Tutorial 1-2 Agency PDF

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The Law of Agency ...

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Commercial Law Tutorial 1 & 2 Agency

Agency: Principal (P) authorize Agent (A) to act on his behalf with regard to the Third Party (TP)  

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E.g. Employees (e.g. bank manager), Trustees Internal and external aspects of agency o Internal(PA): Duty to exercise best endeavours, not to exceed their authority, fiduciary liability o External (P T): A can alter P’s legal position (A helped P to enter into a transaction with T) Depends on the consent of principal and agent

Types of Agency 

A person is constituted agent by being given authority to act for the principal by o (a) being given express authority, o (b) being given implied authority, o (c) subsequent ratification of the agent’s acts and o (d) operation of law – agency of necessity

The doctrine of Apparent Authority 

The authority of an agent as it appears to others – but in fact the Agent was not authorised

 Freeman & Lockyer v. Buckhurst Park Properties Ltd o If a person, by words or conduct, represents or permits it to be represented that another person has authority to act on his behalf, he is bound by the acts of such other person with respect to anyone dealing with him as an agent on the faith of such representation to the same extent as if such other person had the authority that he was represented to have, even

though he had no actual authority. 

Weak form of estoppel (if you have done sth and sb has relied on it, you would be estopped from going back on your promise)

 First Energy (UK) Ltd v Hungarian International Bank Ltd o Exceptional case o Senior branch manager had no actual authority to sanction credit facility for TP, but wrote and signed a letter offering to provide TP with finance (no authority as well) o CA held that senior manager had apparent authority by virtue of the usual authority associated with his position to communicate such offer on behalf of the bank (informing TP that head office approval had been given)  Bank was bound

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Commercial Law Tutorial 1 & 2 Agency

 C.f. British Bank of the Middle East v Sun Life Assurance Co of Canada o Putting someone into certain position of jobs o Branch manager of insurance company  no usual authority to represent to TP that a junior employee had actual authority to execute undertakings to pay $ to the bank o Because of the limited nature of the branch manager’s usual

authority, TP cannot rely on the fact that senior manager had usual authority to sign and send letters on the bank’s behalf (C.f. First Energy: TP unaware of bank’s restriction on such authority)

Third party’s role – the protection of TP is limited to the extent of A’s usual authority

 Armagas v Mundogas o The representation has to come from the Principal o If A does not have authority, TP cannot rely on A’s statement that he had authority o Cannot have a self-authorizing agent, TP’s claim was unsuccessful

 First Energy o Even if A has not actual authority to make decision with regard to the contract, A has authority to communicate P’s decision about the

contract by virtue of the position as a senior bank manager o Distinction drawn between the authority in entering into the contract and authority to communicate o Still good law although being criticized a lot o The court trying to protect the reasonable expectation of honest man and to avoid demonstrable unfairness o In commercial setting (customers are normally entitled to rely on the apparent authority of bank manager) 

HK Chinese Bank v Onlink Investments Ltd o The doctrine CANNOT operate in favour of a TP who is or ought to

have been aware of the lack of authority o TP would be liable for not doubting A’s lack of authority where it was obvious that a power of attorney was being improperly exercised 

Thanakhorn Kasikorn v Akai Holdings Ltd o T can sue/ be entitled to rely on A’s representation unless his belief

as to the A’s authority was “dishonest or irrational, including turning a blind eye” 2

Commercial Law Tutorial 1 & 2 Agency o Not a heavy duty on TP – so long as not turning a blind eye Q1 Postal Bank is a banking conglomerate. Its head office is located in Central, but it has 30 other branches spread all over Hong Kong. The bank’s internal procedure prescribes that each branch manager may only approve loans below HK$100,000; and that transactions of HK$100,000 and above will require the approval of the head office’s Loans Department. As the threshold of HK$100,000 is relatively low, very few outsiders know of this internal limitation. Toyco is a Hong Kong company which manufactures and sells toys. Angela was one of the directors of Toyco. During a Board of Directors meeting in February 2015, Angela was tasked with expanding the manufacturing capacity of Toyco, and authorized to enter into loans on Toyco’s behalf to raise funds for this purpose. Angela sought a HK$5m loan from the Shatin branch of Postal Bank in March 2015. The Shatin branch was the largest branch amongst Postal Bank’s New Territories branches. Anthony, the branch manager at Shatin, was also the Senior Manger overseeing the operations of all the New Territories branches of Postal Bank. Anthony told Angela that he did not have the authority to approve the transaction on his own because of its size , but he would process the loan application and forward it to the head office in Central for approval. The processed application was rejected by the head office in Central, but as a result of a clerical error, Anthony was informed that the application had been approved by the Central head office. Anthony accordingly informed Angela of the approval and she thereupon made plans for the acquisition of new plants and machinery for Toyco. Angela was surprised therefore when she received the letter of rejection from Postal Bank’s head office a week later. Advise the parties.

Angela (one of the directors in Toyco, authorised to enter into loans on Toyco’s behalf to raise funds for this purpose) 

Whether Angela has express authority given by Toyco? YES o Toyco granted Angela the power to enter into loans in the board meeting o Clearly authorised to enter into loans on Toyco’s behalf to raise funds to expand the manufacturing capacity of Toyco

Toyco wants to enforce the transaction and get the loan for the acquisition of new plants and machinery 

Whether there is reliance? o Yes, because Toyco has already made plans  wants Postal Bank to be bound

Postal Bank did not want to grant the loan as such communication of approval was a mistake.  

The head office has rejected the loan application and the loan should not be granted Postal Bank would not want to be bound by Anthony’s act

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Commercial Law Tutorial 1 & 2 Agency Main Issue: Whether Postal Bank is bound by the loan? In order to bind Postal Bank, there has to be some agency relationship with Anthony, whereby making Postal Bank a party of the loan agreement. Anthony (branch manager at Shatin, was also the Senior Manager overseeing the operations of all the New Territories branches of Postal Bank) 

Whether Anthony has the implied actual authority to approve the loan?

o NO implied actual authority o Managerial authority (a person in charge of something can do what people in that position usually do)  Usual authority

o Such authority will not apply if the A had specifically been told not to do the thing in question 

Forbidden by the bank internal procedures  cannot approve loans above HKD$100,000 o Therefore, Anthony does not have actual authority to enter the loan arrangement in question. *Need to draw the distinction between the authority to contract and the authority

to communicate (First Energy) 

Whether Anthony has apparent authority to enter into loans on behalf of Postal Bank? o Based on the impression formed by third party’s mind o Angela has been told by Anthony that Anthony is not authorised  third party (Angela) knew or ought to have known that the agent (Anthony) had no authority to enter into the transaction in question – third party had notice o Anthony had no apparent authority to enter into the loan o Angela cannot rely on apparent authority – no reliance

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Whether Anthony has apparent authority to communicate to the third party the fact the loan was approved? o YES. By virtue of his position as a branch manager & Senior Manager, he has the power to communicate/ make a representation of facts as to whether the loan was approved or not  Such representation/manifestation may be by (1) Statement, (2)

conduct, or (3) allowing the agent to assume a position in which he would normally have certain implied authority

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Commercial Law Tutorial 1 & 2 Agency By analogy to First Energy v Hungarian International Bank,  

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Authority to report decision about loan The senior bank manager told the client that he cannot approve the grant but would refer the transaction to head office HELD: Bank manager who had no actual authority to grant the loan might nevertheless have apparent authority to make representation of facts

concerning the transaction, such as the fact that his principal had given the necessary approval for it This authority is derived from his position as a senior bank manager (having the apparent authority associated with his usual authority to communicate the fact of approval to third party  Bank was bound)

Application   

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Anthony has no actual authority to grant the loan but he had the apparent authority to communicate the decision of head office to Angela Third party is entitled to assume that given his position, such approval from the Bank is valid and the grant of loan is approved Reliance  making plans for acquisition of new plants o Further investigations are needed o British Bank of the Middle East: does not have great deal of reliance, it would be sufficient The fact that the loan have been approved is a fact  a representation of fact The question is whether the agent has the apparent authority to make representation of facts  YES (First Energy) Conclusion: Postal bank would be bound to grant the loan to Angela

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Commercial Law Tutorial 1 & 2 Agency Q2 “The decision in First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd's Rep. 194 is in line with modern commercial realities but is hard to reconcile with orthodox legal principles”. To what extent, if at all, do you agree with this statement. Give reasons for your views. (Which part do you agree/disagree with? *Support with reasons)

First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd's Rep. 194  Apparent authority can operate to enlarge an agent’s actual authority Facts:  The senior manager in charge of the Manchester office of the D bank had no actual authority to sanction a credit facility for the plaintiff.  However, the senior manager wrote and signed a letter offering to provide the P with finance. He had no actual authority to do this either, as such a letter should have been signed by two bank officials.  P wanted to enforce the contract for a loan  D claimed that the contract was unenforceable as the ‘senior manager’ of the bank’s local branch misrepresented that he had obtained specific authority to enter into the transaction Issue: Was the contract enforceable? HELD (CA): YES. P was bound by the representation by the A  Senior manager had inherent apparent actual authority, by virtue of the

usual authority associated with his position, to communicate such an offer on behalf of the bank to the third party that the transaction has been approved– i.e. to inform the P that head office approval had been given for the offer 

to be made – and so the bank was bound. *CA stressed that the decision was consistent with the reasonable expectation of the parties and that it was unrealistic to expect P to have checked with the bank’s head office as to whether an employee as senior as this manager had actually obtained necessary approval to make the offer

Modern commercial realities    

3rd party would frequently deal with A instead of P directly So long as A seems to be authorised, naturally T is entitled to assume A is duly authorised, unless in very unusual transactions It would be impractical and unreasonable for T (3rd party) to check/confirm whether the Board had in fact given approval to the transaction/ A’s authority every time First Energy protects reasonable expectation of honest man and also benefits the principal o Would not defeat the purpose of delegating power to senior bank managers o Problem: the principal needs to keep monitoring their agents  may discourage the use of agents

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Commercial Law Tutorial 1 & 2 Agency Orthodox legal principles

 P is only bound by the apparent authority when the representation actually comes from the P (Armagas v Mundogas)  If A do not have the authority to contract, he should not have the authority to do anything 

Not sufficient if this representation is only made by the agent o Cannot have a self-authorising agent o Third party cannot only rely on the agent’s statement that he has authority

Can still be reconciled with orthodox legal principles: Both Armagas and First Energy are correct  

Armagas: cant have self-authorising agent First Energy: don’t have self-authorising agent, why does he have the authority to communicate – by virtue of the P’s conduct (P set up his operations in such a way that this A is in such a position – P took an action to put such person in this position)

2 innocent parties prejudiced by the agent’s mistake, who should bear the cost of the agent’s mistake? ***First Energy not complying with orthodox legal principles that the representation must come from the Principal (c.f. First Energy: the representation came from the agent) -

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Argue: there was a representation from the Principal, indirect misrepresentation takes the form of appointing the senior bank manager to his position  can be in line with the legal principle

Is this view fair and rational?  YES  if otherwise, then that would put the P in a very dangerous position  because A is sort of free to affect/alter the legal position of P The apparent authority principle was based on the principle of estoppel  prevent P from going back to his promises  binding the P Problem with First Energy: allow the agent who doesn’t have power to enter transaction on behalf of P, and the agent can still bind his principal simply by saying his transaction is approved o P is in a much worse position o A has great deal of power/can easily affect the legal position of P o Principal might have to consistently check/monitor what the agent is doing/communicating (agent has power to change the legal position of the principal) 7

Commercial Law Tutorial 1 & 2 Agency o Might discourage the use of agent o It is a practical decision but it might be unfair to P

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Does First Energy undermine the orthodox legal principle?  alternative views o Yes (NOT in line)  There is no representation  First Energy goes against the orthodox because in First Energy, although the agent had no actual or apparent authority to enter into the transaction, by communicating the decision to the third party (apparent), the principal is bound o No (in line)  Position of agent = senior manager  P has indeed made a representation (a general representation)  not an express representation, but by conduct  P had appointed agent to that position in the company (with the title)  a representation had been made by the principal  suggest to the world that the manager had such power to communicate the approval

The power to approve transactions is different from the power to communicate approval - A recent case authority  company secretary - Skills required for these two powers are different

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Thanakhorn Kasikorn v Akai Holdings Ltd o Lord Neuburger NPJ: The judgments in First Energy illustrates how the law struggles to reconcile principle and predictability with commercial reality and fairness, underlying the inadvisability of seeking to lay down any rigid principles in this area.

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Commercial Law Tutorial 1 & 2 Agency

The doctrine of undisclosed principal - A, who has actual authority, does not disclose the agency at all, but actually acts as if he was a P; the undisclosed P may be liable and entitled on the contract. -

C.f. apparent authority: TP knows the existence of P

Watteau v Fenwick      HELD:

A (previously an owner of beerhouse) sold to Fenwick, and stayed as manager to operate The licence and signs still in A’s name – looks like A is still the owner as far as the general world is concerned Fenwick gave instructions to A not to buy cigars on credit A bought cigars on credit from Watteau – 25 pounds Watteau did not get paid, found out Fenwick was the real owner, sued Fenwick

County Court: Fenwick (P) was liable

 A had implied authority otherwise in every case of Undisclosed Principal, the secret limitation of authority would prevail and defeat the person dealing with the A and later discovering A is agent and has a principal 

Secret limitation of authority – not to buy cigars on credit – only Fenwick & A know about it  unfair to TP

Queen’s Bench: appeal was dismissed

 Once it is established that the UP was actually the P, the ordinary principles in agency will apply – P would be liable for the acts of A even though the relationship was unknown to TP  P is liable for A’s act as long as those acts are of a kind usually confined to A of that character o A goes out and buys cigars – normal, usual for someone of his position to do so  P would be liable (**Usual authority) o Even if A acting outside the scope of his actual authority, P still liable – A was told not to buy cigars – clear limitation on his actual 

authority Compared to partnership UP should be held liable o Dormant partner – sleeping partner – will still be liable as long as they are within the ordinary acts of partnership

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Commercial Law Tutorial 1 & 2 Agency Paul, a secretive and reclusive millionaire, wanted to set up a restaurant and hired 1. Adam as its chef. Wanting to keep his involvement secret, the restaurant was named Adam’s Kitchen, and Adam was instructed to pretend that Adam was the owner of the restaurant. Paul instructed Adam to purchase only local goods as Paul wished to support local farmers. However, Adam placed an order for 30kg of pork per week from Tai Pao Food Industries in Hanoi for 6 months, commencing 2 months ago. The pork was to be paid for at the end of the 6 month period. Paul discovered this when rumours surfaced that some pig farms in Hanoi had been hit by a bout of porcine flu and Adam’s Kitchen was named by local newspapers as one of the Hong Kong restaurants serving pork imported from Hanoi. Advise Paul.

Step 1: Whether we can establish an agency relationship? -

Is there an agency relationship between Paul and Adam? Express authority – Adam is the authorized agent of Paul (para 1 of facts) Secret limitation on what Adam can do

Issue: Whether Paul is bound by the contract with Tai Pao? - Does Paul want to be bound by the contract? o No, Paul had instructed Adam not to buy goods from outside HK o Adam did not make Paul’s involvement known to Tai Pao at P’s request

TP would rely on the exception in Watteau v Fenwick to argue that P should be bound - Generally, there is no undisclosed agency if the act was unauthori...