copyright © 2004 mcgraw-hill ryerson limited 1 part 4 – forms of business organization chapter...

Copyright © 2004 McGraw-Hill Ryerson

Limited 1

PART 4 – FORMS OF BUSINESS ORGANIZATION

Chapter 15 – Law of Agency

Prepared by Douglas H. Peterson, University of Alberta


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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


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THE ROLE OF AN AGENT

Relationship that arises between 2 parties Principal – a person on whose behalf an

agent acts Agent – a person appointed to act for

another, usually in contractual matters How it arises

Expressly, by conduct, by necessity Three parties

Principal, agent, third party Agent acts for principal in relationship with

third party


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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


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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


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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


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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


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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)


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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


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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


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AGENCY

CONTRACTUAL RELATIONSHIPS

EXAMPLE:

PRINCIPAL

THIRD PARTY

AGENT

Authority to Enter into Contract on Behalf of Principal

(Contract Usually Between Principal and Agent) Negotiation of

Contract on Behalf of Principal (Within

Scope of Authority)RESULT

PRINCIPAL

THIRD PARTY

AGENT

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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


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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


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Duty of Care Reasonable care in performing duties

Special skills or competence Duty to maintain standard

Subagents 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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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AGENCY

RIGHTS OF THIRD PARTIES

PRINCIPAL

DISCLOSED PRINCIPAL

UNDISCLOSED PRINCIPAL

AGENT THIRD PARTY

Right of Action

Authority Contract on Behalfof Principal

PRINCIPAL AGENT THIRD PARTY

Right of Action Against Agent or Principal

Authority Contract on Behalfof Undisclosed

Principal

Cont’d


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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


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AGENCY

RIGHTS OF THIRD PARTIES, cont’d

PRINCIPAL

AGENT HOLDING SELF OUT AS PRINCIPAL

AGENT THIRD PARTY

Right of Action

Authority Contracts asPrincipal


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TERMINATION

In accordance with agency agreement By notice

As required in agreement Implied – if not set forth in agreement

For particular period or task At end of period or completion of task

Incapacity of either party Death, insanity

Bankruptcy of principal Principal must inform third parties of

termination or risks continuing liability for agent’s actions


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SUMMARY

Agency arises by expressly or implicitly Expressly

By conduct or necessity Authority

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 1 part 4 – forms of business organization chapter...

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