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Management and Organizational Studies
Management and Organizational Studies 2275A/B
Henry Meredith

1 Chapter 11: Agency and Partnership Introduction  An agent’s function is to represent and act on behalf of a principal in dealings with third parties  By far the most common example of agents representing principals is in the creation of contracts, agents also find themselves involved in other types of legal relationships  Real estate agents do not usually have the authority to enter into contracts on behalf of vendors, but they function as agents nonetheless because they participate in the negotiations and act as go-betweens  Agency: refers to the service an agent performs on behalf of the principal o Service may be performed as an employee, as an independent agent, or gratuitously  When an agent is acting independently, the business performing the service is often called an agency  Where employees also act as agents of the employer, their duties and obligations as agents go far beyond the employment relationship and must be understood as a separate function or set of obligations The Agency Relationship  Can be created by an express or implied contract, by estoppel, by ratification, or gratuitously, the key element being the granting of authority Formation of Contract  Agency agreement: a contract where an agency relationship is created between the agent and the principal o General contract rules apply  Agency contract can cover such things as the authority of the agent, the duties to be performed, and the nature of payment to be received  Generally, there are no additional formal requirements for the creation of such a contract  Although it is wise practice to put the agency agreement in writing, doing so is not necessary except in those jurisdictions where required by the Statute of Frauds or other statute  Under the Bills of Exchange Act, where the agent is to sign cheques or other negotiable instruments, the granting of the agent’s authority must also be in writing  It is not necessary that the agency agreement be under seal, unless the agent will be sealing documents on behalf of the principal as part of his or her agency function  Power of attorney: an agency agreement in writing and under seal  All the elements of a contract (consensus, consideration, etc.) must be present for an agency agreement to be binding o The lack of any one of these elements may void the agency contract, but that will not affect the binding nature of any agreement the agent enters into on behalf of the principal o Only when agents are young, drunk, insane, or otherwise incapacitated that they do not understand what they are doing does the contract between the principal and third party become doubtful on the basis of incapacity or lack of consensus  The actions of an agent may be binding on the principal even when the agent is acting gratuitously o Only consent is necessary Authority of Agents  Most disputes that arise in agency relate to the extent of the authority of the agent in dealing with third parties Actual Authority  Actual authority: the authority specifically given by the principal to the agent and usually set out in the agency agreement o May be expressly stated by the principal or implied from the circumstances  A person who is hired as a purchasing agent has the authority to carry out the customary and traditional responsibilities of purchasing agents as well as the duties necessarily incidental to that function o If the principal has specifically stated that the agent does not have certain powers, no such authority is implied o Even where actual (express or implied) authority is absent, there may be apparent authority  Any written agency agreement should carefully set out the authority of the agent, eliminating, as far as possible, the need for implied authority o An agent who exceeds this actual authority may be liable to the principal for any injury caused by his conduct o No matter how much care is used in drafting an agent’s actual authority, the principal may still be bound by the agent’s conduct that falls within his apparent authority Apparent Authority – Authority Created by Estoppel  Apparent authority: when a principal does something by conduct or words to lead a third party to believe that an agent has authority, the principal is bound by the agent’s actions, regardless of whether there is or is not actual authority 2 o Even when the principal has specifically prohibited the agent from doing what he did, the principal will be bound  Estoppel: an equitable remedy that stops a party from trying to establish a position or deny something that, if allowed, would create an injustice  If the principal has held out the agent to have authority even if no such authority has been granted, the principal is bound o If a third party relied on this representation, the principal cannot then claim that the agent had no authority  Equitable estoppel: involves a promise or commitment to do something in the future o Dealing not with a promise but with a claim or a statement of fact made by the principal  Although the principal may look to the agent for compensation, so long as that agent has acted within his apparent authority, the principal is still bound in contract with the third party  A principal can also be bound by the actions of an agent that would normally be beyond the agent’s authority if the principal has sanctioned similar actions in the past  The existence of this apparent authority is based on the statements and conduct of the principal, not the agent  When the misleading indication of authority comes from the agent rather than the principal, and the action is otherwise unauthorized, the third party will have no claim against the principal  Reasonable person test: used when determining the existence of apparent authority o Also used to determine whether the third party should have been misled into believing that the agent had authority by the statements and conduct of the principal  When a principal puts an agent in a position so that it appears to others that they have authority to make certain commitments, they have that authority, even though it has not actually been given  It is important for public and private institutions alike to take steps to ensure that their agents act within the boundaries defined  To determine whether a principal is bound in contract with a third party by the actions of an agent, a person must first ask, “Was the agent acting within the actual authority given by the principal?” o If the answer is yes, then there is a contract, provided all the other elements are present o If the answer is no, then the question to ask is “Did the principal do anything to lead the third party to believe that the agent had the authority to act?”  If the answer is yes and the third party relied on that apparent authority, there is a contract  It is only when the answer to both these questions is no there is no contract, and the third party must look to the agent for redress  When a principal has specifically stated that the agent does not have authority, no authority can be implied o In spite of such a declaration, there may still be apparent authority because of the principal’s comments or conduct in relation to the third party Ratification  A principal can still ratify a contract even if the agent has acted beyond both actual and apparent authority  The result can seem unfair because the principal is not bound when an agent goes beyond the authority given, but if the principal chooses to ratify, the third party is bound and can do nothing to change that  The power of the principal to ratify must meet the following qualifications: o The third party has the right to set a reasonable time limit within which the ratification must take place o The agent must have been acting for the specific principal who is not trying to ratify  A person cannot enter into a contract with a third party while purporting to be an agent and then search for a principal to ratify  The customer would be free to repudiate the purchase, since the would-be agent did not have a particular principal in mind when entering into the contract o The principal has to be fully capable of entering into the contract at the time the agent was claiming to act on his or her behalf  A principal who did not have the capacity to enter into the original deal because of drunkenness or insanity does not have the power to ratify upon becoming sober or sane o The parties must still be able to perform the object of the contract at the time of the ratification  The contract the agent enters into must not make any reference to the need for ratification  If the contract includes terms such as “subject to principal’s approval”, it becomes merely an agreement to enter into an agreement  The contractual requirement of consensus is not satisfied, and there is no contract  The principal can inadvertently ratify by knowingly accepting some sort of benefit under the agreement Agent by Necessity  Without authority (apparent or actual) or ratification, the principal cannot be bound  In the past, when communications were less reliable, authority was sometimes implied on the basis of agency by necessity  Today, with instantaneous forms of communication, it will be rare for an agency by necessity to arise  Where it does occur, there must be some duty or responsibility placed on the agent to care for those goods  Exception in Family Relationships 3 o It is common for one spouse to have the actual or even apparent authority to act on behalf of the other when dealing with merchants, especially for the purchase of necessities and other household goods o When the marriage breaks down, those merchants who, because of past dealings, have been led to believe a person has authority to act for a spouse may rely on that apparent authority o In the absence of notice to the contrary, the authority continues, even when the spouse has been specifically prohibited from making such purchases o In some circumstances, authority can be implied by operation of law against the will of the other party  A wife who is deserted by her husband is presumed to have the authority to bind him to contracts with third parties for the purchase of necessities o In Ontario, spouses and same-sex partners can be held liable for the purchases of necessities made by the other partner, so long as the purchases were made during cohabitation and the spouse or same-sex partner has not notified the third party that this authority has been withdrawn The Rights and Responsibilities of the Parties The Agent’s Duties  The Contract o When an agency agreement has been created by contract, the agent has an obligation to act within the actual authority given in that agreement o An agent violating the contract but exercising apparent authority can be sued for breach and will have to compensate the principal for any losses suffered o Failure on the part of the agent to fulfill any other obligation set out in the agreement will also constitute an actionable breach of contract unless the specified act is illegal or against public policy o An agent owes a duty of care to the principal o The agent must not only have the skills and expertise claimed but also must exercise that skill in a reasonable manner o Agents often have considerable discretion in carrying out agency responsibilities as long as they act to the benefit of the principal o However, an agent cannot go against the specific instructions received, even if it might be in the principal’s best interests to do so o Agents also have a duty to act in the best interest of their principals  Delegation o Generally, the agent has an obligation to perform the agency agreement personally o An agent is not permitted to delegate responsibility to another party unless there is consent to such delegation, either express or implied by the customs and traditions of the industry  Even then the primary agent has the responsibility to see that the terms of the agency agreement are fulfilled o The authority of an agent is commonly delegated to sub-agents, when that agent is a corporation or large business organization  Accounting o The agent must turn over any monies earned pursuant to the agency function to the principal o If the agent acquires property, goods, or money on behalf of the principal, there is no entitlement to retain any of it other than the authorized commission o Even when the agent has some claim against the funds, he cannot keep them o If the third party owes money to the agent and pays money to the agent intended for the principal, the agent cannot intercept those funds on his own behalf but must pay over any money collected to the principal  Fiduciary Duty o A person owing that duty must submerge personal interests in favour of the interests of the principal he or she represents o Agents owe their principal a positive duty of full disclosure o The agent cannot arbitrarily decide what would likely influence the conduct of the principal and what would not o Because the principal puts trust in the agent, the principal may be vulnerable  Accordingly, the law imposes a fiduciary duty obliging the agent to act only in the best interests of the principal o The relationship is often referred to as an utmost good faith relationship, in which the agent has an obligation to:  Keep in strict confidence any communications that come through the agency function  Act in the best interests of the principal, even if the agent may lose some personal benefit  Not take advantage of any personal opportunity that may come to his or her knowledge through the agency relationship  Disclose to the principal any personal benefit the agent stands to gain; only with the informed consent of the principal can the agent retain any benefit o If there is a failure to disclose, the principal can seek an accounting and have any funds gained by the agent in such a way paid over to the principal o An agent cannot act for both a principal and a third party at the same time o If the principal discovers the agent accepting payment from the third party, the principal is entitled to an accounting and the receipt of all such funds and will likely have just cause the terminate the relationship 4 o Only where full disclosure has been made at the outset and permission given can the agent profit personally in this way o Another problem arises where an agent who is hired to purchase goods or property sells to the principal property actually owned by the agent as if it came from some third party  This is a violation of the agent’s fiduciary duty  Even if that property fully satisfies the principal’s requirements, there must be full disclosure o The reverse is also a breach, where the agent buys for himself what he has been hired to sell to others o The agent must not operate his own business in competition with the principal, especially if a service is being offered, nor can the agent also represent another principal selling a similar product without full disclosure o The agent must not collect any profits or commissions that are hidden from the principal, but must pay over all the benefit resulting form the performance of the agency agreement o Such a breach of fiduciary duty by an agent who is also an employee will likely constitute just cause for dismissal The Principal’s Duties  The Contract o The principal’s primary obligation to the agent is to honour the terms of the contract by which the agent was hired o If the contract is silent as to payment, an obligation to pay a reasonable amount can be implied on the basis of the amount of effort put forth by the agent, as well as the customs and traditions of the industry o If the agreement provides for payment only on completion, there is no implied obligation to pay for part performance o Unless there is agreement to the contrary, the agent is normally entitled to compensation for reasonable expenses o If the agency agreement is vague about the extent of the agent’s authority, the courts will usually favour an interpretation that gives the agent the broadest possible power o When the power to borrow money is involved, however, the courts take a much narrower approach  It is necessary for an agent to be given specific authority to borrow money on the principal’s behalf in order to proceed Undisclosed Principals  In some transactions principals attempt to conceal their identity from the third parties they are dealing with  In these circumstances the agent will usually declare that they are acting for a principal whose identity will remain confidential  Sometimes, however, the agent will simply sign in such a way as to be consistent with them being principal or agent or will actually sign as if he or she were the principal contracting party  When the agent makes it clear they are acting as agent for an undisclosed principal, the agent has no liability to the third party and only the principal can enforce the agreement  If the would-be agent acts as if he were the principal, only he can be sued by the third party and only he can enforce the contract  Where the agent acted ambiguously so that it is not clear whether he was acting as agent or the principal party, the third party has a choice o He can choose to sue the agent or when the identity of the principal is determined he can end that action and commence an action against the principal instead o Once the choice is made, however, he is bound by it  The injured party cannot sue both  once the choice is made, the third party is bound by it  The converse is also true in that the agent can enforce the contract against the third party unless the principal chooses to take over and enforce the contract himself  There are some types of transactions done on behalf of an undisclosed principal that are not binding on the parties o The undisclosed principal is liable only when the agent has acted within his actual authority  Apparent authority applies only when the principal has held out the agent to have authority, and since the principal is unknown there can be no holding out and no apparent authority  For the same reason an undisclosed principal cannot ratify since the agent must be claiming to be acting on behalf of a specific principal in those dealings with the third party for such a ratification to be valid  Where the agent has made no such claim there can be no ratification of it  Finally, an undisclosed principal contract cannot be enforced where the identity of the parties is important to the third party  Where the contract is made under seal (sealed by the agent), the undisclosed principal cannot be sued o Only parties to a sealed document can have rights or obligations under it  Persons acting as agent should be extremely careful to make it clear that they are acting in an agency capacity o This is normally done by writing “per” immediately before the signature of the agent The Third Party  When an agent does not have the authority claimed, either actual or apparent, that agent may be sued by the third party for breach of “warranty of authority”  An agent who intentionally misleads the third party into believing that she has authority when she does not may be sued by the third party for the tort of deceit  Agents who inadvertently exceed their authority can be sued for negligence 5  Where a breach of warranty of authority action is brought, the damages will be limited to those that were reasonably foreseeable at the time the contract was entered into or those that flow naturally from the breach (that is, the damages awarded for breach of contract)  If, unknown to the agent, the goods were to be resold at an unusually high profit that was lost because of the breach of warranty of authority, the agent would not be liable for those losses, since they were not reasonably foreseeable  However, if the third party could establish the agent’s fraud or negligence, the lost profits might be recovered from the agent because they are the direct consequence of the tortious conduct, and in tort law, damages are awarded to compensate for the loss caused Liability for Agent’s Tortious Conduct  When an agent is also an employee of the principal, the principal is vicariously liable for any tortious acts committed by the agent in the course of that employment  Difficulty arises when the agent is not an employee but acts independently o In 1938, Supreme Court held that the principle of vicarious liability is restricted to those situations in which a master- servant relationship can be demonstrated  Courts have been expanding the definition of employment o Even if the relationship involves a person who is essentially an independent agent, that agent may be functioning as an employee or servant in a given situation; thus, the courts may impose vicarious liability on the principal by simply asserting that the agent is also an employee  It is only in rare cases that a principal will be found vicariously liable for the acts of an independent agent  There are some situations in which vicarious liability will apply even if the agent is acting independently o The courts appear willing to hold the principal responsible for theft or fraudulent misrepresentation by an agent, even when no employment exists  Vicarious liability for acts of independent agents is limited to those situations where the acts complained of are actually committed in the process of the exercise of that agency function  A principal can also be found directly liable for his own tortious conduct o If the principal has requested the act complained of, has told the agent to make a particular statement that turns out to be defamatory or misleading, or is negligent in allowing the agent to make the particular statements complained of, the principal may be directly liable o If the agent had fabricated false information, the principal would have been vicariously liable for the agent’s fraud Termination of Agency  Since the right of the agent to act for a principal is based on the principal’s consent, as soon as the agent is notified of the withdrawal of that consent, that authority ends  When the agent is an employee, the relationship is usually ended with appropriate notice  Even where employment may continue, the authority to act as an agent will end immediately upon notification of the agent to that effect  Sometimes, the agency agreement will set out when the agent’s authority will end  If the agency relationship was created for a specific length of time, the authority of the agent automatically terminates at the end of that period  If the agency contract created the relationship for the duration of a particular project or event, the authority ends when the project or event ends  When the principal wants to end the agent’s authority to act, simple notification is usually sufficient, for there is no requirement that the notice be reasonable, only that it be communicated to the agent o This applies to the termination of authority to enter into new contracts on the principal’s behalf, not necessarily to the right to continued payment, which may be based on other contractual considerations  If the activities the agent is engaged to perform become impossible or essential
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