not, regardless of what the service provider calls itself or how it
markets its services.
Before embarking on the legal analysis, it is firstly necessary to consider the roles
performed by the relevant service providers: consultants, grower brokers, buyer
agents and wholesale brokers. The schedule to this paper contains a table
summarizing those roles.
2.
Introductory Legal Concepts
This section sets the introductory framework by defining the key legal terms.
2.1
Agency
There is no single definition for the legal concept of agency but in all
cases the central concept is that of a party (principal) acting through
another (agent) being deemed to act in person as if the principal acted
directly. Even the narrowest definition of the agency has at its centre a
principal granting its agent the authority to create legal relations
between the principal and third parties.
The scope of the agency – that is, the extent to which the agent may bind
its principal - is framed by the authority granted by the principal, by the
law and, in some cases specific rules which apply to the industry or
circumstances in which the agency arises.
1 As amended in October 2012.
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1.2
Broker
A broker is a class of agent who does not have possession of the goods
being bought and sold, and does not sell in his or her own name2.
Rather, the broker’s client is the contracting party and the broker’s role is
confined to negotiating the contract for sale and purchase. Examples of
brokers include real estate agents, insurance brokers and mortgage
brokers.
1.3
Intermediary
A third party whose role is to facilitate a transaction between buyer and
seller is not necessarily an agent of either the buyer or seller, nor does a
relationship of agency arise simply because a person is an introducer of
business or the recipient of a commission for a service.
Where the service provider does not have the authority to represent a
party for the purpose of soliciting business and is not permitted or
obliged to exercise any discretion, the service provider is an
intermediary.
2.
The GTA Trade Rules
This section of the paper considers the meaning of the term “Broker” under the
Rules and why the distinction between Brokers on the one hand, and other
agents, advisors and the transaction parties on the other hand, is relevant under
GTA contracts.
2.1
The definition of Broker under the Rules
The Rules define a Broker, for the purpose of those rules, as being:
“An independent person, firm or electronic trading platform engaged
or used by others, at least partially on a commission basis, to facilitate
contracts under instructions from Buyers and Sellers, relative to goods
to which it does not have actual or constructive possession.”
A person has constructive possession of goods where that person has the
right to control possession of the goods without physically holding the
goods. An example of a person having constructive possession of grain is
2
Agents which have physical possession of the goods are known as “factors”.
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that person, in his or her own name, warehousing grain in a bulk
handling facility operated by a third party.
The definition of Broker under the Trade Rules further clarifies that the
following persons are not Brokers:
2.2
(a)
a person who has possession and absolute control of goods
supplied to him or her to sell and collect the price3. The specific
example is then given that a commission agent to whom a
commodity is consigned for sale is not a Broker.
(b)
a person who only acts for one principal to the exclusion of all
others. Although the Trade Rules are not clear on this point, the
author suggests that this should be interpreted to mean that the
Broker does not act for either transaction party in relation to that
particular transaction. In other words, the clarification is not so
broad as to prevent the Broker from having any commercial
relationship whatsoever with a transaction party. That said, it
may not be in the other transaction party’s interests to use the
Broker where such a commercial relationship exists.
Applying the definition - who is and who is not a Broker under
the Rules
By applying the definition and having regard to the industry roles set out
in the schedule:
2.3
(a)
a wholesale broker will in most cases be considered to be a Broker
under the Rules; and
(b)
a buyer agent, grower broker and consultant will not in most cases
be considered to be a Broker under the Rules. To the extent that
those service providers are involved in the negotiation or
execution of a grain transaction, they are likely to do so as agent of
either the buyer or the seller.
The Broker as an intermediary
The definition of “Broker” together with the powers, duties and liability
of the Broker in Rule 3.1 establishes that the Broker is an intermediary and not an agent of either transaction party – and in turn affords the
This clarification in effect repeats (and does no more than) the main part of the definition, which already provides that in
order for a person to be a Broker under the Rules that person must not have actual or constructive possession of the relevant
goods. The reason for this overlap is likely to be that, prior to amendment of the Rules in October 2012, the main part of the
definition referred to actual or constructive “custody” of commodities or goods in which the person has “no concern”.
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transaction parties and the Broker an added degree of certainty. Rule 3.1
provides that:
2.4
(a)
the Broker is not a party to the contract and does not represent or
act as agent for either party4;
(b)
the Broker has the power to bind the buyer and seller (parties)
only to the extent of their instructions and the parties are not
liable for any acts of the Broker in excess of such instructions5;
(c)
a Broker who, in good faith or otherwise, exceeds its authority is
liable for resulting damages6; and
(d)
a Broker who, in good faith, negotiates a contract which is in
accordance with instructions from both parties, who, at the time
of negotiations, advises each Party the name of the other, and
who completes such negotiations in accordance with the rules
and customs governing such transactions, thereby fulfils all
obligations and has no further liability to either of the parties. A
contract so negotiated is valid and binding between the parties as
if it had been negotiated directly between them7.
The Broker’s Note is paramount
Rule 3.1(1) provides that:
“A Broker’s Note shall be prima facie evidence of the terms of the
contract between the parties. To the extent of any inconsistency
between a Broker’s Note and a document generated by a party, the
Broker’s Note shall prevail.”
The Broker’s Note, being the contract confirmation issued by the Broker,
therefore holds special evidentiary weight in the event that there is a
dispute between the parties as to the terms of the contact. The policy
reason for this Rule is that the Broker is seen to be independent and not
to have vested interest in documenting a transaction inaccurately or in a
way which favours a particular party.
The special evidentiary weight means that, on the face of it, the Broker’s
Note will be presumed to be correct unless there is strong evidence to the
contrary. The Broker’s Note may nevertheless be challenged:
4 Rule 3.1(1)
5 Rule 3.1(2)
6 Rule 3.1(3)
7 Rule 3.1(4)
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(a)
if it is amended or expanded upon in a way which is not
inconsistent with the Broker's Note;8
(b)
if it is manifestly wrong;
(c)
where the parties agree orally to amend the contractual terms and
there is good evidence to this effect; or
(d)
where the parties implicitly amend the terms by their conduct in
performing the contract and there is good evidence to this effect.
Rule 3.1(1) does not prevent the parties from agreeing to amend the
terms of the contract. However, given the special status of the Broker’s
Note, it is particularly important for the parties to ensure it is accurate.
It is also strongly advisable to have the Broker document any amendment
to a contract in which a Broker is involved.
2.5
What if there is no Broker?
Where the buyer and seller are negotiating directly or with the
involvement of a service provider (which is not a Broker under the
Rules), the parties should all the more ensure that the transaction is
documented by a contract confirmation which accurately reflects all
relevant terms. Even though the confirmation will not constitute a
Broker’s Note for the purpose of the parties, the confirmation will
nevertheless likely be the most important, and least rebuttable, piece of
evidence as to the transaction terms.9
Where a service provider such as a grower broker or buyer agent is
involved in the negotiation and contract formation, there are additional
considerations arising under the law of principal and agency to take into
account. These are dealt with in the next section.
3.
The General Law of Principal and Agency
Having established that the wholesale broker acts likely as an intermediary of
the buyer and seller (rather than an agent of either of them) whereas grower
brokers and buyer agents likely act as agent for their respective clients, this
8
The Broker's Note is explicitly said to prevail over any other documents generated by a party to the transaction to the
extent of inconsistency.
9
The October 2012 amendments to the Rules removed obligations on buyers and sellers regarding the preparation of
contract confirmations and the process of accepting and amending contracts where a Broker is not involved. Fundamentally
this means that the normal principles of contractual law regarding offer and acceptance, interpretation and variation apply
without modification by the Rules.
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section considers the key legal aspects of the relationship between principal and
agent, and the relationship between each of them and third parties.
3.1
Fiduciary duties of the agent to the principal
An agent has 2 fundamental fiduciary duties to its principal:
(a)
the duty to avoid a conflict between the agent’s own interests, or
those of another person for whom the agent acts, and the duty
owed to the principal; and
(b)
the duty to avoid profiting from the position as agent other than
from the remuneration payable to the agent by the principal in
connection with the relevant transaction.
These duties can be modified but only with the knowledge and consent of
the principal. While disclosure is important, and the logical starting
point, actual consent is required.
Before engaging an agent, the principal should ensure that the agent is
not conflicted and does not have other commercial relationships which
the principal might consider to be inconsistent with the agent performing
the role for which it has been engaged with the best interests of the
principal solely in mind.
The principal should also be mindful that the agent may, under its
standard terms and conditions, deem the agent to consent to
arrangements which would otherwise constitute a breach of these
fiduciary duties.
3.2
Agent’s engagement and scope of authority
The duties and powers of the agent are defined by the nature of the
engagement and the scope of authority that the principal grants to the
agent upon appointment.
It is important that these matters are set out clearly in writing so that
there is no ambiguity which might form the basis of dispute between
principal and agent at a later point in time. In negotiating the terms of
engagement and the scope of the agent’s authority the principal should
carefully consider requiring the agent to obtain the principal’s written
consent prior to taking important decisions such as agreeing the final
commercial terms – volume, price, grade, delivery period - of the sale or
purchase of grain.
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The principal should pay careful attention to the agent’s terms and
conditions, which may seek to limit the agent’s liability to the principal,
whether for the agent’s unpermitted actions, other breach of terms or
negligence.
3.3
Ostensible authority
A principal may be liable under a contract effected by an agent who has
no actual authority from the principal to effect the contract but to whom,
in the eyes of the third party, the principal has given its authority. This is
called "apparent" or "ostensible" authority.
In order for ostensible authority to be sustained, the following must be
established:
(a)
the principal, by its words, conduct or current or past practice is
deemed to represent to a third party that the agent is authorised to
deal in a particular way;
(b)
the third party relies upon the representation; and
(c)
the third party suffers detriment as a result.
Certain presumptions may be made about the actions of an agent who is
an officer of a principal which is a corporation.
3.4
Acts outside the agent’s authority
Where an agent contracts outside of his or her actual or ostensible
authority then, unless the principal ratifies the contract, the principal is
not bound by the contract, the agent alone is liable on the contract and
the agent will be liable to the principal for resulting damages.
To ratify the agent’s unauthorised act, the principal must do so by
unequivocal language or conduct. Ratification may be express or
implied10.
3.5
Contractual rights and obligations: disclosed principal
Where a properly authorised agent enters into a contract with a third
party on behalf of a disclosed principal - that is, the contract identifies
the principal by name and specifies that the agent contracts as agent for
the named principal - the principal alone can sue, and be sued by, the
10 One should not rely on mere acquiescence or inactivity of the principal in seeking to assert ratification, although it may be
sufficient in certain circumstances.
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third party on that contract for breach. Here, a direct contractual
relationship is created and the agent is not a contracting party.
3.6
Contractual rights and obligations: undisclosed principal
Where a properly authorised agent enters into a contract with a third
party on behalf of an undisclosed principal - that is, the contract specifies
that the agent contracts as an agent but does not name the principal:
3.7
(a)
both the agent and the principal can sue on the contract but the
right of the principal to enforce the prevails over that of the agent
so that if the principal sues the third party then the agent cannot
then sue the third party in respect of the same claim;
(b)
the principal’s rights are not lost if the third party pays money to
or otherwise settles with the agent unless the principal has given
its authority;
(c)
the principal’s right to intervene does not prejudice the right of the
third party to sue the agent for specific performance, or damages
for breach, of the contract;
(d)
the third party may elect which of the principal or agent to pursue
but may not pursue both. The benefit to the third party is that he
or she may look to the financial substance of each.
Onus of Proof
A third party bringing an action against a principal on a contract made by
an agent must prove both the existence of an enforceable contract and
the authority, actual or ostensible, of the agent to make it.
If the principal seeks to enforce the contract, he or she must prove it to be
legally enforceable and that either the agent made the contract within its
actual authority or that the principal ratified the agent’s act in
contracting notwithstanding a lack of authority.
3.8
Payments by principal to agent
Where a principal is required to make a payment to a third party
pursuant to a contract effected by an agent within the agent’s authority,
payment to the agent coupled with the instruction that the money is to be
given to the third party will not, as a general rule, discharge the principal
in respect of the debt if the agent defaults.
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Direct payment by the principal and the third party is therefore the best
means of avoiding exposure to the solvency and fidelity of the agent.
3.9
Payments by third party to agent
A payment by a third party to an agent in satisfaction of a contractual
obligation, whether the principal is disclosed or undisclosed, is likely to
be effective to discharge the third party’s contractual liability.
In these circumstances the third party is also entitled to set off any debts
due to the third party from the agent personally that were incurred prior
to the third party discovering the existence of the principal, and to set off
the amount discharged against the debt owed to the principal.
Principals should therefore, where possible, ensure that all payments are
made directly by the third party to the principal.
3.9
Fraud and misleading and deceptive conduct of the agent
A principal, however innocent, cannot retain property obtained through
the fraud or false representation of its agent. Where in the negotiation
of a contract by an agent on behalf of a principal, the agent is guilty of
fraud, undue influence, unconscionable dealing, misrepresentation or
concealment of essential facts that ought to be disclosed to the other
contracting party, the contract is voidable and the other party may
rescind it and recover any benefit that has passed under the contract to
the principal.
Further, in addition to remedies available to the third party under a
contract, the principal and agent may be held jointly liable to the third
party for damages under statute for the misleading and deceptive
conduct of an agent acting on behalf of the principal.
In these circumstances, the principal may have recourse against the
agent, depending on whether the relevant actions were authorised,
within the knowledge of the principal or within the agent’s scope of
authority.
4.
Conclusion
It should be clear from the above that the legal typification of a service
provider’s role can materially affect the rights and obligations of the service
provider and client as between themselves and in relation to third parties in
respect of grain transactions.
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In order to mitigate the risks that may arise, which include the risks of dispute,
exposure to the solvency of an agent or third party and potential liability for the
acts or omissions of others, the following key actions should be considered.
4.1
All wholesale brokers and agents and contractual parties
Ensure that the contract confirmation is correct and imports the Rules.
4.2
Contractual third parties dealing with an agent
Satisfy yourself that you know who the principal is that you are dealing
with as to identity, creditworthiness, capacity, authority and (if
applicable) production or delivery capability.
4.3
Agents
 Ensure your role and scope of authority is clearly expressed and
understood, preferably in writing.
 Be aware of, and comply with, your fiduciary duties to the principal.
 Always disclose the principal for whom you act in dealings and in the
contract confirmation.
 If asked, be willing to facilitate due diligence between the principal
and counterparty so that matters such as financial substance and
performance capability can be established independently.
 Take contemporaneous notes of instructions from the principal.
 Make sure what you say in negotiation is true. Refer matters outside
your direct knowledge to the principal.
 Consider whether you need to obtain professional indemnity
insurance.
4.4
Persons appointing and using an agent
 Ensure that the agent is reputable and has appropriate market
knowledge, expertise and financial substance.
 In respect of any potential transaction, check whether the agent has
current or previous dealings with the proposed counterparty.
 Ensure the agent’s role and scope of authority is clearly expressed
and understood, preferably in writing.
 Ensure that you are disclosed as the principal in dealings and in the
contract confirmation.
 Understand that you can use an agent without the agent being a
contracting party.
 Payments under or in relation to the contract should be made
directly between contracting parties, principal to principal.
 Take contemporaneous notes of your instructions to the agent and of
any advice provided by the agent.
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Industry Briefing Paper: Brokers and Agents in the Australian Grain Industry
Schedule - Who Does What in the Grain Industry?
Consultant
Function
Acts For
Confirmation
Other Features
Remuneration
Risk management strategy
possibly including advice
on derivatives, foreign
exchange, cash contracting
or other marketing
decisions.
Grower
Consultant should
produce contract
confirmation.
If dealing in financial products or
giving financial advice the
consultant should have an AFSL
and relevant products should have
a PDF or come under a relevant
exemption under the Corporations
Act.
Consulting fees on
an hourly or fixed
basis for advice
but can also be on
a $/tonne
brokerage basis
for executed
sales/marketing
decisions.
Consultant is not
generally a contracting
party.
Grower should be aware of any
alliances/arrangements between
the consultant and third parties.
Consultant should carry
professional indemnity insurance.
Grower
Broker
Cash contracting broker
operating in the spot and
forward market.
Typically provides market
information but does not
advise on trading strategy.
Grower
Broker should produce
contract confirmation.
Broker may be a
contracting party as
agent for the grower.
Grower should be aware of any
alliances/arrangements between
the broker/agent and third parties,
particularly buyers.
Grower should maintain own view
of market trends and pricing and
ensure that the broker or agent has
appropriate market knowledge.
Broker may carry professional
indemnity insurance.
©GTA
July 2012
Paid by grower on
a $/tonne
brokerage basis.
Buyer Agent
Wholesale
Broker
Function
Acts For
Confirmation
Other Considerations
Remuneration
Cash contracting in the
spot and forward market.
May also offer derivatives
if associated with a
licensed buyer.
Buyer
Agent should produce
contract confirmation.
If offering derivative products
needs to hold or be an authorised
representative of an AFSL holder.
Paid by the buyer
on a $/tonne
commission or
retainer plus
commission.
Wholesale broking cash
contracts in the spot and
forward market in the
trade to trade and trade to
consumer market.
Independent
Agent may be a
contracting party as
agent for the buyer.
Broker must produce
contract confirmation,
which holds special
status under GTA Trade
Rules.
Broker not a
contracting party.
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Paid by the seller
on a $/tonne
commission.