Commercial Law lecture 3 PDF

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AGENCY & AUTHORITY Agency - Definition Agency is the relationship arising where one person, the principal,… appoints another, the agent,... to bring about, modify, or terminate legal relations between the principal .and one or more third parties Roy Goode and Ewan McKendrick, Goode on Commercial Law (4th ) edn, Penguin) 179 Note the reference to the principal, the agent and the third party Agency – Difference between common law and civil law conceptions Note that the common law conception of agency is broader than the civil law conception In common law there is a relationship between the Principal and the Third party even where the existence of the Principal is undisclosed – i.e. the Third party believes the Agent to be the principle – see Watteau v Fenwick Usual Authority Therefore in common law we have disclosed and undisclosed agency Disclosed where the Third party knows that the agent is dealing as an agent for another party Undisclosed where the Third party does not know that the agent is dealing as an agent Both common law concepts can infer liability on the Principal Agency – Difference between common law and civil law conceptions This is not the case with the civil law conception – confines agency to direct representation Indirect representation (where the third party is unaware of the existence of the principal) does not confer or impose any liabilities on the Principal

Therefore you have two contractual relationships with regard to transactions – the contract between the Principal and the Agent and the contract between the Agent and the Third party Under normal circumstances, the Principal cannot sue the Third party and vice versa Note that the civil law concept of agency has been adopted in Art 13 of the UNIDROIT Convention on Agency in the International Sale of Goods Agency – concept of :Two types of agency With actual agreement Without actual agreement Remember we are dealing now with the common law * concept of agency Agency – with actual agreement :With actual agreement Express authority – as in the contract :Implied authority Incidental Customary Usual Conduct of the parties and the circumstances of the case Agency – without actual agreement :Without actual agreement Apparent authority

Usual authority Operation of the law Authority An agent has actual authority when it does what was previously (authorised by its principal (expressly or impliedly If an agent is appointed for a particular purpose it has implied incidental authority to do everything necessary to achieve that purpose An agent may have the usual authority of someone in that agent’s position, trade, business or profession The test is what authority would a reasonable person in the agent’s position believe they possessed Usual authority Note that this phrase is confusing as it can be used in two different :ways Referring to actual implied authority between a principal and their agent Referring to apparent authority between a principal and a third party Also – could be a third meaning when the third party does not know of the existence of the principal – as in Watteau v Fenwick Actual authority Diplock LJ in Freeman & Lockyer v Buckhurst Park Properties :(Mangal) Ltd [1964] 2 QB 480 (CA) stated An actual authority is a legal relationship between the' principal and agent created by a consensual agreement to which they alone are parties. Its scope is to be ascertained ,by applying ordinary principles of construction of contracts including any proper implications from the express words

used, the usages of trade, or the course of business ’.between the parties Note that this was a case relating to apparent authority Actual authority In this case for the company to have been bound there would have :had to have been actual authority Armagas v Mundogas SA, The Ocean Frost [1986] 3 All ER 795 Vice President of a company said that he had authority to agree the deal for the sale and leaseback of a ship The third party knew that the agent did not have authority because the deal was so unusual The third party sought to have the deal enforced as against the principal on the grounds that the VP had the apparent authority to enter into the contract Actual authority Armagas v Mundogas SA, The Ocean Frost [1986] 3 All ER 795 Held that the company was not bound because the principal company made no such representation It was not usual that vice presidents agreed to such transactions and the third party knew this Authority - coincide Apparent authority acts as an estoppel, i.e. the principal is estopped from denying that its agent had the authority to do what it did Apparent authority is the authority that appears to others Usual (actual implied) authority is the authority that a reasonable person in the agent’s position believe they possesses

These can often coincide – together with actual authority Authority - coincide Lord Diplock in Hely-Hutchinson Brayhead [1967] 3 Al ER :98 .Apparent authority… often coincides with actual authority' Thus, when the board appoints one of their number to be managing director, they invest him not only with implied actual] authority, but also with ostensible authority to do all] .such things as fall within the usual scope of that office Other people who see him acting as managing director are entitled to assume that he has the usual authority of a '.managing director Authority - coincide :In Brief A principal has the ACTUAL authority to appoint an agent The agent could have the USUAL authority of believing it has the authority to enter into certain transactions Third parties could have the APPARENT authority of believing that the agent had the authority to enter into certain transactions Implied actual authority :Lord Diplock in Hely-Hutchinson Brayhead [1967] 3 Al ER 98 This case is an example of authority being implied because of the conduct of the parties and the circumstances of the case – i.e. actual agreement but also coinciding with apparent authority without agreement Lord Diplock stated that the representation needs to be made between a principal who had actual authority Companies can operate through agents – including the principal

They cannot by themselves do any act and cannot make representations If a company can only act through its agents then the representation of authority has to come through one of its agents Therefore the agent giving the authority has to have actual authority in order to invoke apparent authority This case is an example of usual authority where there has been actual implied authority Implied actual authority :Hely-Hutchinson Brayhead [1967] 3 Al ER 98 :Facts (Agent was chairman of company (principal Board of directors allowed the agent to act as de facto managing director To encourage a third party to invest funds in a sister company the MD wrote on company headed paper agreeing for the company to indemnify the third party in the event that the third party suffered loss After the third party invested funds the sister company went into liquidation The third party sought to enforce the indemnity against the principal Implied actual authority :Hely-Hutchinson Brayhead [1967] 3 Al ER 98 Held that the agent as chairman had no usual authority to bind the principal

BUT because the board of directors allowed him to act as de facto managing director, the agent’s authority was implied by the conduct of the parties and the circumstances of the case Implied actual authority :Hely-Hutchinson Brayhead [1967] 3 Al ER 98 Here the chairman had no express authority to enter into the indemnity agreement No authority could be implied from the fact that he was chairman But by allowing the chairman to act as de facto managing director the chairman had authority implied from the conduct of the parties – actual implied authority, therefore usual authority – as in the first type of usual authority Implied actual authority Note that there are two other types of implied actual :authority Incidental authority – the authority that the agent should possess in order to execute effectively its express actual authority Customary authority – the authority that would be granted to an agent by virtue of the customs of the trade Apparent authority For apparent authority to operate there have to be three distinct :requirements A representation of authority made by the principal to the third ;party and The third party having relied upon that representation as in the following case The third party must have altered its position Apparent authority

Lord Diplock in Hely-Hutchinson Brayhead [1967] 3 Al ER :98 apparent authority... is a legal relationship between the…‘ principal and the contractor created by a representation made by the principal to the contractor, intended to be and in fact agreed upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the apparent authority so as to render the principal liable to perform any obligations '.imposed upon him by such a contract Apparent authority First Energy (LTK) \ Hungarian International Bank [1993] 2 Li Rep 194 (noted 1994) LQR 21-25 Senior bank manager did not have actual authority to agree credit facilities Third party knew this but asked the bank manager for facilities nevertheless After several meetings the bank manager wrote saying that he had head office approval to go ahead HIB had not approved the credit facility so refused to offer it to FE Apparent authority First Energy (UK) Ltd v Hungarian International Bank [1993] 2 Li Rep 194 (noted 1994) LQR 21-25 Held that the bank was bound by the the agreement Although agent did not have the authority to sanction the credit facility, it did have the authority to communicate that Head Office had sanctioned the facility – therefore clothed with ostensible authority Steyn LJ - ‘the law recognises that in modern commerce an agent who has no apparent authority to conclude a particular transaction may sometimes be clothed with apparent authority

’.to make representations of fact Apparent authority First Energy (UK) Ltd v Hungarian International Bank [1993] 2 Li Rep 194 (noted 1994) LQR 21-25 Although the agent did not have apparent authority to enter into the transaction it was reasonable for the third party to believe the agent had apparent authority to communicate that the transaction had been approved This is because it would be unreasonable to expect a third party to check in this situation if the bank’s head office had in fact given approval to the transaction Bank managers usually have authority to sign and send letters on behalf of a bank But, if a third party knows that it is not usual it cannot cannot rely on apparent authority to bind the principal Apparent authority Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] :2 QB 480 (CA) stated Company board of directors had the power to appoint a managing director Did appoint a managing director but not in accordance with the procedures as required by the articles of association Nevertheless allowed him to enter into a contract with a third party firm of architects to apply for planning permission to develop a large piece of land Question for the court was whether the managing director had the apparent authority to bind the principal company Apparent authority Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] :2 QB 480 (CA) stated

Held that the managing director did have apparent authority and the company was bound to contract with the architects The board of directors knew the managing director was employing the architects Thus by conduct the board represented that the managing director had the authority to enter into contracts of this type Apparent authority Note that a third party can only rely on apparent authority if it has no knowledge of the relevant restriction However, what constitutes lack of knowledge and what would ?prevent a third party from relying on the doctrine Apparent authority Thanakharn v Akai Holdings Ltd [2010] HKCFA 479 UK courts have referred to this Hong Kong Court of Final Appeal case Held that the belief that there was apparent authority where a solicitor had acted outside the scope of his client’s apparent authority was dishonest or irrational, e.g. being reckless Apparent authority Stavrinides and others v Bank of Cyprus Plc [2019] EWHC (Ch) (24 (May 2019 This case illustrates that the concepts of reasonableness and honesty are closely connect to apparent authority Relationship manager in a branch of an international bank had signed a letter purportedly writing off £3m of a borrower’s loan Borrower claimed that the manager was cloaked with apparent authority, and as such, the bank was bound HELD that even if it could be assumed that the bank had made a

…representation of authority, it would be unreasonable as Apparent authority Stavrinides and others v Bank of Cyprus Plc [2019] EWHC (Ch) (24 (May 2019 :The borrower Was a long-standing customer who was familiar with the bank’s processes Had previously dealt with more senior individuals, not the manager himself The letter in question was an anomaly as it would be highly unlikely that a local manager would have the authority to write off such a significant debt Usual authority Usual authority can refer to implied actual authority and a specific form of apparent authority (the authority a third party would believe the agent would have by virtue of its (position There is also a third type – distinct from actual or apparent authority whereby the principal can be liable even when it is undisclosed – i.e. where the third party is unaware that the agent has a principal and as such, may not have the authority to enter into transactions The leading case is Watteau v Fenwick which has proved to be a very controversial decision Usual authority Watteau v Fenwick [1893] 1 QB 346 Agent owned a hotel Sold it to a principal who kept the agent as manager of the hotel The licence to run the hotel remained in the name of the agent and

the old sign was kept The principal told the agent not to buy cigars on credit The third party thought that the agent still owned the hotel When he found out that this was not the case he sued the principal for the unpaid cigars Usual authority Watteau v Fenwick [1893] 1 QB 346 Held the principal was liable on the grounds that the third party was unaware of the restriction on the agent’s authority :Per Wills J the principal is liable for all the acts of the agent which… " are within the authority usually confided ti an agent of that character, notwithstanding limitations, as between the ".principal and agent, put on that authority Usual authority It was argued in court that this should only have been tenable if the principal was a disclosed principal i.e. the third party knows that the agent is an agent This argument was rejected on the basis that, if correct, it would mean that every time the principal was an undisclosed principal, .the third party would lose out i.e secret limitation of authority would always take priority Usual authority Note that this decision has been highly criticised – means that principals run very dangerous risks by employing an agent Thus if a principal employs an agent but does not disclose that the agent is an agent the principal is liable for anything that the agent does if it is within the principal’s business activity

The third party must not know of the restriction If it does know of it, it cannot rely on usual authority Usual authority - difficulties :There are major difficulties with this principle Should a principal be bound when the third party is not even relying ?on the fact that the agent is an agent An undisclosed principal cannot ratify a contract However, note that under certain circumstances it has been argued that an undisclosed Principal can sue on the contract – but only if it knows of the existence of the contract and the identity of the parties Ratification If an agent does an unauthorised act a principal can ratify that act A person who performs an act, whether it is an agent or not, must either expressly or impliedly indicate that it is acting on behalf of someone else Therefore an undisclosed principal cannot ratify The Contracts (Rights of Third Parties) Act 1999 does not help as the third party must be identified or identifiable...