PART 4 FORMS OF BUSINESS

ORGANIZATION
Chapter 15 Law of
Agency

Prepared by Douglas H. Peterson, University of

Alberta

Copyright 2004 McGraw-Hill Ryerson Limited 1

 LAW OF AGENCY
The Role of an Agent
Historical Development of the Law of Agency
The Nature of the Relationship
Ratification of Contracts by a Principal
Third Parties and the Agency Relationship
Liability of Principal and Agent to Third
Parties in Tort
Termination of the Principal-Agent
Relationship
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 THE ROLE OF AN AGENT
Relationship that arises between 2 parties
Principal a person on whose behalf an agent
acts
Agent a person appointed to act for another,
usually in contractual matters
How it arises
Expressly, by conduct, by necessity
Three parties
Principal, agent, third party
Agent acts for principal in relationship with third
party
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 THE ROLE OF AN AGENT
Agent acts on behalf of another (the
Principal)
May have authority to bind principal in contract
or simply responsibility to assist principal to
achieve some business objective
Governed by common law rules and, in some
cases, by statute

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 HISTORICAL DEVELOPMENT
Required with the growth of trade and the
rise of the mercantile class
Molded by both common law and law of
equity
Traditionally distinguished from employment
law

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 NATURE OF RELATIONSHIP
Agent is one who is employed to act on
behalf of another
Agent can bind principal
If done within scope of agents authority
General rules of contract apply to agency
relationship
Capacity of agent
Agent can be minor and bind a principal if the
principal is an adult

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 CREATION OF AGENCY
Methods of creating an Agency relationship
Express agreement
Written or oral
By conduct or estoppel
By operation of law
Agency by necessity

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 AGENCY BY EXPRESS AGREEMENT
Methods
Written agreement
Oral agreement
Agency by conduct an agency relationship
inferred from the actions of the principal (agency
by estoppel)

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 AGENCY BY EXPRESS AGREEMENT
Contractual in nature
Normal rules of contract for formation and
performance
If over a year must comply with Statute of
Frauds
Must comply with requirements of formal
contracts if applicable
E.g. land transactions

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 AGENCY BY EXPRESS AGREEMENT
Oral
Advantages of written is duties of parties set
forth
Written contracts not required for simple tasks
Employee purchase materials from hardware store for
employer
Contracts 2 distinct
Contract between principal and agent
Contract between principal and third party

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 AGENCY
CONTRACTUAL RELATIONSHIPS
EXAMPLE:
Copyright 2004 by McGraw-Hill Ryerson Limited.

PRINCIPAL AGENT

Authority to Enter into Contract

on Behalf of Principal
(Contract Usually Between
Principal and Agent) THIRD Negotiation of
PARTY Contract on Behalf of
Principal (Within
Scope of Authority)
RESULT

PRINCIPAL AGENT

THIRD
PARTY

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 DUTIES OF THE PARTIES
Duties of Principal
Fulfill obligations set forth in agreement
Pay the agent
Indemnify agent for reasonable expenses and
liabilities incurred in carrying out agency duties
Principal may be relieved of obligation if
agent acts illegally or in breach of agency
agreement

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 DUTIES OF THE PARTIES
Duties of Agent
Fulfill duties set forth in agreement
Follow lawful instructions of principal
Not disclose confidential information
Keep in contract with principal and inform
principal of developments
Notice to agent is deemed notice to principal

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 DUTIES OF THE PARTIES
Duty of Care
Reasonable care in performing duties
Special skills or competence
Duty to maintain standard
Subagents
Agent may not delegate without consent of
principal
Duty to account
If authority to accept funds or goods must
account to principal
Usually done through trust accounts

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 DUTIES OF THE PARTIES
Fiduciary Duty duty to act in utmost good faith in
the best interests of principal
Seek best price, best deal
Not act for own interests
Disclose information relevant to principals interests
Not profit from information or opportunities that arose
out of agency
Not compete with principal
Agents duty to principal not third parties
May not act for both without consent (conflict of
interest)
May not receive commission from third party
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 AGENCY BY CONDUCT (ESTOPPEL)
Agency is by authority
Real or actual by express agreement
Apparent by actions
Person may be their actions convey impression that
they have authority to act on behalf of another
If person allows and agent enters into contract,
may not be permitted to later deny it
Will be estopped

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 LIABILITY OF PRINCIPAL
Principal liable for agent if acting with either
real or apparent authority
Restrictions in authority of agent must be
brought to attention of third party
Even if agent exceeds actual authority
Implied authority agent has authority based on
conduct and what is normal in the industry
Salesperson in retail authority to sell but in auto
industry is not

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 AGENCY BY OPERATION OF LAW
Circumstances require person to act as an
agent for another
Emergencies common law concept of agency
by necessity
Ship master dump cargo to save ship
Must show no ability to communicate with
proper party
Need pre-existing legal relationship
Rare today with modern communication
techniques

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 RATIFICATION BY PRINCIPAL
Agent purports to enter contract on behalf
of principal but without authority to do so
principal wishes to take advantage of
contract and ratify it
Contract binding just as if agent had authority

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 RATIFICATION BY PRINCIPAL
To be effective
Principal in existence at time contract was made
Pre-incorporation contracts allowed in some provinces
Principal identified in the contract
Principal has ability to enter into and perform contract
Ratification within reasonable time after contract signed
Must be of the whole agreement, not favorable parts
Agreement effective at time of signing not
ratification

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 THIRD PARTIES
Agent signing on behalf of principal
Per ABC Corporation
Per = per procurationem
On behalf of another by his agent
Disclosed versus Undisclosed principal
Disclosed agent has revealed to third party
acting on behalf of principal
Undisclosed agent has not revealed to third
party acting on behalf of principal

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 DISCLOSED PRINCIPAL
Principal alone is liable
Agent has no rights or duties with respect to
third party
Agent may not claim benefits flowing to principal
Agent may
Enter into agreement in own name; or
Enter into agreement as agent for unnamed
principal

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 UNDISCLOSED AGENT
Agent not disclose acting as agent
Third party may assume agent acting as
principal
If agent
Hold self out as a principal
Describe self
Signs as principal; and
Agreement is in writing
Agent alone is liable and personally
responsible for performance

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 FICTITIOUS PRINCIPAL
If agent acts for fictitious or non-existent
principal or;
Acts for principal agent did not have
authority to act for; then:
Third party may sue agent for breach of
warranty of authority
Agent is NOT liable on contract
Agent liable for damages to third party possibly
also tort of deceit

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 NEITHER PRINCIPAL OR AGENT
Contract negotiated by agent where agent
does not describe self as agent or principal
Principal may come forward and enforce
agreement
Third party can bring an action against principal
for any breach
Third party has to choose
May sue principal or agent but not both
Exception: not apply to contract under seal

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 UNDISCLOSED PRINCIPAL
Agent describes self as agent but does not
disclose acting for principal
Agent not personally liable
Third party was aware of a principal, even
though undisclosed
If principal reveals identity after, liable
Principal takes place of agent
Any third party defenses against agent may be
effective against principal

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 AGENCY
RIGHTS OF THIRD PARTIES

DISCLOSED PRINCIPAL

Right of Action

Authority Contract on Behalf

PRINCIPAL AGENT THIRD PARTY
of Principal

UNDISCLOSED PRINCIPAL

Right of Action Against Agent or Principal

Authority Contract on Behalf

PRINCIPAL AGENT THIRD PARTY
of Undisclosed
Principal

Contd
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 LIABILITY TO THIRD PARTIES
General rule principal liable for torts
committed by agent in ordinary course of
carrying out agency agreement
Fraudulent misrepresentation (Deceit)
If in ordinary course of business both agent and
principal liable
Outside scope of agents employment, agent
alone is liable
Same rules as vicarious liability
Innocent misrepresentation
Third party may repudiate contract
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AGENCY
RIGHTS OF THIRD PARTIES, contd

AGENT HOLDING SELF OUT AS PRINCIPAL

Right of Action

Authority Contracts as
PRINCIPAL AGENT THIRD PARTY
Principal

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 TERMINATION
In accordance with agency agreement
By notice
As required in agreement
Implied if not set forth in agreement
For particular period or task
At end of period or completion of task
Incapacity of either party
Death, insanity
Bankruptcy of principal
Principal must inform third parties of termination or
risks continuing liability for agents actions
Copyright 2004 McGraw-Hill Ryerson Limited 30
 SUMMARY
Agency arises by expressly or implicitly
Expressly
By conduct or necessity
Authority
Real or actual
Apparent
Within scope or outside scope of authority
Agent acting for self
Disclosed and Undisclosed Principal
Termination
Various methods
Copyright 2004 McGraw-Hill Ryerson Limited 31