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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
Copyright © 2004 McGraw-Hill Ryerson Limited 2 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
Copyright © 2004 McGraw-Hill Ryerson Limited 3 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
Copyright © 2004 McGraw-Hill Ryerson Limited 4 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
Copyright © 2004 McGraw-Hill Ryerson Limited 5 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
Copyright © 2004 McGraw-Hill Ryerson Limited 6 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
Copyright © 2004 McGraw-Hill Ryerson Limited 7 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
Copyright © 2004 McGraw-Hill Ryerson Limited 8 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)
Copyright © 2004 McGraw-Hill Ryerson Limited 9 AGENCY BY EXPRESS AGREEMENT 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
Copyright © 2004 McGraw-Hill Ryerson Limited 10 AGENCY BY EXPRESS AGREEMENT 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
Copyright © 2004 McGraw-Hill Ryerson Limited 11 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 Copyright © 2004 by McGraw-Hill Ryerson Limited. Contract
Copyright © 2004 McGraw-Hill Ryerson Limited 12 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
Copyright © 2004 McGraw-Hill Ryerson Limited 13 DUTIES OF THE PARTIES 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
Copyright © 2004 McGraw-Hill Ryerson Limited 14 DUTIES OF THE PARTIES 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
Copyright © 2004 McGraw-Hill Ryerson Limited 15 DUTIES OF THE PARTIES 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
Copyright © 2004 McGraw-Hill Ryerson Limited 16 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
Copyright © 2004 McGraw-Hill Ryerson Limited 17 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
Copyright © 2004 McGraw-Hill Ryerson Limited 18 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
Copyright © 2004 McGraw-Hill Ryerson Limited 19 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
Copyright © 2004 McGraw-Hill Ryerson Limited 20 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
Copyright © 2004 McGraw-Hill Ryerson Limited 21 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
Copyright © 2004 McGraw-Hill Ryerson Limited 22 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
Copyright © 2004 McGraw-Hill Ryerson Limited 23 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
Copyright © 2004 McGraw-Hill Ryerson Limited 24 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
Copyright © 2004 McGraw-Hill Ryerson Limited 25 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
Copyright © 2004 McGraw-Hill Ryerson Limited 26 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
Copyright © 2004 McGraw-Hill Ryerson Limited 27 AGENCY RIGHTS OF THIRD PARTIES PRINCIPAL DISCLOSED PRINCIPAL UNDISCLOSED PRINCIPAL AGENTTHIRD PARTY Right of Action Authority Contract on Behalf of Principal PRINCIPALAGENTTHIRD PARTY Right of Action Against Agent or Principal Authority Contract on Behalf of Undisclosed Principal Cont’d
Copyright © 2004 McGraw-Hill Ryerson Limited 28 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
Copyright © 2004 McGraw-Hill Ryerson Limited 29 AGENCY RIGHTS OF THIRD PARTIES, cont’d PRINCIPAL AGENT HOLDING SELF OUT AS PRINCIPAL AGENTTHIRD PARTY Right of Action Authority Contracts as Principal
Copyright © 2004 McGraw-Hill Ryerson Limited 30 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
Copyright © 2004 McGraw-Hill Ryerson Limited 31 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
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