Commercial Law 3
Cassie has been employed by MME business as its business development manager a role that is prominently displayed on all her stationery and business cards. The business intends to open an office in Ballarat and hence sends Cassie to survey relevant business opportunities in Ballarat business district, evaluate competitors and make enquiries on retail premises and report back to head office with recommendation. Cassie surveys the property owned by Theo among other properties. Coincidentally, Pat the owner and CEO of MME enquire about Theo’s property through the phone and indicate that Cassie will be in contact with Theo to inspect the premises with a view of committing to a lease. On inspecting the premises, Cassie is convinced that its best suited to MME and hence she executes in writing a lease arrangement with Theo on behalf of MME. When the copy of the executed lease reaches Pat alongside with invoices of office equipment, he refuses to agree to the terms of the premises and cancels the office equipment order. Theo takes legal action against MME. A number of issues arises in this case. The first issue is whether an agency relationship exists between Cassie and Pat (MME). Another issue is whether Cassie was authorized to enter into a lease agreement between MME and Theo. The final issue is whether the lease agreement between Theo and Cassie on behalf of MME is valid and hence whether Pat can be estopped from cancelling the lease agreement or can be sued for breaching the agreement.
The agency law terms agency as a consensual relationship created either by contract or by law where the principal grants authority to the agent to act on behalf of and under the control of the principal in dealing with a third party. This relationship is fiduciary in nature and the agents’ actions and words to a third party bind the principal. An employer –employee relationship is an agency since the employee (agent) acts on behalf of the employer (principal) as far as dealing with third parties is concerned (Hollis v Vabu, 2001). In this case Cassie is an employee of MME and hence its agent acting on behalf of Pat (owner/principal) to third parties (Theo). Thus, it is clear that an agency relationship exists between Cassie and Pat.
Gordon (2006) states that an agent’s authority to act on behalf of the principle may be express or implied in which case the principal may be held liable for agent’s actions. A principal may give an agent express authority to act on his behalf. The agent may also have express actual authority to act on behalf of the principal where she/he has been expressly told to act as such (Ireland v Livingstone, 1872). In Hely-Hutchinson v Brayhead Ltd (1968) it was held that an agent has implied actual authority that is the usual authority that enables the agent carry out the express authority or perform the duties of his position. Finally, an agent’s authority can be apparent authority which arises when the principal in conduct or words makes the third party to believe that authority has been given to the agent to act in a certain manner although the agent has not been informed this by the principal. In this case, the principal will be bound by the actions of the agent and will be estopped from denying the agent’s actions as was held in Rama Corporation Ltd v Proved Tin and General Investments Ltd (1952). In this case, Cassie has been an employee of MME Company acting as its project development manager. This has been known to everyone due to the fact that her role is displayed in all her stationery and business cards. Furthermore, Cassie goes to Ballarat with clear instructions to look for a business premises and hence inspecting Theo’s premises was only part of the instructions. Though the decision to enter into a lease agreement is not part of her authority, Pat calls Theo and enquires about Theo’s premises. He goes on to indicate that Cassie is to visit Theo’s premises to survey it with an intention of committing to a lease agreement. This is despite the fact that Cassie has been instructed to communicate her findings back to the company. To Theo therefore, the understanding is that Cassie has been authorized by Cassie to enter into a lease agreement on the behalf of MNE. Thus when she finally signs the lease on behalf of the company, Theo understands it to be right as the company owner has already represented Cassie to him as one with authority to enter into the leasing contract on behalf of the company. Thus, it can be concluded that Cassie has apparent authority to enter into the leasing contract on behalf of the company.
It has established that there is apparent authority for Cassie to enter into leasing contract on behalf of the company by virtue of Pat having represented Cassie as such. Agency law states that where the third party believes in good faith that the agent has authority to act in good faith on behalf of the principal, the principal remains liable for the agent’s actions and cannot rely on the defense that he/she did not confer such actual authority to the agent (Minskoff Equities v. American Express, 1995). In this case, it is clear that Theo believed in good faith that Cassie had the authority to act on behalf of MME in entering into the lease agreement. This is because Pat had called him and informed him that Cassie was to visit and inspect the premises with an intention of committing to a lease agreement. When she actually did, Theo must have entered into the agreement in good faith. As such, Pat will be estopped from cancelling the lease contract since signing the agreement was just a way of committing the lease as indicated to him by Pat. Thus, MME is liable for the lease signed by Cassie on its behalf and will be estopped from dishonoring it.
The relationship between agency and contract law
The agency and contract law are related to a great deal. This is because in the course of making a contract, parties have to use agents in executing contracts. For instance, a company though considered a separate legal entity cannot represent itself but has to be represented by a person (individuals). In other words, the company as a principal only makes contracts through individuals who act on its behalf. In other words, this is a kind of agency relationship involved in executing contracts. Employers on the other hand may give authority to employees whether expressly or impliedly to enter into contracts on their behalf. However, problems arise when people that represent the company or others to execute contracts go against the will of the company or the other person. This may also be the case when a contract is entered into by the person acting on behalf of another or the company but it is disowned. This regards the validity of contracts entered into on behalf of a company or an individual by another. How do we deal with the loss suffered by the third party or to whom the contract was entered into? The law of agency deals with what happens when agents behave fraudulently in entering into contracts on behalf of principals or when the principal disowns a contract entered to on their behalf by the agent.
An agent in this case is the individual or firm that is authorized to act on behalf of another known as principal in executing a transaction without assuming any financial risk in the transaction. The relationship between agency and contract law arises in that the agent’s function is that of acting on behalf of the principal in bringing out a contract between the principal and a third party. As such, the agent has to act in good faith in the interests of the principal while avoiding conflicts of interest. As such, a number of issues arise when agents contract on behalf of principals regarding whether the principal should be bound when he wants to denounce such a contract. The principal rule however is that the principal is bound even when the third party does not know that the agent was acting on behalf of the principal. Thus, agency law can be seen as a branch of contract law that guides the contracts entered into by the agent on behalf of the principal.
The agency law provides that an agent is authorized to do and to do only, that which is reasonable for him to infer that the principal wants him to do in the light of the principals’ manifestations and the facts as he knows or should know at the time he acts. However, there are six reasons that will make the principal bound by the gent’s actions. They include when the agent has actual express authority in that there is explicit agreement between the principal and the agent involving the contract entered into. This is the case when the board has authorized the CEO to enter into a certain contract. The contract will also be valid when the agent has actual implied authority or where the agent acts in a manner necessary for the performance of the actions delegated to him/her. In the case of Cassie above, the issue of going to Ballarat to look for new business venue is in line with her duties and is hence actual implied authority. The principal is liable for the agent’s actions where the agent acted on the basis of apparent authority (North Alabama Grocery Co. v J.C. Lysle Miling Co., 1921). This is where though there is no agreement with the agent to act as such, the third party has reasonably inferred from the principal’s conduct that the agent had been authorized. In the above case, Theo infers that Cassie has been authorized to enter into lease agreement on behalf of MME from the call he receives from Pat. Where the principal could have intervened to prevent the contract being entered into, then he is estopped from objecting the contract (Watteau v. Fenwick, 1982). In all these cases, the principal will be held liable for the actions of the agent when the agent entered into a contract with a third party on behalf of the principal.
There are circumstances when third parties ought to be held accountable for contracts that the principal has disowned. Such cases involves when the third party never cared to check authority of the agent. This is when an ‘agent’ claims to the third party that he has been authorized to act on behalf of the principal but the third party does not care to establish this though he goes on to execute the contract (Mussey v. Beecher, 1849). The third party will also be liable for the contract when the party has immediate information about the transaction. For instance, the third party cannot purport to enter into a contract with an agent who is a minor or intoxicated (Woodstock Iron Company v. Richmond and Danville Extension, 1889). The third party will also be liable for the contract where they collude with the agent to defraud the principal. The principal will also be released from liability where the agent’s malfeasance should be obvious to the third party from the contract terms as was held in General Overseas Films Ltd v. Robin Intl, Inc (1982). It should also be noted that the agent will be held liable for the contract where the agent acts to defraud the principal or where the actions are not in the principal’s best interest.
From the discussion above, it can be concluded that agency and contract law are related in that the agency law is aimed at defining the relationship between the three parties including the agent, the principal and the third party. It can be said to be a branch of the law of contract that govern the contracts entered into by the agent on behalf of the principal. Though it is generally held that the principal is always liable for the agent’s actions, this essay has established that at times, the principal will be released from the contract’s liability. The essay in so doing has also explained the relationship between agency and contract law.
Hollis v Vabu Pty Limited (2001) 207 CLR 21
Gordon, P2006, Agency relationships, London, Rutledge.
Ireland v Livingston (1872) LR 5 HL 395.
Hely-Hutchinson v Brayhead Ltd (1968) 1 QB 549
Rama Corporation Ltd v Proved Tin and General Investments Ltd (1952)2QB 147
Minskoff Equities v. American Express, 94 Civ. 967 (PRP) (S.D.N.Y. 1995)
Woodstock Iron Company v. Richmond and Danville Extension, 129 US 643, 662 (1889)
General Overseas Films Ltd v. Robin Int’l, Inc., 542 F. Supp. 684 (S.D.N.Y 1982)
Mussey v. Beecher, 57 Mass (3 Cush.) 511, 518 (1849).
Watteau v Fenwick (1983) 1QB 346.
North Alabama Grocery Co. v J.C. Lysle Miling Co. 205 Ala. 484 1921