Commercial law assignment
1a. Apparent Authority
Apparent authority is a term used in Agency Law to describe a condition wherein a third person is led by the principal to suppose that the agent has sufficient authority to bind the principal, even if the agent does not have authority (Wikipedia, 2006). Because of such act on the part of the principal, he becomes liable to those third persons with whom the agent transacted with. This is in effect a deviation from the rule that an agent must act within the scope of his authority so that his actions may bind the principal. As enunciated in the case of Angerosa vs. The White Company, so far as third persons are concerned, the scope of an agent’s authority does not only speak of the actual authority conferred upon him by the principal, but also those which has apparently or impliedly been delegated to him by the principal (210 N.Y.S.204 (1936)). Thus, while generally the principal should not be liable for acts of the agent done beyond the scope of his authority, the concept of apparent authority becomes the exception. The principal becomes liable to third parties if he permitted the agent to perform certain actions in a manner so as to appear to third persons that he had authority to perform such acts.
As an illustration of this concept, if A customarily sends B to C for purposes of purchasing raw materials, then A cannot later on evade any action of C for payment of said purchases on the ground that it has not granted B any authority to make said purchases. Although a third person, when dealing with an agent, is generally mandated to inquire on the nature and extent of the agent’s authority, the same cannot be said when the acts of the principal sensibly presents the impression that a certain person has been granted by him authority to act as his agent. Thus, in the illustration given, A’s act, of habitually and regularly sending B to C to make purchases, is enough to lead C in believing that B is A’s agent and that the former is clothed by authority to make said purchases.
1b. Todd Ltd.’s liability to Smiths Ltd.
Todd Ltd. is liable to Smith Ltd. For the value of the goods that Ian acquired. Although it is true that Ian, at the time he made the purchases, was no longer an agent of Todd Ltd., the latter cannot escape liability to Smiths by the expedient means of invoking Ian’s termination from the company. It must be noted that when Todd Ltd. decided to terminate the services of Ian, it did not inform Smiths Ltd. of such termination. It has been settled, under the principle of apparent authority, that the principal is bound by the acts of the agent, even if the same were done beyond the ambit of authority, if the principal led third persons to believe that his agent has authority. The principal cannot be permitted to insist on the agent’s lack of authority if his actions reasonably gave the conclusion that the agent has been granted authority. In the case at bar, Todd Ltd.’s silence, as to the termination of Ian, led Smith to believe that Ian is still Todd’s agent. It can be said that such silence on the part of Todd reasonably caused Smiths to rely upon the apparent authority of Ian especially since the latter worked for Todd Ltd. for 5 years and that Smiths is a regular client. Insofar as Smiths is concerned, Ian is still Todd’s agent, clothed with authority; the act of Ian the act of his principal. Smiths Ltd. could very well recover from Todd Ltd. the value of the purchases made.
2a. Undisclosed Principal
A principal becomes an undisclosed principal when his agent, in dealing with third persons, does not reveal the identity of his principal, or the fact that he is in fact acting for a principal. An undisclosed principal has been defined as “a person who uses an agent for his/her negotiations with a third party, often when the agent pretends to be acting for himself/herself” (Undisclosed principal, 2006). Thus, in this case, the agent acts in his own name and the transaction is actually entered into between such agent and a third person. That being, the principal is not bind by any such transaction or contract that the agent may have entered into. The agent becomes the person who is directly liable under the contract. According to the case of Ashe vs. Vaughan, “although an agent enters into a contract with the actual intention of binding his principal only, if his wording of the same or the circumstance of the case are such as to bind himself, he will be personally liable thereon” (159 Okla. 32, 33, 14 P.2d 231, 231 (1932)). Thus, as noted by Barnett, regardless of the relationship between the agent and the principal, in the event that the third person with whom the agent contracted with has no knowledge of such relationship, he may hold the agent liable under the contract, and the agent may also hold such third person liable under the contract (1987).
In the event that the principal in fact authorized the performance of the act by the agent, then reimbursement may be had by the agent from the principal. The principal also acquires standing if the subject of the transaction between the third person and the agent is something owned by the principal. Nevertheless, if the third person does not want to deal with such principal, and he subsequently learns that the agent was merely acting for an undisclosed principal, then the third person may rescind the contract entered into (Lectlaw, n.d).
An illustration of this concept would be a contract entered into between B and C. B purchased raw materials from C without disclosing that he is acting for any principal. In the event of non-payment, C can bring an action directly against B. Such action may be instituted regardless of the fact that B was actually acting as an agent of A. In this case, since B entered into such contract without revealing the name of his principal, or the fact that he was acting for a principal, he is deemed to have entered into the transaction in his own name and recourse against him by the third party is in place. C cannot be expected to inquire on the nature and extent of the authority of B as an agent if B did not even reveal or hinted that he was acting in behalf of a principal. In said transaction, C believed in good faith that he was transacting only with B and thus, he may enforce the contract directly against the latter.
2b. Liability as regards the contract entered into by Anne
Anne is personally liable as regards the purchases she made with Khans. First of all, her act of making the purchases is beyond the scope of her authority. It must be recalled that she was no longer considered as an agent of Todd Ltd. at the time she made the purchases from Khans Ltd.. Even assuming that she is still associated with Todd at that time, the amount of the purchases was way beyond the allowable amount of purchases sanctioned by Todd. Secondly and more importantly, what makes Anne personally liable for the purchases is the fact that she signed the contracts with Khans in her own name. Following the principle of Undisclosed Principal, since Khans had no knowledge of whatever relationship existed between Anne and Todd, plus the crucial factor that the contract was signed in Anne’s own name, then it may hold Anne solely liable for £50,000, or the amount of the purchases made from Khans Ltd. Even assuming that Khans had previous knowledge that Anne is an agent of Todd Ltd., the fact that Anne signed the contract in her own name can reasonably cause Khans to believe that Anne was making said purchases for her own benefit and not for anyone else’s.
The answer would be different if Todd ratified the contract entered into by Anne. As a general rule, the principal cannot be bound by any action on the part of the agent who acted beyond the scope of authority granted him by the principal. One exception to this general rule is when the principal ratified the action of the agent. In the event of ratification, then the agent is deemed to have acted with authority. Thus, in the case in question, if Todd Ltd. subsequently ratified the purchases made by Anne from Khans Ltd., then the effect would be as if Anne acted within the bounds of authority granted to her by her principal. Thus, Todd would be liable for payment of the purchases made by Anne. In fact, once Todd ratifies the contract between Anne and Khans, the latter cannot even assert Anne’s previous lack of authority in order for it to escape performance of its duty under the said contract.
It is not relevant that when Anne made the purchase, she was not clothed with any authority because Todd Ltd.’s subsequent ratification cured such a defect. It has been said that the act of ratifying the contract influences the transaction in its entirety—even from its beginning (Federal Garage, Inc. vs. Prenner, 106 Vt. 222). It was as if Anne had authority at the time she entered into the transaction with Khans Ltd. Thus, if Todd Ltd. ratifies the contract between Anne and Khans, then it would be bound by said contract. The act of Anne in making said purchases from Khans had the effect of binding her principal, Todd Ltd. Hence, in the event of non-payment by Anne of the purchases from Khans, then the latter may bring an action against Todd Ltd. as the principal.
In the event that Anne had acted within the bounds of authority granted to her by the principal, Todd Ltd., and Khans Ltd. failed to deliver the goods, either Anne or Todd Ltd. could sue Khans for the performance of the contract. Anne has the power to enforce the contract as she is one of the contracting parties. Being the party who entered into the transaction with Khans she has the interest in seeing to it that the terms of their agreement are faithfully performed. Non-delivery of the subject of the contract gives the buyer in the contract a right of action. So also, as the money used to pay for the purchases belongs to Todd, then it may bring an action against Khans for the delivery of the goods. It must be noted that Todd remains to be the principal of Anne. Thus, Anne’s act of entering into said contract had the effect of binding Todd; it has interest in the timely delivery of the goods covered by the contract.
It must be noted, however, that Khans may set up the defense that it believed in good faith that it was dealing solely with Anne, and that it intended to contract with no other party—especially not Todd. It could raise the argument that had it known that it was actually dealing with Todd, it could have given a different price, or it could have demanded for other terms in respect of the goods bought through Anne. In this event, Khans could even rescind the contract based on such ground. This appears to be a good rule, in order to prevent any fraudulent collusion between the agent and the principal.
Barnett, R. (1987). Squaring undisclosed agency law with contract theory. California Law Review [Internet]. Available from: http://www.bu.edu/rbarnett/squaring.htm [Accessed 20 August 2006].
Wikipedia contributors (2006). Apparent authority. Wikipedia, The Free Encyclopedia [Internet]. Available from http://en.wikipedia.org/w/index.php?title=Apparent_authority&oldid=52424774 [accessed 20 August 2006].
Agency. Lectic Law Library [Internet]. Available from http://www.lectlaw.com/files/lws46.htm [accessed 19 August 2006].
Undisclosed principal. Law.com Dictionary [Internet]. Available from http://dictionary.law.com/default2.Asp?selected=2188&bold=%7C%7C%7C%7C [accessed 20 August 2006].