Agency Law 20140204
Agent : A person who acts on behalf of someone else for some specific purpose
Principal: A person whom an agent represents for some specific purpose
Agency : The legal relationship between a principal and an agent
Sometimes the agent has the ability to bind the principal to a contract
Must be within the authorized authority of the agent (ex. Car dealer gives customer 50% discount when
only authorized by dealership for 30%
Agents do not always have authority to enter into legal obligations on the principals behalf (ex. Real Estate
Agent cannot commit to price without asking the seller)
Basic Rules of Agency
Creation of an Agency Relationship
Principal and agent enter into a contract that sets out the terms
Includes scope of agent’s authority & remuneration
In provinces with tStatutes of Fraud , contracts over 1 year must be in writing
Must also be in writing if the agent will have the authority to sign cheques on behalf of the principal
Ex. Listing agreement with a Real Estate Agent
Commercial Representation Agreement:
A type of express agency Occurs when a manufacturer of goods agrees to allow someone to enter into contracts with customers on
its behalf to sell its goods
Business relationships created by express agreement may have the effect if making someone your agent,
even if they are not referred to by that name.
If you authorize a lawyer to act on your behalf in closing a real estate transaction, the lawyer is acting as
Actual Authority : The authority a principal gives an agent to act on its behalf
Can be granted in the contract or agency agreement
Can be granted through oral delegation of authority
Apparent Authority : Exists when the principal creates the reasonable impression that the agent is
authorized to act on the principals behalf
Could be created by a statement to the third party by the principal that the agent has the authority to
conduct certain business
Ex. President tells you that the sales manager can buy office supplies
Under partnership law, each partner is an agent of the partnership and can bind the partnership to
obligations that arise in connection with carrying on the business of the partnership in the usual way
Ratification : A contract is ratified when someone accepts a contract that was negotiated on their behalf
but without their authority
Must meet following requirements:
It must be clear. It can be eitheexpress or implied from behaviour
It must occur within areasonable time after the creation of the contract. What is reasonable depends on
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 and then try to find someone to ratify the agreement after.
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 If the principal chooses to not ratify the agreement, the agent is not liable to the third unless the third
party and the agent intended the contract to be binding on the agent personally.
When is the Principal Liable?
The rules regarding when a principal is liable in contract balance the interests of the principal with the
interests of third parties seeking to enter into contracts with
On one hand, a principal does not want to be bound to a contract that an agent purports to enter into to act
on its behalf it the contract was outside the authority it granted to the agent.
On the other hand, a third party that enters into a contract with an agent on behalf of a principal does not
want to spend too much time or money investigating whether the principal has actually given authority to
that person to enter into the contract.
In large transactions each party will do significant research to ensure person they are dealing with has
agency and authority for everything they are committing to.
Investigations backed up by documentation such as certified copies of resolutions of a corporation’s board
of directors authorizing people signing the contract to enter into the transaction on the corporation’s behalf,
and lawyers’ opinions regarding authority.
In most situations, the cost of this risk management is not justified by the size of transaction (risk is less
than antirisk steps)
However the agent acquires actual authority, the principal is bound by any
obligations that the agent creates within the scope of that authority.
That is true whether of not the third party knows the exact scope of the agents actual authority
The third party may be aware of common indications of authority (ex. Name tag says “sales manager”)
Apparent and actual authority are not necessarily connected
Good example to remember:
Hire a lawyer, he has apparent authority that he can settle the claim even if you never gave actual authority.
Can later sue lawyer for exceeding scope of authority given.
Usual Authority : Allows a person appointed to a particular position to exercise the authority usually
associated with that position.
What is usual is determined by reference to the authority of agents in similar positions in similar businesses 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 it knew, or should have known, that the agent did not have
Where the principal is a business and not an individual:
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 within the business organization
Ex. Sales manager decides prices, gives salesperson(agent) authority to give 20% discounts
Agent acts within the scope of the actual authority given by the principal to the agent created
By express delegation to the agent
By appointing the agent to a position with that authority
By implication from the circumstances
Agent acts within the scope of the apparent authority created by principal’s representation to a third party,
which may consist of
The principal’s statement or conduct
The principal acquiescing to the agent acting with that authority
The 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
When is the Agent Liable?
Normally, an agent is not liable personally
A court may decide that the parties implicitly intended the agent to be liable. The agent can also be held
personally liable if it presented itself to the third party as the principal. When agent is acting on behalf of an undisclosed principal , the third party can hold either the agent or
the principal liable
To avoid risk of personal liability, agent should clearly explain its own role, and disclose the existence of the
principal to the third party
Undisclosed Principal : Exists when the agent purports to contract without disclosing that it is acting on
behalf of a principal
An agent is not liable under a contract they create unless outlined in the contract.
If an agent creates a contract outside of its authority, it is not liable under the contract. However, can be
liable for any loses the third party suffers as a result of the transaction.
May be liable to third party for fraud or deceit (if agent knew it was not authorized for transaction)
Even if not fraudulent, may be liable for a breach of warranty of authority
Breach of Warranty of Authority : Occurs when an agent indicates that is authorized to act for a
principal when it is not.
Liability arises even if the agent honestly, but mistakenly, thought it had the principal’s authority.
The third party does not bear the risk of loss when it was mislead by the agent.
The Agent’s Duties to the Principal
When an agent is appointed by contract, its responsibilities may be set out in some detail
It must comply with those duties and follow any instructions given by the principal
The agent can be held liable for failing to do so
Ex. Principal hires agent to insure ship. Agent fails to do so, ship sinks, agent must cover cost that
insurance would have covered.
May be implied duties. (Ex. Agent receives goods to sell, implied that must take care of goods, liable for
damage or loss)
In general, an agent’s obligations cannot be delegated to anyone else – they are personal obligations.
There are important practical exceptions
If you hired an advertising firm as an agent to place newspaper advertisements on your behalf, the actual
task of negotiating for the advertisements would have to be given to some person within the firm. Because an agency relationship exposes the principal to the risk of being held liable in unwanted ways, the
common law also imposes two other types of duties on agents that reduce the principal’s risk: Fiduciary
Duty and A Duty of Care
Fiduciary Duty : Requires an agent to act in good faith and in the best interest of the principal
While the precise content of that duty depends on the facts, one of its key requirements is that agents avoid
situations in which their personal interests conflict with the best interests of their principals
Fiduciary duty may be breached even if the principal did not suffer any loss.
An agent must disclose to the principal any information that may be relevant to the principal’s interests.
An agent cannot personally profit from the unauthorized use of information or opportunities that arose as a
result of the agency relationship
An agent cannot compete with the principal.
An agent’s fiduciary duty may be displaced by the principal’s instructions. If told to act a certain way, must
do it, even if something else would be in principal’s best interests.
Duty of Care : Requires an agent to take reasonable care in the performance of its responsibilities
The precise content of duty depends on what the agent agreed to do and circumstances
If duty is breached, agent must compensate principal for any loss suffered.
Principal may be denied recovery if it knew that the agent was incompetent or unqualified
Agent must understand the scope of its obligations, ensure that it is able to fulfill those obligations, and alert
its principal to any deficiency in its skills
The Principal’s Duties to the Agent
Principal must fulfill any obligation that is set out in the agency contract and certain obligations imposed by
Unless the parties agreed that the agent would work for free, the principal must pay reasonable
remuneration for the agent’s services.
A principal has an obligation to indemnify the agent for liabilities and expenses that are reasonably incurred
in connection with the agency relationship Termination
Ways to terminate Agency
Either party gives the 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
Can create practical difficulties if the agent is unaware that the principal has lost capacity.
Since the principal cannot be liable for obligations that arise after the incapacity occurs, the third party may
try to hold the agent personally responsible. In some cases, the agent may be liable for breach of warranty
Agency agreements often require a reasonable notice period before termination
If agent is employee, law states that the agencyemployment relationship can be terminated only for just
cause, or with either reasonable notice or compensation in lieu of notice
Risk Management Issues
A principal is liable for contracts created on its behalf by an agent with either actual or apparent authority
The principal’s risk of being bound to unwanted contracts is more easily managed with respect to actual
Can use an agency agreement to clearly state what the agent it and is not authorized to do
Principal must carefully monitor how it communicated, directly and indirectly, with third parties to avoid
giving an agent apparent authority to create unwanted obligations to third parties
Principal must also realize that apparent authority may exist even after the actual agency relationship has
come to an end
If a third party dealt with the agent before the agency relationship was terminated and that third party was
unaware of the termination, it may be able to enforce any new agreements that the agent purports to enter
into against the principal. To avoid, principal should notify all of its customers whenever it terminates an agent’s authority
Principal is vicariously liable when agent commits torts if:
The agent was an employee
Tort was committed within the course of employment
If the agent is acting within the scope of its actual or apparent authority, the principal is liable for the agent’s
fraud or negligent misrepresentation.
Often best way to avoid risk is to carefully select, train, supervise, and require reporting from agents
Business Relationships in which Agency Issues Arise
Joint Ventures and Strategic Alliances
Joint Venture: Legal arrangement in which two or more parties combine their resources for a limited
purpose, a limited time, or both
Strategic Alliance : Any arrangement in which two or more parties agree to cooperate for some
Formal or informal
Varying degrees of cooperation
Ex. May be used to describe arrangement in which parties
Conduct a research project together
Jointly market products
Share information If a joint venture or strategic alliance is purely contractual, the participants are not automatically agents for
May agree to set up agency relationship, precise scope of agency relationship should be clearly stated in
joint venture agreement
Even if no actual authority given in agreement, one joint venturer’s actions may provide the other joint
venture with apparent authority
Distributorship : Exists when on business enters into a contract to sell another’s product
Does not normally involve an agency relationship
Parties can agree distributor acts on behalf of the supplier when it deals with customers for some purposes.
Usually the distributor buys the supplier’s products and then resells them on its own behalf (most distributor
agreements expressly state that the distributor isnot an agent
Suppliers do not want to be exposed to the risk of unwanted obligations, must be concerned about avoiding
the creation of apparent authority
Franchises : A purely contractual relationship under which the franchisor gives the franchisee the right to
operate its “system” in return for a set of fees
A licence 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
Franchise agreements invariably provide that the franchisee is not an agent of the franchisor.
Franchisor may still be held liable in some circumstances
Franchise agreement will include a commitment by the franchisee to indemnify the franchisor for any liability
that it incurs that relates to the operation of the franchised business of the franchisee
Agents Governed by Special Statutes:
Pg. 513514 Basic Forms of Business Organizations 20140204
Sole Proprietorships: Basic Forms of Business Organizations 20140204
Sole Proprietorship : exists when a person carries on business on their own, without adopting any other
form of business organization
Can employ other people, but you remain sole owner
Both legally and practically, no separation between the business and the proprietor
Cannot employ yourself because can’t enter a contract with yourself
Gets all the benefits and liabilities
Exclusively responsible for;
Performing all contracts entered into in the course of the business, including contracts with customers,
suppliers, employees, and lenders
All torts committed personally in connection with the business. That person is also vicariously liable for all
torts committed by employees in the course of their employment.
For income tax purposes, the income or loss from the sole proprietorship is included with the income or loss
from other sources in calculating the sole proprietor’s personal tax liability.
Main advantage: Simple and easy to set up and dissolve
When dissolved, still can be liable for obligations from before the business dissolved
Main disadvantage: Unlimited Personal Liability
Unlimited Personal Liability : Third parties may take all of the sole proprietor’s personal assets to
satisfy the business’ obligations
Limited financing options (borrow money directly)
Legal Requirements for Sole Proprietorships
Name must be registered if that name is something other than (or more than) the proprietor’s personal
Registration must be completed in every province or territory in which the sole proprietorship carries on
Does not create any ownership interest in the business name Basic Forms of Business Organizations 20140204
Business Licence is necessary for some activities
Business Licence : Government permission to operate a certain kind of business.
Ex. Taxidriving, restaurants, r