Commercial Law Exam Notes

Agency may be defined as a relationship between the principal (P) and the agent (A) whereby A has the authority to create a legal relationship between P and the third party (T). The purpose of agency is that two people can enter a valid contract with one another without having to deal with each other personally. Instead, the contract or other transaction is brought about through A who when dealing with T acts or purports to act, on behalf of P. Authority

The concept of authority of A to act for P is central to the decision as to whether agency exists but authority does not mean that P must expressely consent to A acting on P’s behalf. The concept of authority also encompasses circustances where an agency relationship is created without the express consent of P. Scope of agency

Distinguishing agency from other relationships is important because the term ‘agent’ may be used in commerce to describe a party who is in fact not an agent at law. In International Harvester Company of Australia Pty Ltd v Carrigans Hazeldene Pastoral Company (1958) 100 CLR 644 the High Court held that to determine whether a legal agency exists it is necessary to look at the substance of the arrangement between P and A, not just the form of the relationship such as the use of the term agent. The following are some examples only of relationship that may create a legal agency: oEmployee

oBroker oPowers of attorneys

An entity that purchases stock for retail may be termed a retail agent but would not be an agent at law. The retail agent in this example if the principle in their own right, as they enter the contract with the wholesaler directly (not via an agent) and they also enter the retail sale directly. Independent contractors also are not normally agents in the first instance. For example,

If you were to contract with a buildr as an independent contractor to construct a shed, then the builder is not your agent as they employ their own labourer and acquire matrials for the construction in their own name. They do not enter contracts on your behalf. However, it is important to note that a party may act as an agent in one capacity and not in another. In the previous example, the builders contract may not include landscaping to carry out the work that you have outlined. Giving the building contractor the authority to arrange the landscaping work on your behalf creates an agency agreement for this act with you as principal and the building contractor as your agent.

Given that it is the substance rather than the form of the relationship which is critical to the establishment, or otherwise, of an agency relationship, agency must therefore be associated with a specific act that the agent has authority to carry out on behalf of the principal. The High Court in Peterson v Moloney (1951) 84 CLR 91 made it clear that to determine weather an agency existed it was necessary to identify the act which the agent was proported to have authority to perform. It is not a question as to weather the person is an agent, but whether that person was an agent with authority to enter that particular contract or perform that particular act on behalf of the principal. Agency not restricted to contracts

Sometimes it is suggested that an agency can only exists when A has the authority or the capacity to create a contractual relationship between P and T. However, whilst this is the most common form of agency (and is the one we will be concerned with) an agency relationship can exists even though A does not have this power. For example in CML Life Assurance Soc Ltd v P and C Cooperative Assurance Co of Australia Ltd (1931) 46 CLR 41 the High Court accepted that an agency existed between the appalent life insurance company and someone engaged to sillicit applications for life insurance of its behalf, even though that person could not conclude a contract of insurance bwtween the applicant and the company. Capacity of agent and Principal

For a principal to enter an agreement indirectly through an agent they must have the legal capacity to perform the act that is being performed by A. In affect P can only act through an agent for matters which they could legally perform themselves directly. For example in contract a minor cannot normally enter a contract and therefore the minor could not enter this contract by an agent who was not a minor. In contrast, all persons of sound mind can be an agent as A is not required to posses the legal capacity to enter an agreement that binds P to the third party (T). It is P that must have the legally capacity not A, because it is P that is liable under the agreement and not A.

In certain areas the common law position has been modified by statutes which prevent un qualified or un licensed people acting as certain kinds of agents. For example, auctioneers, stock and station agents, real estate agents, business agents and stock brokers are often required to be licensed. i)Infants: Infants do not have full contractual capacity for this reason although they can appoint an agent to act for them, any contract made or act performed on their behalf will only be legally enforceable if they would be bound had they performed this act personally.

ii)Corporations: Section 124 of Corporations Act 2001 (CTH) provides that a company has the same legal capacity of a natural person or an individual. The creation of agency relationship and the authority of an agent When defining agency it is misleading to suggest that an agency relationship can only arise by an agreement between P and A. Although, such an agreement is the most common manner in which agency is created it is by no means the only way. In summary, agency can be created in the following ways. An agent has actual authority where it results expressely or by implication from an agreement by A and P. This agreement between the parties need not be contractual and it is usually not necessary for it to be in any particular form.

However, there are a number of exceptions in which a prescribed form must be followed for example in Victoria S 126 of the Instrument Act 1958, provides that is A signs an agreement (or memorandum or note there of ) for the sale of land, on behalf of P, P will be bound by that agreement only if A was authorised to act in this manner in wiritng signed by P. There is also a common law rule that if A is appointed to execute a deed A’s appointment must be by deed unless A actually executes the deed in the presence and with the authority of P.

A document empowering someone to act as an agent is known as a power of attorney which at common law may or may not be a deed. Constructive authority arises where there is no actual authority but the action of the principal creates an agency relationship, which P is stopped from denying.

Constructive authority therefore can arise through estoppels (obstensible authority), when the principal represents to T that A has authority which A does not actually posses. The other form of contructive authority is where P ratifies A’s authority, subsequent to A entering an agreement on behalf of P that A did not initially have authority for. There is a furher form of authoruity known as usual authority, this has been described as authority to perform the tasks A would usually be engaged to perform, however there appears to only be one case that directly supports the existence of such authority and as such we do not focus on this form of authority. Actual authority is a legal relationship between P and A created by an agreement between them to which they alone are parties.

The scope of the authority given to A is determined by applying the ordinary rules of construction used when interpreting contracts. Actual express authority: express authority requires the consent of both parties and may be given orally or in writing and the written document may be a deed or not Boulas v Angelopoulos 1991. Actual implied authority: in addition to actual express authority A may also have actual implied authority. This is an authority that is not actually granted to A expressely but which arises by implication from the terms in which the agent was made P’s agent.

Thus, unless provided otherwise P would be regarded as having granted authority to: i)Do what is necessary to effectively carry out its express authority ii)Do whatever is incidental to the ordinary conduct of a trade or business it is authorised to conduct iii)Do whatever is usually incidental to acts it is authorised to perform in its trade, business or profession as an agent iv)Act according to the usages and customs of the place or business in which it operates Garnac Grain Co Inc v HMF Faure & Fairclough Ltd 1969 AC 1130 Hely/Hutchison v Brayhead Ltd 1968 1 QB 549

Cumming v Sands 2001 NSWSC 2 Agency by Estoppel

Ostensible authority: Agency can be created where a person (who therefore becomes P) in some way represents or allows it to be represented to a third party (T) that another person (A) is P’s agent. Where this happens P will be stopped because of this conduct from denying to T that A was infact authorised to act as an agent. This is known as ostensible authority (also termed apparent authority). Obstensible authority does not arise from the consent of the principal authorising A to act. As is the case with actual authority but results from the representations by the principal to the third party that the agent does have authority even though A is not actually authorised to act in the manner. Rama Corporations v Proved Tin & General Investments Ltd 1952 1 AII ER 554 at 556 establishes that for an agency to be created by estoppel it is necessary for there to be: i)A representation by P

ii)Reliance on that representation by P iii)An alteration by T of its position as a result of this reliance. The creation of agency by estoppel should not be confused with agency by implied agreement. In cases of the latar A is infact authorised to act by P. However, this authority is implied by conduct rather than granted by P expressely. In cases of agency by estoppel on the other hand A is not authorised to act on P’s behalf in any way. However, P is estopped from asserting this because of the representation made to T. It is important to note that an expressed or implied limitation on A’s actual authority will not prevent obstensible authority being established.

This is because obstensible authority arises from the representations of P to the third party and the courts will uphold the rights of T because the principal has represented that A has the authority even though A is un authorised. If A’s authority is terminated al together B will still be bound by a transaction entered into between A and T within the scope of A’s ostensible authority, provided that T was unaware the A’s authority had be terminated. Preconditions to obstensible authority

i)Representation: the representation must be a.One of fact b.Made to the third party c.Authorised or made by principal

The representation that A has authority may be expressed or implied from a course of dealing or implied by conduct on a particular occasion. The representation can be made to T or to a number of third parties. A representation will be regarded as being made to T if the circumstances justify the inference that T was aware of it. A representation by A that it has authority cannot create ostensible authority for ostensible authority to be created the relevant representation must be by P or someone authorised by P to make the representation. ii)Reliance: Ostensible authority will only arise if T knew of P’s representation and relied upon it when dealing with A. In other words there must be a causal connection between the representation and T’s dealing with A.

iii)Detriment: Strictly T’s act must be to its detriment. Some causes seem to require no more than an alteration of position and suggests that this can be constituted by entering into the contract with P. However, that is almost certainly not good law.

Freeman & Lockyer v Buckhurst Park Properties 1964 2 QB 480 Pacific Carriers Ltd v BNP Pariburs 2004 208 ALR 213 Crabtree/Vickers Pty Ltd v Australian Direct Mail Advertising Pty Ltd 1976 133 CLR 72 Prospect Industries v Ancorp Ltd 2003 QSC 296

Usual Authority There is limited authority for the view that an agent may possess a third kind of authority/usual authority. The authority an agent usually has is relevant of course to actual and ostensible authority for example, it may lead to the conclusion that a particular power is to be implied into A’s actual authority or may give rise to the belief that A has ostensible authority to act in a certain way. However, the existence of usual authority involves going beyond this and creating a third category of case in which P is bound to T where A acts within the limits of usual authority even though P neither authorised to act more represented to T that A was so authorised. In practice this can only happen when T did not know of P’s existence, because only then will usual authority not give rise to ostensible authority.

Usual authority was considered in Watteau v Fenwick 1893 1 QB 346 However the authority of this decision and the existence of this kind of authority has been doubted by eminent duress. The decision in this case has been criticized as being contrary to basic agency principals and was doubted by Isaacs J in International Paper Co v Spicer 1906 4 CLR 739 and 763. It will arise only very rarely in commercial practice because in most cases the third party will be aware of the existence of a principal and the appropriate doctrine will be ostensible authority

RATIFICATION- Corporations Act 2001 Section 131-133 (Cth)

In the previous topic we look at the creation of an agency relationship through either actual or ostensible authority. In this topic we will examine the creation of the agency relationship via: oP’s ratification of A’s act; and

oOperation of law We also consider the doctrine of undisclosured principal, and finally will briefly look at the rights and obligations of the principal. Where A has entered into a transaction on P’s behalf but without P’s authority, P may adopt that transaction by subsequently ratifying A’s action. Ratification can occur for transactions in respect of which A has no authority to act for P at all, or in respect of which A had someauthority to act on P’s behalf but exceeded that authority, and there was no estoppels to create ostensible authority. An important aspect of the adoption by P of A’s unauthorised actions is that the ratification can be retrospective.

That is, the subsequent ratification becomes effective from the times of the agents act, not from the time of the later ratification. PreConditions of Ratification

i)A must have purported to act for P Ratification is only possible if P was in some way nominated as A’s principal when the transaction was entered into. In other words, A must have purported to act on P’s behalf. For this reason, an ‘Undisclosed principal’ cannot ratify even though A actually intended to act on P’s behalf. ii)P must be competent to perform the transaction

With the exception of corporation, to be able to ratify a contract P must exist and not be under any legal disability when the contract was made and at the time of ratification. Problems of competency are now uncommon because the main area in which they arose-in connection with corporations-has been reformed by the combined operation of S 124 & 131-133 of the Corporations Act 2001. Section 124 gives corporations the legal capacity of a natural person and S 131-133 allows a corporation to ratify a contract made on its behalf but before it was incorporated. iii)P must ratify in time

Ratification must take place within a reasonable time which, according to Metropolitan Asylums Board v Kingham (1890) 6 TLR 217, can in no case extend beyond the time at which the contract is to be performed. iv)P must know all the material facts

For P to be deemed to have ratified it must, at the time, have full knowledge of all the material circumstances in which the act in question was done unless it indicated that ratification was intended regardless of the circumstances. The nature of ratification

i)Ratification may be expressed or implied Ratification may be express or implied and can be effected by an agent. Therefore, assuming P is aware of all the material facts, suing on a transaction or retaining a benefit under it will usually imply ratification. Because notice of ratification does not have to be given to anyone, silence or acquiescence can amount to ratification. ii)Formalities

Except where s126 of the Instruments Act 1958 (vic) applies, ratification need not be in writing even though the contract A negotiated has to be written or evidenced in writing. However, raitification must be by deed if A acted by deed in the first place. iii)Ratificayion is of the whole transaction

P must either accept or reject the transaction as a whole. Therefore if P adopts the favourable parts of a transaction P will be bound by the rest. However, according to Harrison & Crossfield Ltd v London & North Western Pty Co [1971] 2 KB 755 it is possible to ratify a transaction for one purpose while rejecting it for another. There it was held that P could ratify for the purpose of bringing a criminal prosecution without being held to have ratified so as to be liable under the contract in issue. The effect of ratification

As a general rule, the effect of ratification is to invest A, P and T with the same rights and liabilities they would have possessed had A been authorised to act; Bolton Partners v Lambert (2889) Ch D 295. This means that ratification operates retrospectively. There are two established exceptions to the general rule. First Watson v Davies [1931] 1 Ch 455 shows that if the agreement between A and T was made subject to P’s ratification, T can withdraw from it prior to that ratification.

The reason for this is that the agreement is really an offer to P by T and of course offers can be withdrawn prior to their acceptance. Second, ratification cannot be used to divest or prejudicially affect any proprietary or quasi proprietary right vested inn a third party at the time of ratification. Agency of necessity

An agency will be created where A, faced with an emergency in which P’s property or interests are in jeopardy, acts on P’s behalf in order to protect P’s property or interests. In Whit v Troups Transport [1976] CLY 33 for example, an agency of necessity was found to have been created when the police, unable to contact P, engaged T to free P’s lorry after it had become jammed under a bridge in a busy thoroughfare of a large town. Doctrine of undisclosed principal

The law of aagency has been developed partly because a principal may not wish to conduct their business directly but wishes to remain anonymous until the agreement is finalised. As such, common law has recognised that a valid agency agreement can exist where the principal is not disclosed to the third party. As a general rule, an undisclosed principal (P) only has rights and obligations under the contract made between A and T if A has actual authority to enter into it on P’s behalf either expresssely or implication.

As we saw in Keighley, Maxsted & Co v Durant, the doctrine of ratificaiion has no application to undisclosed principals, because it requires that no authority is to be given. The only possible exception to this rule arises from the doctrine of usual authority. The doctrine of undisclosed principal also cannot exist in relation to ostensible authority as the form of authority requires that P makes a representation to T. This would not be possible if P was undisclosed.

The undisclosed principal doctrine may sevre some purpose in allowing commerce to operate even where P wishes to remain anonymous but it sits uneasy with the notion that T maybe contracting with an entity other than the one they are dealing with. It is also important to note that where an agent acts with actual authority for an undisclosed P, the agent may in fact be contracting in their own name until the principal is disclosed. The rights and obligations of principal, third party and agent Finally for agency, we deal with the rights and obligations of P, A and T arising out of an actual or alleged agency between P and A. When considering these rights and obligations it is first essential to ascertain whether the agents actions were authrosied as this will unfluence the parties rights and obligations. The duties of A

Both the common law and equity impose duties on A in favour of P. Precisely what duties are imposed, however, and what remedies are available for their breach depends upon the nature of the relationship between P and A. For example, in contract A must comply strictly with the terms of its appointment and is not free to disregard them merelt because it considered that to do so would be in P’ss best interest. This in Fray v Voules (1859) 1 E & E 839,

A solicitor who comprised his clients action, contrary to instructions, was held liable for breach of contract even though both he and counsel thought that this was in the clients best interest. In contrast, a gratuitous agents are under no contractual obligations to perform their tasks and cannot be liable to P for failing to do so. In other words, although agents can be liable for misfeasance, they cannot normally be liable for non feasance. Further, as HedleyByrne shows, even in respect of misfeasance, agents can protect themselves by a suitable exception clause showing that they did not undertake to exercise care. Equity intervenes in a range of activities, including those of agents, to require high standards of business and professional conduct. The duties imposed by equity are known as fiduciary duties and they are distinct and self contained.

These duties are imposed upon individuals because they carry on an activity which requires legal regulation. A person on whom such a duty or obligation is imposed can be described as a fiduciary for the purposes of that particular duty. It is misleading; therefore, to describe the agency relationship as a fiduciary one, rather that relationship may give rise to an activity or activities in respect of which a fiduciary duty is imposed. The following are examples of duties which may be imposed by either or both the common and the equity law. To keep accounts

A may be required by its contract to keep accurate and up to date accounts of money and goods received on P’s behalf, and unless authorised to do otherwise A must not mix its own money or property with that of P. Equity imposes a similar obligation in respect of money or property beneficially owned by P Not to delegate

A may not delegate its authority or appoint a subagent to act on behalf of P unless this has been authorised by P. The reason for this rule is that the agency relationship is generally a confidential one- P places trust and confidence in A. If A delegates without authority, A may be liable to P for any loss thereby occasional to P. A will forfeit any remuneration it would otherwise have earned arising out of the transaction. The duties of P and A rights

P will only be obligated to pay remuneration to A if there is a contract between them imposing this duty or if, although there is no such contract, the agent acted on P’s behalf in circumstances permitting a quantum meruit claim. P’s duty to pay remuneration when it has been earned. Most of the problems in this area concern commissiona gents- agents engaged under contracts providing that commission is to be paif to the upon the occurrence of a particular event.

Unless and until the specified event occurs, the commission has not been earned and is therefore not payable. Precisely what the event is and whether on the facts provides otherwise. P’s duty to pay remuneration will only arise if A is the effective cuase of the transaction in question. A must show therefore, not merely that the event occurred, but also that it was largely responsible for this happening. Indemnity

Unless otherwise provided, A is entitled to be indemnified by P in respect of liabilities and expenses incurred whilst acting on P’s instructions. Unless remuneration or an indemnity is paid, A may exercise a lien over P’s goods or the right of stoppage in transit. Agents liability to third party

i)Disclosed P

As a general rule if A, with P’s actual authority, entered into a contract on its behalf with T, then only P and T will be bound by the contract; A will be unaffected by it. However, P is not bound by the unauthorised acts of A unless A had ostensible authority to so act and T was unaware that A acted without authority, or unless O has ratified. If A acts within ostensible authority, or if P ratifies, a normal contract will be created between P and T. ii)Undisclosed P-

Preconditions to P being able or made to assume the contract In certain circumstances P may sue, or be sued, on a contract made on its behalf by A, even though A did not reveal to T that A was acting as an agent. Although the contract is ostensibly between A and T personally, P is able to subsequently reveal its existence as A’s principal and assume rights and obligations under the contract.

This rule is known as the doctrine of the undisclosed principal and is justified on the grounds of business convenience as it avoids circuitry of action When T discovers that A was acting for P, T can elect to sue either P or A. However, once T has elected to proceed against one it cannot thereafter proceed against the other if this election proves to be unprofitable. Breach of warranty of authority

When an agent purports to act on behalf of a principal the agent is holding themselves out as having the authority to act for P and the third party is entitled to believe the agents professed authority provided they have relied on it; Leggo v Brown and Dureau Ltd (1923) 32 CLR 95. Ratification will not relieve A from liability for breach of warranty of authority. Nevertheless, as the desired relationship between P and T is created by P’s act of ratification, T may find it impossible to prove that it suffered damage as a result of A’s unauthorised act. Settlement by or with an agent

There are three situations to have in mind, namely where: oT makes a payment to A oA makes a payment to T, and oP makes a payment to A

i)Payment by T to A T’s payment to A will discharge T’s contractual obligation to P in the following cases: oWhen A passes on to P the money received, whether or not A was authorised to receive it and whether or not P was disclosed oWhen A has lien on P’s goods and pursuant to A’s authority sells them to T will discharge its liability to P to the extent of A’s lien regardless or whether A passes on to P the money received. oWhen A, acting for a disclosed P, had actual or ostensible authority to receive the payment on P’s behalf. T will be discharged in such a case regardless of whether A in turn passes the money in to P. It is generally assumed, however that agents do not have such authority.

For example, it has been held that an estate agent employed to find a purchaser has no implied or ostensible authority to receive a deposit or the purchase price. oWhen P is undisclosed and T believes that A is acting on its own account and pays A accordingly.

This is so whether or not A passes on the payment to P. However, before T can rely on such a payment to discharge its liability to P, T must be able to show that P did something which misled it to believe that A was acting personally; for example, by giving someone a possession of the goods sold to T. Such conduct has said to raise an estoppels in favour of T. Payment by A to T

If A pays T on P’s behalf this will discharge P;s liability to T. A could then claim reimbursement from P Payment by P to A Generally T’s rights against P will be unaffected by any payement P has made to A however in the following three situations T will be bound by such a payment where: oA relays the payment to T in discharge of P’s obligation to T oA acts for a disclosed principal and T has requested payment by A, or leads P to believe that A has already paid T, or leads P to believe that T looks to A alone for payment. In such cases, if A fails to pay.

Twill be estopped from claiming against P because of its conduct. oA acts for an undisclosed principal and P has given A sufficient money to meet the obligation to T, whether or not A does pay T. This proposition is based on Armstrong v Stokes (1872) LR7 QB 598, a case which has not been free from criticism. The rationale for this rule is that without it P would be fairly prejudiced; as T dealt only with A, and it is not unreasonable to expect him to look at A for payment when P has paid A.

Contracts for the sale of goods Nature and formation of a contract for the sale of goods Definitions Contract of sale Section 6(1) defines a contract of the sale of goods as one whereby the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration called the price. Goods Act 1958- Section 6

Sale and agreement to sell S6. SALE AND AGREEMENT TO SELL (1)A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration called the price. There may be a contract of sale between one part owner and another. (2)A contract of sale may be absolute or conditional

(3)Where under a contract of sale the property in the goods is transferred from the seller to the buyer the contract is called a sale; but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled the contract is called an agreement to sell. (4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred. Thus, in addition to the essential elements of any contract of sale, a valid contract for the sale of goods required: o‘goods’

o‘a money consideration’ o‘a transfer or agreement to transfer the property in the goods from the seller to the buyer o