Contract & Consumer Law Chapter 7 Contractual Agency

7.2 Creation of Agency Agency occurs when one person, the principal, authorises another person, the agent, to act on their behalf. There are two contracts involved: Between the principal and the agent. Between the agent and the third party on behalf of the principal. The contract is enforceable between the principal and the third party. Essentially the agent facilitates the creation of a contract between the principal and the third party and is able to bind the principal to the contract because the agent is exercising the delegated contractual power of the principal. Therefore the agent is effectively speaking with the voice of the principal.

Creation of Agency Agency can be created: Expressly – By written or spoken words. By implication – Where agency is implied. Obviously, the best way to create an agency in a commercial situation is with a clear written contract between the principal and agent setting out the limits of the agent’s authority.

Creation of Implied Agency By estoppel- when the principal’s conduct encourages others to believe that an agency relationship exists, and the third party relies on that conduct, the principal cannot later deny that the agency exists. Tooth v Laws (1988) 9 LR(NSW) 154 By ratification – A principal can retrospectively approve an un-authorised action. This can be done expressly or impliedly. For ratification to be effective the following conditions must be met: the agent must be acting on behalf of the particular principal; the principal existed at the time of the unauthorised action; the principal had contractual capacity at the date of ratification; the principal has full knowledge of the details of the transaction; the principal ratifies the entire contract.

Creation of Implied Agency Question: If a contract is ratified by a principal, from what time does it take effect? From the date at which it was agreed to between the agent and the third party or from the date of ratification by the principal?

Creation of Implied Agency By co-habitation – If parties are husband and wife or in a defacto relationship, in some States the law assumes that the spouse has the authority to pledge credit on household necessities. By necessity – Agency by necessity will occur when the following can be shown: A person was entrusted with the property of another; Immediate action is needed to prevent the owner suffering loss; Despite the person’s best efforts they cannot contact the owner; and The person entrusted with the property acted in the best interests of the owner. Great Northern Railway Co v Swaffield (1874) LR 9 Ex 132 The essential point to note about an agency of necessity is that an agency does not exist from the beginning of the relationship. The agency only comes into existence because of the combination of circumstances – if one element is missing, for example it was possible for the person entrusted with the property to contact the owner, they simply did not try, then even if their ultimate actions preserved the property and were to the benefit of the owner, an agency of necessity could not be said to exist.

7.3 Types of Agent General Agent – An agent engaged by the principal to conduct trade or business on their behalf. Universal Agent – A general agent with extended powers to do all acts that a principal may do themselves. Special Agent – An agent appointed to perform a particular task.

7.4 Extent of Agent’s Authority The principal is only bound to those acts which an agent commits within actual or apparent authority. Actual authority is the real authority that the principal intended to delegate to the agent. May be expressly stated orally or in writing or implied. Apparent authority is the authority that is assumed has been given to the agent, even though that agent has not expressly or impliedly given it to the principle. Another way to explain actual and apparent authority is to consider that actual authority is the authority the agent has looking through the eyes of the principal. Apparent authority is the authority the agent appears to have through the eyes of a reasonable person in the position of the third party when they consider the conduct of the principal and agent.

Extent of Agent’s Authority If an agent acts outside of both actual and apparent authority the principal is not bound by the conduct of the agent. The principal may choose to ratify the contract with the third party but if they do not, then the third party has no claim against the principal. As the third party cannot enforce a contract against the principal if the agent has acted outside both actual and apparent authority, the third party may choose to take action against the agent for breach of warranty of authority.

7.5 Duties of an Agent A fiduciary duty (a position of trust) exists between the agent and principal based on the law of contract and tort. Due to this position of trust, the agent owes the following duties to the principal: To follow the principal’s lawful and reasonable instructions. To act in person (cannot delegate tasks, except in certain circumstances). To act in the principal’s best interests (cannot put their own interests before the principal’s). To keep separate and proper records. To exercise reasonable and proper diligence. To maintain confidentiality. Not to make a secret profit.

Duties of an Agent Question: Lara appoints Fred as her special agent to sell her comic book collection for no less than $10,000. Rhys is very keen to obtain the collection and knows there is competition. Rhys approaches Fred and offers $15,000 for the collection and an extra $1,000 to Fred personally if Fred will persuade Lara to except the $15,000 offer. $15,000 is the highest offer Fred has received so far. Fred agrees and the transaction takes place. Has Fred breached any duties he owes to Lara as her agent? Explain.

7.6 Rights of an Agent The agent has the following rights against the principal: Right to agreed or reasonable payment. Right to indemnity and reimbursement. Right to a lien – The agent is entitled to retain possession of the principal’s property until the principal has paid him/her as long as the property is related to the agency agreement. Right of stoppage of goods in transit – An agent contracted to buy goods for a principal has a right to take possession of the goods while they are in transit.

7.7 Liability in Contract Where an agent enters a contract on the principal’s behalf, if there are any breaches of the contract, the principal will be held liable, not the agent. This is because the agent facilitates the creation of the contract between the principal and the third party using the delegated contractual power of the principal. An agent may be liable to a principal if they fail in their duty to follow instructions or act diligently. An agent may be liable to a third party if the agent does not tell the third party that they are acting as an agent.

Liability in Contract Where the agent discloses the agency, they may only be held liable if: The agent agrees to be liable The agent is made liable due to trade custom The principal does not exist The agent acts outside their actual and apparent authority

7.8 Doctrine of Undisclosed Principal Where the existence of the principal has not been disclosed to the third party and there is a contractual breach, the third party can sue either the principal or the agent, but not both. The third party’s choice will depend on the nature of the contract and how to achieve the best commercial outcome.

Liability in Tort Both principals and agents are liable in tort where the agent is acting within their actual or apparent authority. A tort is a civil wrong against another such as negligence or defamation. The agent cannot be sued by the principal while acting within their authority. While a tort is committed while an agent is acting outside their authority the principal will likely escape liability.

7.9 Breach of Warranty of Authority An agent who falsely claims they have authority to act and so acts outside both their actual and apparent authority can be sued by a third party. The third party must prove that: The agent represented that they had authority to act; The third party relied upon the representation; and The third party was unaware of the real situation.

7.10 Termination An agency can be terminated through: The actions of the parties; or The operation of law.

Termination Termination of the agency relationship due to the parties’ actions may occur in the following situations: Complete performance – the agent has completed their task. Mutual agreement – both principal and agent agree to end the agency relationship. Revocation by the principal – the principal withdraws the agents authority (though this can be a breach of contract). Renunciation by the agent – the agent announces that they no longer want to act on behalf of the principal (though this also may amount to a breach of contract). Agent accepting a secret profit - which strikes at the heart of the agency relationship of utmost good faith. When considering termination of an agency reladtionship the first thing to remember is that the contractual agency is simply a contract, and as a result all of the principles of termination of contracts we have previously address apply. That is why the most common way in which an agency will come to an end is performance, where each party does what it is they are required to do. Other ways in which the agency can be brought to an end address the concept of contractual authority or capacity.

Termination Termination of the agency relationship due to the operation of law may occur in the following situations: Expiration of set time period Death Insanity Bankruptcy Frustration of the contract – some event has occurred making the completion of the agent’s duties impossible. Deregistering of a corporation – If the principal is a corporation the agency relationship will end if the corporation is deregistered.