Chapter 13 Agency Relationship PDF

The Agency Relationship Canadian Business and the Law, EIGHTH EDITION Objectives After studying this chapter, you should have an understanding of the agency relationship and its relevance to business how an agency relationship comes into being agency duties and liabilities how the agency...

The Agency Relationship Canadian Business and the Law, EIGHTH EDITION Objectives After studying this chapter, you should have an understanding of the agency relationship and its relevance to business how an agency relationship comes into being agency duties and liabilities how the agency relationship ends 2 The Nature of Agency Agency is the relationship between two persons that permits one person, the agent, to affect the legal relationships of another, known in law as the principal. agency: A relationship that exists when one party (the agent) represents another party (the principal) in the formation of legal relations. agent: A person who is authorized to act on behalf of another. principal: A person who has permitted another to act on their behalf. 3 Examples of Agency Relationships A sports agent negotiates a multimillion-dollar deal on behalf of a hockey player. An insurance agent sells fire and theft insurance on behalf of several insurance companies. A travel agent sells tickets, cruises, and vacation packages on behalf of carriers and hotels. 4 Relationships in Agency There are two key relationships at play in an agency situation: o agent–principal relationship o outsider–principal relationship  relationship between the principal and the party with whom the agent does business (the outsider or third party) 5 Law of Agency This law governs the relationship where one party, the agent, acts on behalf of another, the principal. It addresses and rights and duties of the principal, agent, and third party (outsider), and the complications resulting from these relationships. It is derived largely from tort and contract law. 6 Creation of Agency (1) An agency relationship usually arises by contract between the parties in which the principal authorizes an agent to act on their behalf and the agent agrees to do so. The contract may be created only for a single purpose—for example, to purchase a delivery van. Alternately, it can arise as part of a larger contract—an employment contract, for example, where the employee’s duties include entering into sales transactions for the employer (principal). 7 Creation of Agency (2) Sometimes a relationship arises by conduct or behaviour of the principal, which leads outsiders to believe there is an agency relationship. An agency agreement can be express, implied, oral, in writing, or in writing under seal. power of attorney: A document, with or without seal, granting wide or specific powers to the agent to act for the principal. 8 The Concept of Authority The authority of the agent is a key aspect of the agency relationship. It determines whether there is a contract between the principal and the outsider. When an agent acts within the scope of the agent’s authority and negotiates a contract for the principal, the principal is bound by the contract, whether or not the principal likes it. 9 Actual Authority actual authority: The power of an agent that derives from either express or implied agreement. Express authority may be written or oral and is the authority specifically granted by the principal to the agent—for example, authority to purchase supplies. Implied authority arises by implication, such as from o the position the agent occupies o necessity in order to carry out or implement the agent’s express authority o well-recognized custom in a particular trade, industry, or profession 10 Apparent Authority apparent authority: The power that an agent appears to have to an outsider because of conduct or statements of the principal. 11 Business Application of the Law 13.1 Agent’s Authority to Enter Agreement to Share Prize Finalists agreed to share a $100 000 prize when one won. The winner’s wife had been present to agree with the plan and signed a document agreeing to share. When the winner was named, he did not share—other finalists claimed their amount. The court found that the winner’s wife was acting as her husband’s agent to be present at the location but did not have apparent authority. 12 Agency by Estoppel This form of agent authority can arise in three situations. o An agent exceeds their actual authority but acts within their apparent authority and thereby binds a principal to a contract against their wishes. o The principal indicates that another is their agent when, in fact, no agency relationship exists. The principal is not permitted to avoid the contract by claiming that no agency relationship existed, because the principal gave every appearance that one did. o Where an agency relationship has been terminated or an agent’s authority has been curtailed. 13 Case 13.1 Rockland Industries Inc v Amerada Minerals Corporation of Canada, 1980 CanLII 188 (SCC) Kurtz was the manager of Amerada’s petrochemical products with responsibility for domestic and foreign sales. Kurtz and representatives of Rockland concluded an agreement by telephone on September 5. On September 3, Kurtz had been informed by his employer that he would need to get the approval of the executive operating committee for the sale to Rockland. Rockland did not comply with the agreement and was sued for breach of contract. Court: Onus was on Amerada to notify Rockland of the limitation—it was not up to Rockland to inquire as to Kurtz’s authority. By permitting Kurtz to act in its business by conducting negotiations, it had represented to Rockland that 14 he had permission to act. Agency by Ratification (1) An agency relationship is created when one party adopts a contract entered into on their behalf by another who at the time acted without actual or apparent authority. o Unlike agency by estoppel, the principal has not conducted themself in a misleading way, and the law does not force the principal to adopt the contract. In agency by ratification, the agent does not have the authority to do what they do. 15 Agency by Ratification (2) A principal cannot ratify every contract that their agent enters. A principal can only ratify a contract if o the principal does so within a reasonable time; o They have the capacity to create the contract at the time the agent entered into it and at the time of ratification; and o the agent identified the principal at the time of entering the contract. 16 Business Application of the Law 13.2 Real Estate Agents Real estate agents usually have no authority to make a binding contract of sale on behalf of the principal (the homeowner or the purchaser). Normally, the agreement between the owner or the purchaser and the real estate agent does not confer any authority on the agent to enter a contract on behalf of the property owner or purchaser. The term agent is often used very loosely to refer to anyone who represents another, and it is not always restricted to relationships where the agent enters into contracts on behalf of the principal. 17 Duties of the Agent (1) The agent is required to perform in accordance with the principal’s instructions. If the agent fails to perform these duties, they are in breach of the contract. Performance must meet the standard of the particular trade or industry. Normally, it is expected that the agent will personally perform the obligations, but there may be an express or implied provision for delegation. 18 Duties of the Agent (2) An agent owes a fiduciary duty to the principal. fiduciary duty: A duty imposed on a person who has a special relationship of trust with another. Fiduciary duty includes the following: o making full disclosure of all material information that may affect the principal’s position o avoiding any conflict of interest that affects the interests of the principal o avoiding acting for two principals in the same transaction o avoiding using the principal’s property, money, or information to secure personal gain o avoiding accepting or making a secret commission or profit 19 Case 13.2 (1) Duraguard Fence Ltd v Badry, 2019 ABQB 783 Duraguard makes and installs chain-link fences. It was a long-time client of an insurance brokerage firm and broker with 43 years of experience. It deferred to the broker for all the company’s insurance needs. In 2004, without being asked or discussion, the broker made changes to Duraguard’s insurance including reduction of coverage for theft to $5000. In 2007, Duraguard discovered that an employee had stolen approximately $589 000. Duraguard sued the broker for negligence and breach of fiduciary duty. 20 Case 13.2 (2) Duraguard Fence Ltd v Badry, 2019 ABQB 783 Court: Brokerage was negligent. o Insurance agents owe a duty to their customers. o The onus is on the agent to review the customers’ insurance needs and provide the full coverage requested. o Should an uninsured loss occur, the agent will be liable unless he has pointed out the gaps and advised how to protect against those gaps. o The broker failed to discuss the adequacy of the $5000 limit and failed to ask about previous employee dishonesty. o The broker had no fiduciary duty because the broker did not have authority to bind Duraguard to a contract. 21 Case 13.3 (1) Raso v Dionigi, 1993 CanLII 8664 (ONCA) Rafealla Sirianni and her husband wanted to invest in income producing property. They asked her brother-in-law, Guerino Siriianni, who was a realtor, to find an investment property. He found a property that was not for sale and prevailed upon the owners to list it for sale and then brought them an offer from “R. Raso in trust,” which was actually from Rafealla, who used her maiden name for the offer. The realtor did not disclose his relationship with the offeror. The price was agreed upon after several offers and counteroffers. Later, the seller learned about the relationship and refused to complete the contract. 22 Case 13.3 (2) Raso v Dionigi, 1993 CanLII 8664 (ONCA) Raffaela Sirianni sued for specific performance of the contract, and Sirianni and the real estate agency sued for their commission. Court: o Sirianni was not a mere middleman and took an active role in the transaction. o A real estate agent who acts for both sides has a fiduciary duty to both his principals to disclose all material facts. o Sirianni breached his fiduciary duty to the sellers by failing to disclose the relationship and failing to advise of the money that the purchasers had available. 23 Case 13.3 (3) Raso v Dionigi, 1993 CanLII 8664 (ONCA) Court: o It is immaterial whether the transaction is fair, and it is irrelevant whether the principal would still have entered the transaction if disclosure had been made. o Where an agent has breached a fiduciary duty in this manner, the agent is precluded from claiming any commission. o The purchasers are not entitled to specific performance, as they had knowledge of the agent’s breach and actively participated in the scheme. 24 Duties of the Principal Duties are usually set out in the contract. The contract usually requires the principal to do the following: o compensate the agent o assist the agent as agreed in the contract o reimburse the agent for reasonable expenses o indemnify the agent against losses incurred while carrying out agency business 25 Ethical Considerations 13.1 Real Estate Agents' Commissions and “Steering” Real estate agents representing buyers have access to information about the amount of commission available and may “steer” the buyer away from low commission houses to high commission houses. The practice of steering buyers toward listings where the seller is offering higher commissions over those offering lower commission is illegal in Ontario where agents are required to inform the buyer of properties that meet the buyer’s criteria without regard to the amount of remuneration. 26 Contract Liability in the Agency Relationship When an agent enters into a contract with a third party on behalf of a principal, it is the principal, not the agent, who ordinarily is liable on the contract. An agent who acts without authority and contracts with an outsider is liable to the third party for breach of warrant of authority. warrant of authority: A representation of authority by a person who purports to be an agent. An agent may be bound when they contract on their own behalf to be a party to the contract along with their principal. 27 Liability of an Undisclosed Principal (1) An agent may incur liability when they contract on behalf of an undisclosed principal (i.e., the outsider does not know they are dealing with an agent at all). undisclosed principal: A principal whose identity is unknown to a third party who has no knowledge that the agent is acting in an agency capacity. The general rule is that the principal is still liable on the contract so long as the agent is acting within their authority and the agent has no liability. 28 Liability of an Undisclosed Principal (2) If the agent pretends to be the principal, they may be personally liable on the contract. If the agent says they are acting for a principal but cannot reveal their identity, the principal alone is liable on the contract. 29 Liability of the Agent to the Principal An agent can be sued by the principal for breach of their contract if the agent exceeds their actual or apparent authority. 30 Tort Liability in the Agency Relationship As a general rule, an agent is personally liable for any torts that they commit. The principal is vicariously liable for the agent’s actions so long as the agent is acting within express, implied, or apparent authority. 31 Termination of Agency Agreements An agency agreement can come to an end in a number of ways: o The agency relationship ceases by operation of the law; this most commonly occurs due to the death, dissolution, insanity, or bankruptcy of one of the parties. o The parties agree to bring their relationship to an end. o One party gives notice of termination to the other. The principal should give notice to third parties. 32