Agency and partnership law - Case Study Example

Agency and Partnership Law Affiliation: The scope here is primarily to evaluate understanding a specific case as described in the following section and offer necessary advise to ADC, one of the parties involved based on applicable laws and legal liberty. In order to advise ADC of their rights and obligations, it is important to focus on the effect of contract made by the agent Andrew, his status in terms of authority based on agreement, his duties towards the principal and his right towards the third party. The general rule applies where the agent's contract was authorised, either in advance, or after the fact by ratification; the position may be different where the agent has apparent but not actual authority. It would also be reasonable to conclude Andrew's act as the best available option, given his rights, to confirm the order even prior to receiving verbal or written confirmation from ADC. A thorough and detailed analysis and interpretation follows in the forth coming sections. Table of Contents Table of Contents 3 1. Case Study 4 2. Question 4 3. Parties Involved in the Case Study 5 4. Agent 5 5. Principal 5 6. Third Party 5 7. Undisclosed Principal 6 8. Disclosed Principal 6 9. Agency: The law of agency 7 10. Agency Agreement 7 11. Authorised Acts 10 12. Unauthorised Acts 10 13. Agent and Principal Relationship 11 14. Mutual Rights and Obligations of Principal and Third Party 11 15. Andrew confirming Dan of PC Express without ADC's approval. 12 16. Duties owed by agent to principal. 13 17. Advise to ADC regarding James withdrawal. 14 18. Principal- Third Party 15 19. Principal-Third Party: Misrepresentation by the agent 15 20. Agent-Third Party: Liability to the third party on the contract. 16 21. Agent-third party: Agent's right to sue third party. 17 22. Defenses available to the third party 18 1. Case Study Andrew works as an agent for business trading in different varieties of computers. ADC Ltd is a company needs 20 sets of Model XXP computers by Christmas 2009 by spending no more than 20,000. Dan is the sales assistant from PC Express, who offers Andrew 20 sets of the new Model XXP Plus computer at a discount price of 30,000. Andrew is sure that ADC Ltd would want the new model of computer rather than the old model and asked Dan to wait for an hour so he can speak to ADC Ltd in order to get the permission. He discloses that this order would be beyond his power and he is only acting as the agent. When Andrew rings Dan back to confirm the order he is asked specifically whether he received consent from ADC Ltd, Dan is told that it has all been sorted and that permission has been given, the order is made and the goods are delivered. However, Andrew did not in fact seek permission from ADC Ltd, he did ring but no one answered the phone call. Considering he had to contact Dan from PC Express in an hour, he concluded the deal before the written or oral permission from ADC Ltd. After Christmas, ADC Ltd asked Andrew to buy another 35 sets of Model XXP computers due to the expansion of the business. James owns a company involved in the production of computers and his business is mainly on importing computers from China and reselling them to the customers in the UK. James has just imported some Model XXP Computers from China. Knowing that Andrew often works as an agent for many companies in the computer business he contacted him with the purpose of concluding a contract. James is aware that Andrew works as an agent for ADC Ltd. However, James does not want Andrew to contract with him on behalf of ADC Ltd as the agent as in every previous transaction ADC Ltd has been very late in making payments. Andrew is aware of the previous problems and of James' current instructions. Andrew enters into a contract with James and signs the contract 'as the agent' for an unnamed purchaser. Some weeks later James discovers that the Andrew contract with him on behalf of ADC Ltd and he pulls out of all future obligations under the contract on this basis. 2. Question With reference to relevant case law advise ADC Ltd as to their rights and obligations. Would your answer be different if the offer made by PC Express only lasted for an hour and Andrew clearly knew that he would not get a similar offer from anywhere else . 3. Parties Involved in the Case Study As there are three parties involved in concluding a contract through an agent, there are three sets of mutual rights and obligations to consider, that is, those of the Principal and the agent, the principal and the third party and the agent and the third party. However keeping the case study in view and the required analysis of applicable laws that needs to be furnished to support the response, we will first dwell on a few definitions, identify the relevant parties in the case study and thereafter evaluate if the question in scope regarding advise to ADC and if the response would be any different if PC Express's offer lasted only for an hour. The advantage would be to refer to respective section and definition while the arguments are in progress in the later sections. 4. Agent Agent will be indicated hence worth as A. Andrew is the agent of ADC in the case study. 5. Principal Principal will be represented as P in this document. Here ADC Ltd is the Principal 6. Third Party We will use T to indicate third party. James and PC Express are both third parties here. 7. Undisclosed Principal This is also known as undisclosed agency where the existence of the agency is not disclosed. T believes the contract is with A and is unaware that A is acting for P; nevertheless, P is entitled to intervene and enforce the contract. There is no legal requirement that the agency be disclosed. There is often a subtle confusion between undisclosed principal and masked principal. When T is aware about A being an agent for P however not exactly knowing the identity of P does not make it undisclosed agency. There may be difficulty in distinguishing between unidentified, where the existence of a principal is disclosed however not their identity and undisclosed principals. Furthermore, where the existence of the principal is undisclosed the agent will always appear to contract as principal and it may be difficult to determine whether or not the 'agent' has actually contracted as principal.1 The principal may wish to appoint an agent to tender for a contract, or bid for real estate or purchase shares on their behalf, as they might be disadvantaged if third party is aware of their interest. 8. Disclosed Principal The disclosed principal or disclosed agency is where the existence of the principal is disclosed. The disclosed principal may be named, that is, identified or unidentified. James was aware of Andrew being an agent without knowing the identity of the principal he was working for. So this case is disclosed principal. 9. Agency: The law of agency There are a number of regulations that apply some as a result of common law and others as a result of the Commercial Agents (Council Directive) Regulations 1993. Agents are obliged to act in good faith and conscientiously; to obey all reasonable lawful instructions of the principal; to act within the limits of their authority; to avoid any conflict of interest with the principal; to disclose all material facts to the principal and to refrain from divulging confidential information to third parties; not to make a secret profit or accept bribes; to account to the principal for property and money of the principal which is under the agents control; and not to delegate their authority without the principal's consent. 10. Agency Agreement An Agency Agreement may be created in several ways. In order to appropriately justify under what circumstances Andrew went ahead and confirmed the order to Dan of PC Express and the authority he had exercised, it is important to understand A's overall authority scope. Actual Authority: P gives prior consent to A's action. 'Actual' authority is a legal relationship between principal and agent created by a consensual agreement to which they alone are parties. Andrew had actual authority to close the transaction with PC Express only at the price approved by ADC. Apparent Authority: A acts without P's consent but P is estopped from denying A's Authority. Apparent authority is equivalent to 'appearance of authority'. There may be an appearance of authority whether or not there is in fact authority based on the fulfillment of the following three criteria. A. Representation2 B. Reliance C. Alteration of position resulting from reliance3 Ratification: A acts without prior authority but P gives retrospective consent by ratification. We could go ahead with this assumption for Andrew's attempt to close the deal at a higher price as he would be able to justify the need of the hour. Andrew is sure that ADC Ltd would want the new model of computer rather than the old model and Dan from PC Express was already offering a discounted price for the bulk purchase, however it does not match with the approved price limit. Necessity: A acts without P's consent but the law deems P to have consented. Express Actual Authority: A's express actual authority depends on the express words used by P, whether oral or written. - Based on Agreement: - Must be an intention to act on behalf of another4 - Determining the extent of agents actual authority: By Deed of Appointment5 By oral appointment or writing not under seal6 An Agent cannot have actual authority when he exceeds an express limit on his authority or when he does something which his principal has expressly prohibited. While he had the authority to transact with PC Express, going beyond the approved price limit was a decision purely in the interest of the company. The case study hints at the fact that ADC would be keen to have only the New models of the computers. Implied Actual Authority: The Scope of A's express actual authority may be broadened by implication. In the case of a written agency agreement the normal principles of construction of written documents allow the implication of additional authority from the express words used, the usage of the trade or the course of business between the parties. Implied actual authority maybe inferred from the conduct of the parties and the circumstances of the case where Agent is impliedly authorised to undertake activities relating to a particular position.7 Incidental authority: Every agent who is given express authority also has 'the right to do all subordinate acts incidental to and necessary for the execution of that authority' Usual Authority: An A has implied actual authority to do what is usual in his trade, profession, or business for the purpose of carrying out his authority or anything necessary or incidental thereto. With or without giving benefit of doubt to Andrew, there has been no indication, whatsoever of any personal interest involved in the entire exercise. It was just a matter of unfavorable circumstances that he could not receive a verbal confirmation over phone for the new price and yet fully aware that ADC might not get a better deal for the New models in this discount price. Andrew has carried out his authority with no personal gain from Dan or PC Express and in the honest and sincere faith of closing the transaction in ADC's favor, well within the scope of his trade and business. Customary Authority: An agent has implied actual authority to act in accordance with the usage and customs of the particular place, market or business in which he is employed, so long as those usage or customs are reasonable and lawful. 11. Authorised Acts Agent enters into a contract on the principal's behalf with a third party or conducting any such activity having the principal's actual authority to do so falls in the purview of authorised acts. 12. Unauthorised Acts Where an agent acts within the scope of their authority, any contract is the contract of the principal and the agent cannot sue or be sued on it, unless there is a contrary intention. Neither the principal nor the agent will be liable on a 'contract' made with the third party where the agent acted without actual or apparent authority and the principal has not ratified. However, the third party may be able to bring an action for breach of warranty of authority by the agent. Andrew signed with James well within the authority and with ADC's knowledge as the case study does not state anything otherwise. 13. Agent and Principal Relationship The agreement determines the relationship to some extent and the various clauses there in. However an agent's representation to the third party varies based on disclosed and undisclosed agency. 14. Mutual Rights and Obligations of Principal and Third Party The mutual rights and obligations of the principal and third party where the agent acted for disclosed principal Authorised Acts - As a general rule, as seen already, if an agent enters into a contract on the principal's behalf with a third party, having the principal's actual authority to do so, only the principal and the third party will be bound by the contract. The agent will be unaffected by it. The principal and third party are brought into a direct relationship, as if they had negotiated personally, and their rights and obligations are thereafter determined according to the ordinary rules of contract. This allows ADC to bind James by the contract and his obligation to fulfill the order as agreed in the contract, regardless of disclosed agency with ADC being behind the scene. Unauthorised Acts - The principal is bound by the unauthorized acts of the agent, if: The agent had apparent authority to act in that way, and the third party was unaware that they acted without authority; or The principal has ratified the act of the agent. If these conditions are satisfied, a normal contract will be created between the principal and the third party. If a agent executes a deed on the principal's behalf, the principal cannot sue or be sued on it, unless: The principal is described as a party to the deed and it is executed in their name; or The agent entered into the deed in their own name but as a trustee for the principal of the rights under the deed, in which case the principal may enforce those rights in proceedings to which the agent is a party. Even if Andrew had signed the contract with James, without ADC's approval, this provision allows ADC to go ahead and sue James, keeping Andrew in confidence and support his motives throughout by ratifying or acting on behalf of the deed. 15. Andrew confirming Dan of PC Express without ADC's approval. The key point here is the statement by Andrew when he discloses that this order would be beyond his power and he is only acting as the agent which is an indication of limited power to proceed with the order to buy 20 sets of computer at a cost higher than what was communicated or approved for this purchase, by ADC. He did not have the authority to undertake the transaction. It would seem, therefore, that when Andrew agrees to buy on behalf of ADC that is not what is happening. Dan is aware that Andrew has no authority to accept an offer and that such acceptance can only be made by ADC due to the change in unit price and that is precisely why Dan clarified from Andrew if he had received approval. If this is the case, there is no agreement for ADC to ratify because ratification requires the agent to purport to act for the principal, which Andrew seems not to be doing. It is worth just noting that, in view of the statements about his actual authority, Andrew does not have apparent authority, implied actual authority and Watteau v Fenwick does not apply, and there is no agency of necessity either. 16. Duties owed by agent to principal. Apart from the duties imposed by the terms of the agency agreement to obey the principal's reasonable instructions and act within actual authority and not to delegate without the authority of the principal, an agent also has fiduciary duties. This requires the agent to perform with honesty and good faith for the benefit of the principal. Andrew agreed to proceed with the deal with increased unit price, bearing in mind the urgent need of ADC and within a specific time frame. He was not furthering the his own interests. The precise nature of the fiduciary duties owed by an agent to a principal will depend on the terms of their contractual relationship. It is possible to narrow the range of duties, although not to remove the core obligations of honesty and good faith. 8 If the agent is a commercial agent within the provisions of the Commercial Agents (Council Directive) Regulations 1993 (see 3.3.4 below), certain obligations cannot be excluded or limited (regulations 3 and 5): the obligation to look after the principal's interests and act dutifully and in good faith, and, in particular, the duty to make proper efforts to negotiate transactions, to communicate relevant information and to comply with reasonable instructions. Andrew did just that in the given circumstances. 17. Advise to ADC regarding James withdrawal. Where the Principal's existence is disclosed and the agent's acts are actually authorised, only the principal and third party will be bound by a contract. Where the Principal's existence is not disclosed, in order to avoid circuity of actions the doctrine of undisclosed principal may allow the principal to sue and be sued on any contract entered into by the agent: Freeman & Lockyer V Buckhurst Park Properties (1964). In both scenarios, ADC's right are reserved to ensure the third party adheres to the contract signed and makes sense to advise ADC to take the agent into confidence for next steps to sue or consider any other legal persecution. So ADC is free to exercise those rights. It might be better to say that where the third party was not deceived by the undisclosed principal or had no interest in the identity of the principal, the third party cannot raise defenses that were available against the agent. James is not aware that Andrew is acting as agent for ADC, but has expressed his desire not to trade with that company. We cannot restrict the discussion to Said v Butt. Our response would consider whether that decision is the leading authority in light of cases such as Dyster v Randall & Sons, Nash v Dix, and, in particular, Siu Yin Kwan v Eastern Insurance Co Ltd. The application of these cases to this situation is made even more likely by the fact that James showed no interest in asking Andrew for whom he was acting. 18. Principal- Third Party The general rule is, where a person contracts as agent for a principal the contract is the contract of the principal, and not that of the agent; and, prima facie, at common law the only person who may sue is the principal, and the only person who can be sued is the principal. 9. This allows ADC the right to sue James for not abiding by the contract and withdrawing from obligations. According to Lord Scarman view was that everyone is liable for their contracts, even where they act for another, unless they can show that this liability is removed by the law of agency 10 The principal may sue or be sued on the contract with the third party if the agent discloses the agency and acts within actual authority or acts without actual authority and the principal ratifies. 19. Principal-Third Party: Misrepresentation by the agent The principal is liable to the third party for a misrepresentation if: it was made by an agent acting within their actual or apparent authority or the principal ratified, and the misrepresentation induced the third party to enter into the contract. This is also the case where the misrepresentation by the agent is fraudulent or negligent and even if the principal was unaware of the agent's actions, or the agent was acting for personal benefit and not for the benefit of the principal11. In this case we find no such fraudulent misrepresentation. Therefore ADC reserves the right to confirm Andrew as their legal representative absolutely authorized to sign the contract with James and thereby binding James to it. 20. Agent-Third Party: Liability to the third party on the contract. The general rule is that where the agency is disclosed, the principal alone is liable on the contract. However, the agent may make himself or herself personally liable in addition to the principal. Where A contracts with B on behalf of a disclosed principal C, the question whether both A and C are liable on the contract or only C depends on the intention of the parties. That intention is to be gathered from (1) the nature of the contract, (2) its terms and (3) the surrounding circumstances. The intention for which the Court looks is not the subjective intention of A or of B. Their subjective intentions may differ. The intention for which the Court looks is an objective intention of both parties, based on what two reasonable businessmen making a contract of that nature, in those terms and in those surrounding circumstances, must be taken to have intended. 12 Where someone signs a contract in their own name and without any qualification, the general rule is that they will assume personal liability, unless the contrary can be gathered from the rest of the document and the surrounding circumstances. In Universal Steam Navigation Co Ltd v James McKelvie & Co [1923] AC 492 (Sealy and Hooley, p.160-61), the contract was signed 'as agents'. This showed that they did not sign as principal and, therefore, did not incur personal liability. Signing 'for' another has the same effect. On the other hand, in The 'Swan', Brandon J thought that merely adding the word 'agent' or 'director' would not, normally, relieve the signer of liability. A term rendering the agent personally liable may be implied by the custom of the agent's trade. In Fleet v Murton [1871] LR 7 QB 126, it was held that there was a custom in the London fruit trade that the agent was personally liable if the name of the principal was not disclosed. That leaves one more option for ADC to ensure Andrew is involved in negotiating with James to comply with the contract and deliver the goods. 21. Agent-third party: Agent's right to sue third party. The agent cannot sue on the contract between the principal and the third party, but there are exceptions to this general rule: for example, where the parties intend that the agent shall be able to sue and where an agent, who is liable on a contract because of the Companies Act 1985, s.36C, may also enforce that contract (Braymist Ltd v Wise Finance Co Ltd [2002] EWCA Civ 127). This needs to be explored further between Andrew and ADC to ensure James executes his obligations 22. Defenses available to the third party While advising ADC it is important to inform about the defenses available to the third party. In response to a claim by the disclosed principal, the third party can use any defense or claim arising from the contract, any defense or claim available against the principal. A defense or claim available against the agent and unconnected with the contract cannot be used against the principal. Cited Work 1. Principles of Commercial Law, Turley, Ian, Second Edition ISBN 1876213 108 2. Commercial Law, Bradgate, Additional websites http://www.berr.gov.uk/whatwedo/businesslaw/partnership/page25911.html http://fletcher.tufts.edu/multi/texts/BH784.txt http://www.bis.gov.uk/partners http://www.londonexternal.ac.uk/current_students/programme_resources/laws/subject_guides/commercial/commercial_ch3.pdf Read More