Commercial Law of Agency PDF

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Lecture notes by Luke Butler...

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Commercial Law: Agency Legal Concept:  Ewan McKendrick (ed), Goode on Commercial Law (2010), p 179:  There is no legal definition of Agency.  ‘Agency is the relationship arising where one person, the principal (P), appoints another, the agent (A) to bring about, modify or terminate legal relations between the principal and one or more third parties (T).’  Principle allows Agent to bring about a contract with a 3rd Party  Who might be agents in the legal sense?  Company directors  Employees  Solicitors

Creation of a Principle-Agent R/s:  P and A relationship may be created:  By express or implied agreement in the contract between P and A  By doctrine of A’s apparent authority (agent may not have actual express authority but may have apparent authority to do so)  By operation of law  By ratification of an unauthorised A’s acts by P

 Agency is a fiduciary relationship of trust and confidence  Can be contractual or non-contractual (gratuitous)  Need not be a contract, but there must be consent:  Yasuda Fire & Marine Insurance Co of Europe Ltd v Orion Marine Insurance Underwriting Agency Ltd [1995] QB 174 at 185: “Although in modern commercial transactions agencies are almost invariably founded upon a contract between principal and agent, there is no necessity for such a contract to exist. It is sufficient if there is consent by the principal to the exercise by the agent of authority and consent by the agent to his exercising such authority on behalf of the principal.”

 Differences between consensual and contractual agency:

 Presence/absence of consideration  If contractual:  A has obligation to carry out his functions  Principal has obligation to remunerate A  Irrespective of whether contractual agreement  A has right to indemnity for loss and expense incurred in execution of duty which arises by operation of law (if there is no contract and I appoint you as an agent and you are exercising a particular duty, not obliged to pay but they have a right to indemnity)  Agreement between P and A may be oral, in writing, or by deed (usually “power of attorney”) = generally no formality  It need not be express: can be implied from conduct  P only bound by A’s acts if P has capacity to do act himself

Actual Authority: Do they have the authority to empower the agent and what is the scope of the authority?  2 types:  Express: Where P expressly grants to A the authority to effect changes in its legal position with T  Implied: law regards the authority as having been conferred upon the agent by necessary implication  Whether A has authority is a question of fact  If P has given prior consent to A acting on P’s behalf, A has “actual authority”  Actual authority conferred by P on AS under terms of agreement or contract between them  Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, per Diplock LJ at 502-3:  “An ‘actual’ authority is a legal relationship between 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 the trade, or the course of business between the parties. To this agreement the [third party] is a stranger; he may be totally ignorant of the existence of any authority on the part of the agent. Nevertheless, if the agent does enter into a contract pursuant to the ‘actual’ authority, it does create contractual rights and liabilities between the principal and the [third party].”

The importance of ascertaining this authority: (there is particular consequences)

 A must act within scope of his actual authority if  A is to be entitled to indemnity from P  A is to be remunerated under contract between P and A  If A acts outside his actual authority  A may be liable to P for breach of contract  A may be liable to a 3rd party for breach of his implied warranty of authority  But note that Principle may later adopt or ratify A’s unauthorised actions

Express Actual Authority:  P asks A to do something on their behalf  If A’s instruction is unclear (e.g. can be construed in one of two ways) and P denies agency as a result, court will likely favour A who should be entitled to rely on what P says  Ireland v Livingston (1872) LR 5 HL 395  Livingston( P) wrote to Ireland (A)asking him to ship 500 tons of sugar  Letter stated: “Fifty tons more or less of no moment, if it enables you to get a suitable price.”  Ireland shipped 400 tons in one vessel, presumably intending to ship the rest in another vessel  Livingston refused to accept the 400 tons and wrote to Ireland to cancel any further shipment  HL held that Livingston was bound to accept the sugar ( the instruction was unclear, interpretative ambiguity of the letter when it has been clearly stated 500 tons) Implied Actual Authority:  A’s authority to act on behalf of P could be implied from:  The relationship between P and A  The particular role occupied by A

 Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 Lord Denning, MR at 583: “[A]ctual authority may be express or implied. It is express when it is given by express words, such as when a board of directors pass a resolution which authorises two of their number to sign cheques. It is implied when it is inferred from the conduct of the parties and the circumstances of the case, such as when the board of directors appoint one of their number to be managing director. They thereby impliedly authorise him to do all such things as fall within the usual scope of that office.”  Facts: ( agency cases are very contextually specific)  Richards (R) was chairman of Brayhead (B)  R also acted as de facto MD (with B’s knowledge/acquiescence)  B also had shares in Perdio Electronics Ltd

 To encourage H-H to inject funds into Perdio, R (as chairman of B) wrote/signed 2 letters on B’s notepaper to H-H purporting to indemnify H-H against any loss H-H might incur as a result of lending money to Perdio  H-H advanced £45,000 to Perdio  Perdio went into liquidation  H-H had to pay off company loan he had guaranteed  HH sought to recover £45,000 under indemnity from B  B refuses to pay money to H  Did R have authority to bind B? The court held that:  R had actual authority to bind B implied from the circumstances of the case Lord Denning, MR at 584-5: “It is plain that [R] had no express authority to enter into these two contracts on behalf of [B]; nor had he any such authority implied from the nature of his office. He had been duly appointed chairman of the company but that office in itself did not carry with it authority to enter into these contracts without the sanction of the board. But I think he had authority implied from the conduct of the parties and the circumstances of the case […] such authority being implied from the circumstance that the board by their conduct over many months had acquiesced in his acting as their chief executive and committing [B] to contracts without the necessity of sanction from the board.”  Over the course of months, we have acquised and allowed him to enter into these contracts by nature of his circumstances. “The judge did not rest his decision on implied authority, but I think his findings necessarily carry that consequence. The judge finds that Mr. Richards acted as de facto managing director of Brayhead. He was the chief executive who made the final decision on any matter concerning finance. He often committed Brayhead to contracts without the knowledge of the board and reported the matter afterwards.” (course of conduct)

Forms of Implied Actual Authority:  Implied agreement  Incidental authority  A has implied actual authority to do everything necessary for, or ordinarily incidental to, effective execution of his express authority in the usual way:  E.g. agent instructed to sell house has incidental authority to sign agreement of sale (Rosenbaum v Belson [1990] 2 Ch 267)  Cf A instructed to “find a purchaser” not to “sell” has no incidental authority to conclude a contract ( Hamer v Sharp (1874) LR 19 Eq 108)

 Usual authority  A has implied actual authority to do what is usual in trade, profession or business for purpose of carrying out his authority or anything necessary or incidental thereto:  E.g. if board of directors appoint someone to be MD ‘they thereby impliedly authorise him to do all such things as fall within the usual scope of that office’ (Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549, per Lord Denning MR.  Customary authority  A has implied actual authority to act in accordance with usages and customs of particular place, market, or business in which he is employed, so long as they are reasonable and lawful ( custom where you have to act in a certain way provided it is reasonable)  Usage or custom will be unreasonable if it is inconsistent with P’s instructions to A or nature of P and A’s relationship itself

Apparent Authority  Apparent or ostensible authority  P makes a representation to T that A has authority to enter on behalf of P into a contract of a kind within the scope of the apparent authority  Relevant where:  A never had actual authority  A’s actual authority has ended  A’s actual authority is limited  Rama Corporation v Proved Tin [1952] 2 QB 147, Slade J at 149–50: o

“… a person [e.g. T] cannot set up an ostensible or apparent authority unless he relied on it in making the contract or supposed contract. … Ostensible or apparent authority which negatives the existence of actual authority is merely a form of estoppel, indeed, it has been termed agency by estoppel, and you cannot call in aid an estoppel unless you have three ingredients: (i) a representation, (ii) a reliance on the representation, and (iii) an alteration of your position resulting from such reliance.”

 Freeman & Lockyer v Buckhurst Park [1964] 2 QB 480 o

Kapoor (K) and Hoon (H) form Buckhurst Park Properties (Mangal) Ltd (B)

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K and H and their nominees are appointed as directors of B

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Plan to use B as vehicle for purchase/ resale of property

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Articles of association contained power to appoint an MD but no one ever appointed

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K acted as de facto MD and entered into contracts on B’s behalf: Board knew and acquiesced in this!

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K instructs Freeman & Lockyer (F) as architects to apply for planning permission to develop estate/do connected work

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K had no actual authority to do it

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Architects claim their fees – Q: did K have apparent authority to bind B?

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County Court: B is liable to F for the payment

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CA: K had no actual authority to bind B but K did have apparent authority

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Diplock LJ at 502 et seq:

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“It is necessary at the outset to distinguish between an ‘actual’ authority of an agent on one hand, and ‘apparent’ or ‘ostensible’ authority on the other. Actual authority and apparent authority are quite independent of one another. Generally they co-exist and coincide, but either may exist without the other and their respective scopes may be different … it is upon the apparent authority of the agent that the contractor normally relies in the ordinary course of business when entering into contracts.”

Representations must be made by the principle for apparent authority

“An “actual” authority is a legal relationship between 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 the trade, or the course of business between the parties. To this agreement the contractor is a stranger; he may be totally ignorant of the existence of any authority on the part of the agent. Nevertheless, if the agent does enter into a contract pursuant to the ‘actual’ authority, it does create contractual rights and liabilities between the principal and the contractor”  Freeman & Lockyer is said to represent the ‘orthodox’ position on apparent authority  It is orthodox in the sense that apparent authority cannot be founded on representations made by the agent  Nevertheless … the ‘orthodox’ position has been challenged in a number of cases  Most notably Armagas v Mundogas, First Energy, and Kelly v Fraser  Can an agent have apparent authority from the principal to make representations as to his own authority Put another way  Can the principal give an agent apparent authority to make representations as to his own authority? YES  The Raffaella [1985] 2 Lloyd’s Rep 36, CA (agent can have some sort of apparent authority to make representations  Bank (D) had internal rules which did not provide employee with actual authority to sign transaction with a sole signature (corporate entity and other branch managers have authority to sign the documents)  Bank’s credit manager (Booth) solely signed a letter of guarantee  At time Booth signed guarantee, he made representation assuring C’s representative that one signature was sufficient

 Trial judge and CA held Booth had apparent authority to bind bank by virtue of his designation as credit manager and because of what bank permitted him to do in the past.  Browne-Wilkinson J: “I have so far ignored the representation made by Mr. Booth that ‘in London one signature is sufficient’. [Counsel] submitted that a principal cannot be held liable as a result of the agent holding himself out as possessing an authority he does not in fact possess: he relies on remarks to that effect in the Freeman & Lockyer case […] at p.505 […]. I am not satisfied that the principle to be derived from [that] case is as wide as [counsel] suggests [Freeman & Lockyer] dealing with the position where the agent had neither authority to enter into the transaction nor authority to make representations on behalf of the principal.”  It is obviously correct that an agent who has no actual or apparent authority either (a) to enter into a transaction or (b) to make representations as to the transaction cannot hold himself out as having authority to enter into the transaction so as to affect the principal’s position. But […] if a company confers actual or apparent authority on A to make representations on the company’s behalf but no actual authority on A to enter into the specific transaction, why should a representation made by A as to his authority not be capable of being relied on as one of the acts of holding out? There is substantial authority that it can be: see […] the Freeman & Lockyer case per Lord Justice Pearson at p499; Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 per Lord Denning MR at p539-A-D.”  If, as I am inclined to think, an agent with authority to make representations can make a representation that he has authority to enter into a transaction, then the judge was entitled to hold, as he did, that Mr Booth, as the representative of Refson in charge of the transaction, had implied or apparent authority to make the representation that only one signature was required and that this representation was a relevant consideration in deciding whether Refson had held out Mr Booth as having authority to sign the undertaking. However, since it is not necessary to decide this point for the purposes of this appeal, I express no concluded view on it.” Taking Stock:  Distinguish Freeman & Lockyer (apparent authority did not come from director making representations about own authority; apparent authority came from board’s acquiescence that he had entered into these types of contracts)  In principle, A can have apparent authority from P to make representations about A’s own authority e.g. that he has authority to make representation that only one signature was required  Relevant to determining whether P held A out as having authority to sign undertaking  But cases in which it can be said that A has apparent authority from P to make representations about A’s own authority will be rare:  Why?  T would normally have been put on inquiry as to actual limitation of A’s authority (i.e. no reliance/inducement)  Thus, it will be very difficult for T to rely on a specific representation of A’s authority to act  unless A would usually have authority to do act in question

 Armagas Ltd v Mundogas SA [1984] 1 AC 717  Mundogas (M) were inter alia ship charterers  International Gas Corp of Oslo (IGCO) owned Ocean Frost  IGCO let Ocean Frost on time charter to M for 12 months  Charterparty contained option for M to purchase OF at charterparty end (to be exercised by June 1980) for $5,200,000  1980 M thought OF could be sold at profit above option price  J interested Armada group in possible purchase  Armada told J that they would not purchase unless M agreed to charter it back for 3 years at appropriate rate of hire  J and Mag fraudulently conspire to bring spurious 3 year CP into existence deceiving Armada into believing charter was genuine to induce them to purchase  Mag had authority from M to agree straightforward sale  Mag had no authority to agree to 3 year charter back  Mag aware it would be impossible for him to obtain such authority  J agreed with Armada that transaction was to be with company to be incorporated by Armada in which WMC was to have 49% interest  J offered Mag “a piece of the ship” and later transferred 1/3 share in WMC’s interest  J falsely represented to Armada that Mag had actual authority to agree to both sale of vessel and charter back by M for 3 years  Armada was told that Mag had no general authority from M to enter into such a transaction, but that he had sought and obtained specific authority for it  Armada did not believe the transaction was within the usual authority of an employee in Mag’s position  M agreed to sell vessel to company named by Armada for $5,750,000; delivery to take place after expiry of M’s current charter with IGCO  Contract signed by J on behalf of M, having obtained telex authority to do so, and by member of Armada  Armagas Ltd was incorporated by Armada and nominated as purchaser of vessel  Mag signed, purportedly on M’s behalf, a CP whereby Armagas agreed to let vessel to M for 36 months; CP signed by member of Armagas  Mag and Armagas member signed addendum to CP agreeing minimum hire rate of $350,000 pcm and owners had option to cancel CP  Reason: oral agreement between Armagas and J that if Armagas could find buyer for vessel at $6.5m or more, vessel would be sold, charterparty cancelled and profit divided between Armada group, WMC and M

 Also agreed that 3 yr CP was to be kept secret from M’s chartering and operations department  $350,000 pcm hire rate was reasonable according to market  Mag and J thought market would continue to be buoyant and would arrange series of 12 month charters covering period of spurious 3 year CP at these monthly rates  They drew up a 12 month charter by Armagas to M at $365,000 pcm commencing when vessel passed to Armagas in 1981  This was signed by J on behalf of M  J also asked member of Armagas to sign it on behalf of Armagas, representing that it was required for M’s internal purposes;  Member of Armagas was willing to do so only if at same time an addendum was made to 3 yr CP reducing its period to 2 yrs  Period followed in which M sought to press J to obtain Armagas’ signature to the 12 month charter; member of Armagas was pressing J to obtain M’s signature to the addendum  Neither was ever signed  April 1981, vessel completed service under IGCO charter and became property of Armagas.  However, vessel remained in service of M, as M believed under 12-month charter, and as Armagas believed, under 3 yr CP  Managers and master of vessel were provided with copy of 12-month charter unsigned by Armagas, Armagas being persuaded by J to do this on the ground that the 3 yr CP had to be kept secret  In 1982, fraudulent ...