Commercial Law Lecture 4 - duties of an agent PDF

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Commercial Law Lecture 4 – Agency: Duties and rights of an agent Duties of an agent The central duty of an agent is to obey its principal’s instructions. If it fails to do so, it could be contractually liable if it operating under contract. However, gratuitous agents (i.e. non-contractual) could liable if they breach a duty of care under tort. Note that there are two types of duties: Performance and Fiduciary. Different duties Performance: 

Duty to perform contractual undertakings

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Duty to obey instructions

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Duty not to delegate

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Duty to act with reasonable care and skill - general standard for most contracts

Fiduciary: 

Duty to avoid conflicts of interest

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Duty not to profit from position

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Duty not to accept bribes

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Duty to account

Duty to perform contractual undertakings The agent has a duty to perform contractual undertakings. Failure to do so would be a breach of contract: Fraser v BN Furman (Productions) Ltd [1967] 1 WLR 898 (CA) The defendant engaged Miller Smith & Partners (its agent) to replace insurance policies. The agent failed to do so and Fraser (an employee of the defendant) sustained injuries in the course of its employment. Fraser successfully sued the defendant who then sought an indemnity from its agent to cover the damages and costs incurred. Held: Agent was in breach of contract. It should have obtained the required insurance so had to indemnify the defendant for the amount of money it had to pay Fraser. If an agent exceeds its authority then it is in breach of contract: Fray v Voules (1859) 1 E&E 839 Facts: A solicitor was instructed not to compromise a legal action. It did so anyway as it felt that it would be in the interests of its client. Held: Was in breach of its duty to perform contractual undertakings.

Duty to obey instructions The duty to obey instructions is strict – an agent could be liable for breach of contract if it does not do what it is instructed to do. But, note that this only applies to agents under contract so does not apply to gratuitous agents. Turpin v Bilton (1843) 5 Man & G 455 Facts: Bilton (agent) was instructed by Turpin (principal) to insure a ship against ‘the perils of the sea’. Bilton failed to obtain insurance and the uninsured ship (on transit from Newcastle to Rio de Janeiro) was lost at sea following a storm. Turpin sued for damages. Held: Bilton was in breach of contract in not obtaining insurance. Ordered to pay damages to compensate for the loss. 

An agent will not be liable for following imprudent instructions (Overend & Gurney Co v Gibb (1871-72) LR 5 HL 480 (HL).

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An agent will not be liable for breach of contract if the acts would be illegal or result in a void or unenforceable contract (Cohen v Kittell (1889) 22 QBD 680 (QB).

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BUT an agent could be liable for being unable to carry out instructions if it did not inform the principal within a reasonable amount of time (Callender v Oelrichs (1838) 5 Bing NC 58).

Duty not to delegate The general rule is that an agent cannot delegate its authority (nor appoint a sub-agent) without the express or implied consent of the principal. But, is there privity between the principal and sub-agent even if the appointment has been authorised by the principal? The general principle is no – the agent would remain responsible for acts of the (authorised) sub-agent. However, does the sub-agent owe the principal the normal duties of an agent and do the fiduciary duties still apply? De Bussche v Alt (1878) 8 Ch D 286 Facts: A shipowner employed an agent to sell its ship in either Inida, China or Japan. The agent appointed a sub-agent with consent and the principal contacted the sub-agent with instructions. The sub-agent then bought the ship itself and re-sold it at a profit. Held: That the sub-agent was liable and had to account for its profit as there was privity between itself and the principal.

Calico v Barclays Bank [1931] All ER Rep 350 Facts: The principal sold cotton to the buyer in Beirut. Barclays were instructed to insure the cotton in the event of the buyer not accepting the consignment. Barclays appointed a sub-agent (with knowledge of the principal) as they did not have an office in Beirut. The sub-agent failed to

obtain insurance and the cotton was destroyed in a fire. The principal sued Barclays and the sub-agent for negligence. Held: The sub-agent was not liable because there was no privity between itself and the principal. However, Barclays was liable due to the general rule that the agent is responsible for the whole transaction. 

imNote that the difference between Calico and De Bussche is that the principal had corresponded directly with the sub-agent in De Bussche so there was privity.

Duty to act with reasonable care and skill Although all agents owe the principal a duty to exercise reasonable care and skill, there are different sources for contractual agency and gratuitous agency. With contractual agency, a term is implied requiring the agent to exercise reasonable care and skill. In addition, the agent will also owe a tortuous duty of care, so could be liable under contract or tort. However, a gratuitous agent would only be liable under tort. Chaudry v Prabhakar [1989] 1 WLR 29 (CA) Fact: Chaudry (principal) wished to purchase a car but had limited knowledge of them. She asked her friend Prabhakar (agent) to locate a car for her. Chaudry stipulated that the car must not have been involved in an accident. Prabhakar (who was not an expert) located a car, noticed but the bonnet had been repaired but did not make any further enquiries. He then recommend the car to Chaudry, who purchased it and then discovered that it had been involved in an accident and was effectively worthless due to bad repairs. Chaudry sued Prabhaker – who contended that as a gratuitous agent he only had to display the usual skill that he would exercise in his own affairs (i.e. when he bought a car for himself). Held: The court established an objective standard. A gratuitous agent has a duty to exercise the level of care and skill that would be considered reasonable in all circumstances. Prabhaker failed to do this so was liable to pay damages. Therefore the standard of care for contractual and gratuitous agents is the same.

Agent owes a fiduciary duty The agent owes the principal a fiduciary duty even though it is not a trustee. The burden of proof rests on the agent – i.e. it has to prove that there has not been a conflict of interest. This duty derives from equity, so also applied to gratuitous agents (with the same rules applying). This duty is strict and paramount. The agent must not put itself in a position where its interests and conflicts conflict. The burden of proof rests on the agent whereby it has to prove that there was no conflict of interest in the particular situation. If the agent cannot disprove the allegation then the principal will be able to rescind the contract (as the contract is voidable). This right lasts until the breach is discovered and the principal

does not have to suffer any loss – the breach is so serious it taints the relationship. Conflict of interest Boardman v Phipps [1967] 2 AC 46 A solicitor was acting as an agent for the trustees of an estate. He attended the Annual General Meeting of a company which the estate had a minority shareholding in. The solicitor received information on the value of the shares, but considered them to be underfunded. He recommended to the trustees that they should purchase more shares, but they declined. The solicitor, acting in good faith, then bought a controlling interest in the company. The company prospered and the solicitor prospered as did the estate as the value of its shareholding increased. But, had he acted in conflict of interest? Held: House of Lords held that he must pay his personal profit to the estate because a) the information he received belonged to the estate and b) it was irrelevant that he had acted in good faith. ‘It is quite clear that if an agent uses property with which he has been entrusted by his principal so as to make a profit for himself out of it without his principal’s consent, then he is accountable for it to his principal... So also if he uses a position of authority to which he has been appointed by his principal so as to gain money for himself, then he is also accountable to his principal for it... Likewise with information or knowledge which he has been employed by his principal to collect or discover or which he has otherwise acquired for the use of his principal, then again if he turns it to his own use so as to make a profit by means of himself, he is accountable.’ Lord Denning, Boardman v Phipps [1965] Ch 992 at 1018

Imageview Management Ltd v Kelvin Jack [2009] EWCA Civ 6 Facts: Jack was a professional footballer from Trinidad and Tobago. He appointed an agent to negotiate a contract in the UK. The agent was required to obtain a work permit. A contract was offered by Dundee United Football Club who offered the agent £3,000 to obtain the necessary work permit (the usual cost was approx. £750). Jack was not informed of this arrangement and refused to pay the agreed 10% of wages commission. The agent sued Jack. Held: Court of Appeal decided against the agent. Jack was entitled to all the fees he had paid to the agent, including the £3,000. Why was this? Because the agent had acted in its own interest without disclosing to the principal. 

Note that if the payment had been disclosed to the principal then there would not have been a conflict of interest.

Duty not to accept bribes

An agent who accepts bribes is deemed to have put its own interests first – therefore there is a breach of fiduciary duty. The courts take a harsh approach to bribery and can adopt a broad approach to determine what amounts to a bribe. Further, the principal has a wide range of remedies available to it and does not have to have suffered any loss. Hippisley v Knee [1905] 1 BK 1 Facts: An agent was employed to sell the principal’s goods. It was agreed that the agent’s expenses would be reimbursed. The agent sold the goods and reclaimed the full cost of advertising, despite having received a discount. This was a trade custom, but the principal did not know this. Held: Court of Appeal held that in accepting the bribe and discount and claiming the full cost, the agent was in breach of his duty and therefore had to account. But, he was allowed to keep his agency commission as he had acted in good faith.

Industries & General Mortgage Co Ltd v Lewis [1949] 2 All ER 573 (KB) Facts: The principal (Lewis) instructed his agent to obtain a loan. Lewis obtained a loan from IGM and paid them a fee. Unbeknown to Lewis, IGM had agreed to pay half of this fee to his agent. Held: This amounted to a bribe even though there was no dishonest motive on IGM’s behalf. The agent had breached the duty and had to account to Lewis. 

Slade J stated that a payment amounts to a bribe if:

‘(i) The person making the payment makes it to the agent of the other person with whom he is dealing; (ii) that he makes it to that person knowing that the person is acting as the agent of the other person with whom he is dealing; and (iii) that he fails to disclose to the other person with whom he is dealing that he has made that payment to the person whom he knows to be the other person’s agent.’ If the agent accepts a bribe, the following remedies are available: 

The contract could be terminated and the agent dismissed.

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The agent could lose the right to any commission or remuneration that it was entitled to.

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The agent and the briber are jointly and severally liable under the tort of deceit for any loss that the principal suffered.

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The principal can commence a restitutionary claim against either the agent or the briber to recover the amount of the bribe.

FHR European Ventures LLP v Cedar Capital Partners LLC [2015] UKSC 45 Facts: The principal (FHR) wished to purchase share capital in a hotel company based in Monte Carlo. Cedar Capital Partners LLC (the agent) were appointed to negotiate with the owners of the share capital (Monte Carlo Grand Hotel Ltd). FHR purchased the share capital for €211.5m.

However, unbeknown to FHR, Cedar had an agreement with MCGH to receive €10m if the purchase went ahead. FHR commenced proceedings to recover. Held: At first instance that Cedar was in breach of the duty, but the €10m was not held on trust for FHR. FHR appealed as it wanted a proprietary remedy as well as a personal remedy for the price (so as to be a secured creditor). The appeal was allowed and €10m was held on trust for FHR. Cedar then appealed on the grounds that such a proprietary remedy was not suitable. The appeal was dismissed. The Supreme Court held that FHR had a personal and a proprietary remedy and could elect whichever. This decision was significant for the following reasons: 

A principal can recover a bribe and its increase in value.

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The remedy is proprietary so the principal’s claim would rank ahead of unsecured creditors in the event of insolvency.

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The principal can trace assets of the agent to third parties (as it is proprietary).

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It can also apply to other relationships – e.g. employer/employee, company/director etc.

Also see:  

First Subsea Ltd (Formerly BSW Ltd) v Balltec Ltd [2017] EWCA Civ 186 Faichney v Vantis HR Ltd [2018] EWHC 565 (Ch)

The duty to account There are three main duties under the duty to account: 1. The duty to keep the principal’s money and property separate from its own and others. 2. The duty to provide the money to the principal upon demand. 3. The agent must keep accounts of all transactions that were entered into on behalf of the principal and be able to render them to the principal on demand. Rights of an agent Under the common law, agents are not provided with as many rights as principals. They are entitled to remuneration if the agreement contains an express or implied term to that effect, or if it is entitled to claim a quantum merit. There are usually no problems when remuneration is expressed in the contract, but although the courts may be unwilling to imply a term, they are often unwilling (but may allow a claim for quantum merit). This is generally in accordance with the normal contractual rules that relate to the implication of terms.

Way v Latilla [1937] 3 All ER 759 (HL) Facts: The agent (Way) agreed to send information to the principal (Latilla) relating to gold mines. In return, Way would receive a concession in any gold mines obtained by Latilla. There was no mention of this concession in the agreement, and Latilla denied offering it. Held: That there was no completed contract between the two parties which provided for the remuneration. However, Way was entitled to receive a quantum merit of £5,000 as there was a contract of employment which indicated that the work was ‘not to be gratuitous.’ 

Note that a reward of a quantum merit is not awarded on the basis of the market value of the work, but on the basis of unjust enrichment (i.e. the benefit gained from the defendant). This was recently confirmed in Benedetti v Sawiris [2013] UKSC 50, [2104] AC 938

Deprivation of opportunity What happens if the principal decides not to sell? Luxor v Cooper [1941] AC 108 Facts: The principal wanted to sell two cinemas. There was an agreement with the estate agents that the commission would be paid on ‘completion of sale’. The estate agent introduced a third party who wanted to buy, but the principal then changed its mind and refused to sell. The estate agent sued for commission. Held: The action failed because there was no sale. 

However, the outcome could be different if the agent had effected a binding contract:

Alpha Trading Ltd v Dunshaw-Patten Ltd [1981] QB 290 (CA) Facts: Alpha (agent) was instructed by D-P Ltd (principal) to locate a large quantity of cement. Alpha would receive commission based on the amount sold in return. Alpha located a purchaser who introduced it to D-P and a contract to purchase 10,000 tonnes was made. D-P then failed to perform the contract so Alpha did not receive its commission. Alpha then commenced proceedings. Held: Alpha was entitled to the commission and was awarded damages of $25,000 plus interest. Effective cause An agency agreement will often contain a clause stating that the agent will only receive remuneration or commission should a particular event or result occur. Unless otherwise provided, the agent will only be entitled to commission if it was the ‘effective cause’ of the particular event or result. This has created uncertainty as the courts have been inconsistent with regard to whether an agent should be the effective cause or an effective cause.

Millar, Son & Co v Radford (1903) 19 TLR 575 (CA) Facts: Millar was instructed by Radford (the principal) to find a purchaser for his property, or failing that, a tenant. Millar found a tenant after being unable to find a purchaser. The tenant undertook a lease on the property and then purchased the property fifteen months later from Radford. Millar claimed commission and Radford refused. Held: Millar was not the effective cause, so the claim failed. ‘The right to commission does not arise out of the mere fact that agents have introduced a tenant or purchaser... it is necessary to show that the introduction was an efficient cause in bringing about the letting or the sale.’ Collins MR 

But what about where there was more than one effective cause?

Also see:   

Nahum v Royal Holloway and Bedford New College [1998] EWCA Civ 1760 Foxtons Ltd v Bicknell [2008] EGLR 23 Wollenberg v Casinos Austria International Holding GmbH [2011] EWHC 103

Right to reimbursement and indemnity Agents have the right to be reimbursed for their expenses and indemnified for any losses that might be incurred. In contractual agency, it may be an express terms but the courts may imply such a term. In gratuitous agency, the agent may be able to claim a restitutionary right to reimbursement based on the payments which the agent was compelled to make and which were for the principal’s benefit. This would be based on unjust enrichment.

Right to a lien An agent may be able to claim a lien over the principal’s property in certain circumstances. A lien is a right to retain possession (as security) of another person’s goods until that person satisfies its debt, or in the case of agency, pays the agent its commission or indemnifies the agent. There are two types of lien: 1. A general lien which entitles the agent to retain possession of any goods that belong to the principal until the relevant obligation is met. However, the courts are often reluctant to provide a general lien, unless the agreement provides for one. 2. A particular lien which will only entitle the agent to retain possession of the goods to which the particular obligation relates....