Module 1 - Agency
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School
Toronto Metropolitan University *
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Course
603
Subject
Law
Date
Feb 20, 2024
Type
docx
Pages
19
Uploaded by SargentSquidMaster1165
Agency
Textbook
McInnes, M., Kerr, I., & VanDuzer, J. A. (2017).
Managing the law: The legal aspects of doing business
(5th Edition). Pearson.
o
Chapter 19: Agency and Other Methods of Carrying on Business
McInnes, M., Kerr, I., & VanDuzer, J. A. (2022).
Managing the law: The legal aspects of doing business
(6th Edition). Pearson.
o
Chapter 20: Agency and Other Methods of Carrying on Business
Topics and Learning Objectives
Topics
This module will cover the following topics:
Basic Rules of Agency
o
Introduction
o
Creation of an Agency Relationship
o
When Is the Principal Liable?
o
When Is the Agent Liable?
o
The Agent’s Duties to the Principal
o
The Principal Duties to the Agent
o
Termination of Agency Relationship
Risk Management Issues
Business Relationships in Which Agency Issues Arise
Learning Objectives
By the end of this module you should achieve the following objectives:
Basic Rules of Agency
o
Describe an agency relationship.
o
Apply the law pertaining to the creation (3 different ways) of an agency
relationship.
o
Apply the law pertaining to ratification of a contract.
o
Explain in what circumstances a principal will be liable for a contract created by an agent.
o
Apply the law pertaining to the creation of an agency by way of actual authority.
o
Apply the law pertaining to the creation of an agency by way of apparent authority.
o
Explain when an agent is liable to a third party?
o
Explain an agent’s fiduciary duty to a principal.
o
Explain an agent’s duty of care to a principal.
o
Identify a principal’s duties to an agent.
o
Apply the law pertaining to the termination of an agency relationship.
Risk Management Issues
o
Apply different risk management strategies that a principal may use in order to reduce the risk of an agent binding the principal to a contract.
o
Explain in what circumstances a principal may be liable for the torts committed by an agent.
Business Relationships in Which Agency Issues Arise
o
Explain how an agency relationship can arise in a joint venture, strategic alliance, distributorship and franchises, and what the implication is thereof.
o
Explain why and generally how the government regulates certain agency relationships such as real estate agents, insurance agents, travel agents, stockbrokers and lawyers.
Introduction
This week we will focus upon the law of agency. The agency relationship is one of the most common relationships in the business world. An agency is a type of
relationship where one person (
principal
) uses another person (
agent)
to represent and act on their behalf. A product manufacturer may hire an agent to find buyers for their product or to acquire supplies. A musician may hire an agent to find venues for them to perform at. An employee of a business may be an agent for the business so as to commit the business to contracts. Of particular importance and concern for a principal is understanding when a principal becomes liable for a commitment created by an agent. Likewise, an agent would want to understand when they personally become liable for commitments.
Some agency relationships are regulated by the government. The government decided that it is in the public interest that certain agents must be licensed and registered. For example, real estate agents, insurance agents, mortgage agents, travel agents and stockbrokers.
We will discuss how to create an agency relationship, the duties and liabilities of each party, how to terminate the relationship, and how principals can manage the risks associated with using agents.
In addition to agency, we will very briefly discuss a few other business relationships (e.g., joint ventures, strategic alliances, distributorships, franchises) that may give rise to an agency relationship, but which the parties usually wish to avoid.
Pause and Reflect
In what circumstances should a principal be legally bound to a contract created by their agent? How does a third party know that an agent is indeed an “agent” for the principal they claim to be an agent for? What kind of inquiries are necessary? If any?
These are important questions to reflect upon as we move through this module.
Creation of an Agency Relationship
An agency relationship can be created in 4 different ways:
1.
Express Authority (i.e., expressly by agreement);
2.
Apparent Authority (i.e., implicitly);
3.
Law; or
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4.
Ratification.
In the sections below we will explore these different ways.
Express Authority (Express Agreement)
The principal and agent can enter into an
express agreement
, written or oral, creating the agency relationship and setting out the rights and responsibilities of each party. There may be statutes that mandate that certain agency agreements be in writing. The
Statute of Frauds
in some provinces requires certain agency agreements to be in writing. The
Bills of Exchange Act
requires an agent to have written authority to sign cheques on behalf of a principal. Agents that must be licensed by the government may be obligated to have written authority from their principal.
In the express agreement (written or oral) the principal should clearly state that the agent has the authority to act on the principal’s behalf – this is known as
actual authority
.
However, even without an express agreement, it is possible to give a person actual authority by appointing them to a position that carries that type of actual authority. For example, appointing a person as Sales Manager, a position that holds the authority to create sales contracts, would give that person the actual authority of that position despite no express agreement stating that.
Please see Figure 19.1 (Creation of Agency) in the textbook.
Apparent Authority
An agency relationship can arise without the principal giving actual authority to a particular person, but instead by the principal creating the reasonable impression in the view of a third party that the person is authorized to act on the principal’s behalf. This is known as
apparent authority
. An agency may be implied if the conduct of an alleged principal is sufficient for a reasonable person to conclude that another is that person’s agent, then an agency will arise by implication.
A
corporation
is an inanimate legal entity. As such, it cannot do anything by itself. It needs a human being to act on its behalf. So, commonly directors, officers and employees act as agents for the corporation. The agency can be created by either by
express authority
or by
apparent authority
.
By Law
An agency relationship can also arise by operation of law. Under partnership law, each partner is an agent of the partnership and can bind the partnership to obligations that arise in connection with carrying on the business of the partnership in the usual way. Section 6 of the Ontario
Partnerships Act
states:
Power of partner to bind firm
6.
Every partner is an agent of the firm and of the other partners for the purpose of the business of the partnership, and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he or she is a member, bind the firm and the other partners unless the partner so acting has in fact no authority to act for the firm in the particular matter and the person with whom the partner is dealing either knows that the partner has no authority, or does not know or believe him or her to be a partner. R.S.O. 1990, c. P.5, s. 6. How Activities Work
This course contains activities like the one that appears below. The activity begins with a scenario, followed by a series of questions. Think of an answer to the questions (using the information in the scenario), and then click the question to reveal an answer and/or explanation.
Activity
Tom, Maya and Raj own and operate a sports bar and restaurant called “The Sports Pages”. They
structured their ownership as a general partnership and have a written and signed Partnership Agreement. Among other things, the Partnership Agreement states that all purchases over $2,000
must be approved by all partners. The bar has 10 TV screens 55 inches each that display different
sporting events non-stop. Maya has heard from customers that the TV screens are too small. She told Tom and Raj that they should buy bigger TV screens to keep customers happy and attract new ones. Tom and Raj said no, it wasn’t in the budget. Two weeks later, Maya contacted a TV supplier and ordered 10 new 70 inch HDTV screens and had them delivered and installed when Tom and Raj weren’t working. She got them for a good price, $10,000 installed. Customers loved the new screens! But, when Tom and Raj found out they were furious. They told Maya she
did not have the authority. They contacted the TV supplier and told it that the purchase was not authorized and therefore they were not paying for the TVs. They told the supplier to go after Maya.
Question: Do Tom, Maya and Raj have to pay the invoice? Yes or No. Explain and support your answer identifying the applicable law and applying it to the facts.
Answer:
Yes, Tom, Maya and Raj are liable for the invoice. Tom, Maya and Raj have a general
partnership. Section 6 of the
Partnerships Act
states that each partner is an agent of the firm and the other partners and the acts of a partner in carrying on the business in the usual way binds the firm and the other partners. Buying new TVs for
a sports bar that uses TVs in its business would probably fall within the meaning of section 6. Maya did
not
have authority to make the purchase because the Partnership Agreement required all partners to agree to purchases over $2,000, and Tom and Raj did not agree. However, the TV supplier did not know that Maya did not have authority; therefore, the partnership and the 3 partners are liable for the invoice.
Tom and Raj are upset about being liable for the TV invoice.
Question: What recourse do they have?
Answer:
Maya breached the Partnership Agreement, so Tom and Raj can sue her for damages for breach of contract. If the Partnership Agreement provides for a specific remedy (e.g., indemnification) for a partner exceeding one’s authority, they could also pursue that remedy.
Maya came across a great deal on an apartment building. The building had to be purchased right away, otherwise someone else would buy it. There was no time to contact Tom and Raj about it, so Maya entered into an agreement to buy it on behalf of the partnership and her partners.
Question: Are Tom, Maya and Raj legally bound to the agreement to buy the apartment building? Yes or No. Explain and support your answer identifying the applicable law and applying it to the facts.
Answer:
Section 6 of the
Partnership Act
states that each partner is an agent of the firm and the other partners and the
acts of a partner in carrying on the business in the usual way
binds the firm and the other partners. Maya’s agreement to buy an apartment building does not appear to be an act that would fall within the usual way of carrying on the business of a sports bar and restaurant. Therefore, Tom and Raj would not be bound to the agreement.
By Ratification
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If a person, without actual or apparent authority, professes to be an agent of another person, and purports to create a contract on such other person’s behalf, it shall not be binding upon them. However, such other person may ratify the contract made by another on their behalf, and in such case the contract shall be binding on them. For ratification to be effective, the following 5 requirements must be satisfied:
1.
Ratification must be
clear
, either by express agreement or implied from behaviour;
2.
Ratification must
occur within a reasonable time
after the creation of the contract;
3.
The
whole contract
must be
ratified
;
4.
The person professing to be the “agent”
must have identified
the person that was the “
principal
”.
5.
The person identified as the
“principal” must have had the legal capacity
to enter into the contract both at the time the professed agent created the contract and at the time of ratification.
In the event that the person identified as the “principal” does not ratify the contract,
who is liable on the contract? The person professing to be the “agent” would not be personally liable on the contract unless the third party and the “agent” intended that the “agent” be bound to the contract. If the third party and the “agent” did not intend the “agent” to be personally bound to the contract the third party may have legal cause of action against the “agent” for fraudulent misrepresentation, deceit or breach of warranty of authority.
When Is the Principal Liable?
In answering this question, the law tries to balance the interests of the principal with those of the third party. The principal does not want to be bound to contracts that their agent creates beyond the express authority given to them. However, a third party dealing with an agent does not want to spend a lot of time and effort to ascertain the extent of the agent’s express authority.
Generally, a principal is bound to obligations that their agent has created within the
scope of their:
1.
actual authority; or
2.
apparent authority.
As noted earlier, a person can ratify an obligation created by another, without authority. In this section, we will focus only upon actual and apparent authority.
Actual Authority
A principal can give an agent actual authority by:
1.
a contract that expressly states the authority; or
2.
being appointed to a position that has certain authority.
If an agent has actual authority, obligations created by them within their authority will bind their principal. It does not matter whether the third party knew the extent of the agent’s authority or not.
Apparent Authority
A third party dealing with an agent usually does not know the extent of the agent’s authority, and it is difficult for them to determine it. An agent’s authority will often be found in a contract or in an internal business document that is not easily accessible to the third party.
The law recognizes this challenge, and accordingly,
allows a third party to rely upon the reasonable impression created by a principal’s words, actions or acquiescence.
It does not matter that the person was not appointed as agent, or was appointed as agent but not given that specific authority. The principal will be bound to a contract created by someone with apparent authority. “Apparent authority” may also be referred to as “ostensible authority” or “agency by estoppel” or “agency by holding out”.
If a principal allows an agent to act as if they had authority, such behaviour (i.e., acquiescence) may be a form of representation to a third party that reasonable leads that third party to believe the agent has that authority.
A few additional important points:
1.
Third Party Reliance
– the third party must reasonably rely on the appearance of authority. In other words, if the third party knew or should have known that the agent did not have the authority it would not be
reasonable to rely upon the appearance of such authority, and therefore, the
principal would not be bound to the obligation.
2.
Person Making Representation Has Organizational Permission
– In cases where the principal is not an individual, such as a business organization, the person making a representation to a third party must be someone who is permitted to make such a representation in that business organization.
In
summary
, a principal is liable for obligations created by their agent’s apparent authority. Apparent authority can arise when a principal represents to a third party that the agent has authority by:
1.
principal’s statement or conduct;
2.
principal acquiescing to the agent acting with that authority;
3.
principal appointing the agent to a position that usually has that authority (but does not actually have that authority) (i.e., agent has “usual authority”).
And, the third party must rely on the appearance of authority; in other words, the third party did not know nor should have known that the person did not have authority.
Activity
Please read
Case Brief 20.1
(
Spiro v Lintern
[1973] 3 All ER 319 CA) in the textbook.
Question: How did John give his apparent authority? Explain and support your answer.
Answer:
John owned a property. He gave actual authority to Iris to list the property for sale (not to sell it).
Iris listed it but then acted beyond her actual authority by entering into an agreement to sell the property to Lintern. John knew what Iris had done this but he did not contact Lintern to advise him that Iris did not have the actual authority to sell his property, and therefore he (i.e., John) was not bound by the contract to sell the property. Instead, John did nothing at this time. In fact, John then allowed Lintern and his architect to come to the property and enter the house to inspect
and plan some repairs, and still John did not notify Lintern that Iris had no authority.
The court held that Iris had apparent authority.
John did not actually say anything to Lintern
to lead him to reasonably believe Iris had authority. However, John allowed Iris to act as
if she had the authority to sell the property (i.e.,
acquiesced
), and he also permitted Lintern to enter the property to prepare plans knowing that Lintern believed he had purchased the property. John’s actions would suggest that what Iris did was authorized.
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Key Point
Apparent authority cannot arise based solely upon the conduct of the person purporting to be the “agent”.
Apparent authority can only arise when a principal represents to a third party that the agent has authority.
Sunshine Retirement Home (“Sunshine”) operates a residence for seniors. Sunshine’s Chief Executive Officer (“CEO”) is Jenny. Sunshine’s Purchasing Manager is Kevin. The Purchasing Manager is authorized to make purchases for Sunshine. Sunshine is looking to reduce costs by finding a lower cost supplier of cleaning products. Kevin negotiated and entered into a 3 year contract with Star Cleaning Products (“Star”) to be the exclusive supplier of Sunshine. When Jenny learned about this contract she was very upset about the 3-year term and the exclusivity given to Star.
Question: Is Sunshine bound to this contract? Yes or No. Explain and support your answer by referring to the applicable law and applying it to the facts.
Answer:
Yes, Sunshine is bound to the contract. Kevin, as Purchasing Manager had
actual authority
to enter into contracts to purchase products for Sunshine. Therefore, Sunshine, as principal, is bound to a contract created by its agent, Kevin, who had actual authority.
Let’s assume that Kevin, the Purchasing Manager for Sunshine, had express authority to create contracts for 1 year or less.
Question: Would Sunshine be bound to the 3-year, exclusive supply contract with Star? Yes or No. Explain and support your answer by referring to the applicable law and applying it to the facts.
Answer:
Yes, Sunshine would be bound to the contract. Kevin, as Purchasing Manager, did
not
have
actual authority
to enter into the 3-year contract. However, Kevin, as Purchasing Manager, has
apparent authority
by virtue of the
usual authority
associated with the position of Purchasing Manager. Star did not know and could not have known that Kevin did not have authority.
Let’s assume that Kevin, the Purchasing Manager for Sunshine, was on vacation. George is the Human Resources Assistant at Sunshine. George has never worked on a purchase contract and does not have authority to do so. Jenny, the CEO, was
short-staffed and had no one qualified to deal with the supply contract. So, Jenny told Star that George, the Human Resources Assistant at Sunshine, would deal with the supply contract while Kevin was on vacation. George negotiated and signed a 5-
year, exclusive supply contract between Sunshine and Star. Jenny was very upset when she learned about the 5-year term, so she contacted Star to tell them the contract was not binding on Sunshine.
Question: Is Sunshine bound to the 5-year, exclusive supply contract with Star? Yes or No. Explain and support your answer by referring to the applicable law and applying it to the facts.
Answer:
Yes, Sunshine would be bound to the contract. George, as Human Resource Assistant, did
not
have
actual authority.
However, George had
apparent authority
by virtue of Jenny’s representation to Star. Jenny, as CEO, is someone that would be permitted to make such a representation to a third party. Star did notknow that George did not actually have authority. Star relied on Jenny’s representation that George had authority. Therefore, Sunshine is bound to the contract.
What if prior to the 5-year, exclusive supply contract being signed, Star learned that George, the Human Resources Assistant, did
not
have actual authority, to create the contract, but despite learning this they signed the contract anyway?
Question: Would Sunshine be bound to the 5-year exclusive supply contract with Star? Yes or No. Explain and support your answer by referring to the applicable law and applying it to the facts.
Answer:
No, Sunshine would not be bound to the contract. Jenny represented to Star that George had authority. This would have given George apparent authority if Star reasonably relied upon the representation. But, Star learned that George did not actually have authority; therefore, Star cannot reasonably rely upon Jenny’s representation. Star knew George did not have the authority
to create the contract on behalf of Sunshine.
When Is the Agent Liable?
Agent and Third Party Intend Agent to be Liable
An agent usually negotiates a contract on behalf of an identified principal. The third
party is aware that the contract is being created with the identified principal, not
the agent. Therefore the agent is not personally liable for that contract. However, the agent and third party can expressly or implicitly intend that the agent be bound to the contract, and in such case, the agent would be personally liable.
Undisclosed Principal
An agent can also be held personally liable for a contract in the case of an
undisclosed principal.
This arises when an agent with express authority from a principal does not disclose to the third party that they are representing a principal (undisclosed principal). The third party is led to believe that it is contracting with the
agent directly. In such a case, if the third party learns that the person they dealt with was only an agent, and had actual authority from their undisclosed principal, the third party can hold either the agent or the principal liable, but not both.
Not Representing a Principal
In the event a person, without actual or apparent authority, represents to a third party that they are an agent for a principal when they are not, the purported “principal” is not liable for that contract. If the person made the representation knowingly, they would have acted
fraudulently
, and accordingly would be liable on
that basis. On the other hand, if the person did not make the representation fraudulently, they may still be liable to the third party for
breach of warranty of authority
. This liability flows even if the person honestly believed they had actual authority but were mistaken. This can happen in a situation where an agent has actual authority from their principal, but unbeknownst to them the principal lost legal capacity to create a contract, such as in the event of death, mental incapacity or bankruptcy. Although the agent is arguably innocent they would nevertheless be liable to the third party on the basis of breach of warranty of authority.
Activity
Grand Coffeehouse (“Grand”) operates a chain of coffee shops and is expanding. Roger found a new location in a strip plaza that he believes Grand will want. Roger approached the Landlord of the plaza and told them that he was Grand’s agent and
was representing it in finding new locations. The Landlord and Roger negotiated a lease and ultimately a lease was signed between the Landlord and Grand (signed by
Roger as Grand’s agent). Grand had not given Roger actual authority nor apparent authority.
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Question: Who is legally bound to the “contract” (i.e., lease)?
Answer:
Grand
is
not
contractually
bound
to the contract because Roger did not have actual nor apparent authority.
Roger
is
not personally liable for the contract unless Roger and the landlord
specifically
agreed
that Roger would be liable. If Roger did not agree to be
bound to the contract, Roger may be liable
for losses
suffered by
the landlord
on the basis of:
1.
Fraud or deceit
(i.e., Roger knew he did not
have authority
)
; or
2.
Breach of warranty of authority
(Roger believed he had authority to act for Grand
and told this to the Landlord, but Roger did not have authority. It does not matter that Roger honestly believed he had authority.)
Question: What if Grand wanted to be bound to the contract, is there anything it could do to be bound?
Answer:
Yes, Grand could
ratify
the contract.
Agent’s Duties to the Principal
An agent’s duties to their principal can be summarized briefly as follows:
1.
fulfil their contractual obligations;
2.
follow the principal’s lawful instructions;
3.
not delegate the fulfilment of duties to another party unless agreed to by the principal, expressly or implicitly;
4.
fiduciary duty; and
5.
duty of care.
As we have discussed, an agent with actual or apparent authority can bind a principal to a contract. So, an agent can expose a principal to serious risks. Accordingly, an agent’s common law fiduciary duty and duty of care help reduce the
principal’s risk. We will discuss those 2 duties below.
Fiduciary Duty
An agent’s fiduciary duty requires that they act in good faith and in the best interests of their principal. This overarching duty includes the following:
1.
no conflicts of interest;
2.
duty of full disclosure of all relevant information;
3.
prohibition on personally profiting from the unauthorized use of information or opportunities arising from the agency relationship; and
4.
prohibition on competing with the principal.
A principal can give express authority to an agent to do something that would otherwise violate their fiduciary duty. For example, if an agent discloses to their principal a real or potential conflict of interest, the principal can permit the agent to
act despite the conflict of interest.
Breach of fiduciary duty would give rise to a claim for damages for any loss suffered. However, importantly, a breach of fiduciary duty does not require the principal to prove a loss. Further, an agent is usually required to disgorge any benefit received. This creates a strong incentive for an agent to fulfil their fiduciary duty, and not act in their own self-interest since there will be no benefit to doing so.
Review the Ethical Perspective Box: Should Agents be allowed to represent the Buyer and the Seller in a Real Estate Transaction, in your textbook. This is an issue which can commonly arise.
Pause and Reflect
Please read Ethical Perspective 20.1 (“Should Agents Be Allowed to Represent the Buyer and the Seller in a Real Estate Transaction”) in the textbook. As a self-
reflection exercise, answer questions #1 and #2. When considering these questions, consider the following:
What does the fiduciary duty of an agent consist of?
What if the parties are experienced and well-informed regarding real estate transactions?
What if one of the parties is an individual who is not well-informed and has no experience regarding real estate transactions?
What if the land is located in a remote area and it is difficult to find more than one agent?
Is it possible to truly act in the best interests of both parties?
Duty of Care
The duty of care requires an agent to take reasonable care in performing their agency obligations. If an agent breaches their duty of care the principal would be entitled to damages for their loss.
If an agent lacks knowledge or experience and discloses this to the principal, and the principal accepts this risk, the principal’s claims for damages may be precluded or limited for knowingly accepting the risk.
Activity
Please read
Case Brief 20.2
(
Fine Flowers Ltd. v General Accident Assurance
(1977) Ont. C.A.) in the textbook.
Question: Identify the legal grounds for liability.
Answer:
The court held the insurance agent liable for:
1.
breach of contract
– the insurance agent had contractual agreed to obtain “full coverage” for all foreseeable and normal risks. The insurance agent breached this contractual obligation.
2.
breach of an agent’s duty of care
– an agent has a duty to take reasonable care in the performance of their responsibilities. The insurance agent was careless (i.e., did not take reasonable care) in fulfilling their duties.
PLEASE NOTE
: Although the insurance agent was liable on 2 legal grounds, it does not mean that the plaintiff recovers twice for their losses. The plaintiff had to elect to recover damages under breach of contract or for negligently breaching the duty of care.
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Question: Why wasn’t the insurance agent liable for breaching their fiduciary duty to
the principal?
Answer:
An agent’s fiduciary duty requires them to act in good faith and in the best interests
of the principal. The insurance agent breached their contractual duty and was careless but there was no evidence that they were preferring their own interest or someone else’s interest over that of the principal. The agent did not have a conflict of interest. The agent did not personally profit from unauthorized use of information and was not competing with the principal. The agent did not withhold relevant information.
Robert is a stockbroker. He represents Mr. Green with respect to his investments. Mr. Green is retired and lives off his small investment portfolio. Because of his age and dependency on his investments his portfolio is safe and conservative. Robert has advised Mr. Green wisely over the years. Robert was approached by Stellar Investment Fund (“Stellar”), a high risk/high reward investment. Robert was told that if his clients bought Stellar they would pay him a 10% commission which is extremely high by industry standards. Robert convinced Mr. Green to sell half his portfolio and buy Stellar, “a safe investment that paid a higher return”. Robert was happy receiving a big commission cheque from Stellar. Unfortunately 2 months later Stellar collapsed and is out of business. Mr. Green’s investment in Stellar is worthless. Mr. Green is in a terrible financial situation unable to pay his bills. Mr. Green wants to sue Robert.
Question: On what legal basis could he sue Robert? Explain and support your answer referring to the law and applying it to the facts.
Answer:
Mr. Green would have a strong case against Robert for breach of fiduciary duty. Robert was Mr. Green’s agent. An agent has a fiduciary duty to their principal. Robert breached this duty by:
1.
Robert did not act in Mr. Green’s best interest. Mr. Green was retired and needed a safe investment portfolio to live on. He should not have advised him to invest in risky investments.
2.
Robert had a conflict of interest. Robert favoured his own best interest over that of his principal, Mr. Green. He wanted to earn a larger commission for himself. Robert
also favoured Stellar’s interest (it wanted investors to buy its securities) over Mr. Green’s best interest.
3.
Robert failed to disclose relevant information to Mr. Green, such as the risky nature of the investment and the fact that Stellar was going to pay Robert 10% commission.
Also, Robert misled Mr. Green by saying that Stellar was a safe investment.
Since stockbrokers are regulated by the government Mr. Green will likely have violated statutory provisions and may lose his licence to be a stockbroker.
Principal’s Duties to the Agent
A principal has the following duties to its agent:
1.
fulfill obligations set out in the agency contract;
2.
pay reasonable remuneration to the agent unless they agree otherwise;
3.
indemnify the agent for liabilities and expenses reasonably incurred in connection with the agency provided the agent did not act illegally or in breach of the agency agreement.
Termination of Agency
An agency relationship can be terminated in the following ways:
1.
either party gives notice of termination to the other (subject to any contractual terms or law);
2.
the agency contract stated that the agency terminates upon a specific event, and that event occurred;
3.
the agent is appointed for a specific project or time frame, and that project is completed or the time period expired, as the case may be;
4.
impossibility of performance;
5.
principal lost legal capacity (e.g., death, insanity or bankruptcy) to create a contract.
Risk Management Issues
As we have seen, a principal is liable for contracts created by an agent with actual or apparent authority. This risk can be minimized by limiting the agent’s actual authority.
A principal is also exposed to liability for torts committed by agents. An agent may be an employee, in which case the principal/employer is vicariously liable for torts committed within the course of employment. Even in the event that the agent is not an employee, the principal may
be liable for the agent’s fraud or negligent misrepresentation if the agent was acting within the scope of their actual or apparent authority. Tort liability can be minimized by carefully hiring, training, supervising, and requiring reporting from agents.
Business Relationships in Which Agency Issues Arise
There are many other business relationships that may be created between parties. They include joint ventures, strategic alliances, distributorships and franchises. From an agency perspective, the parties creating these relationships usually wish to clearly avoid creating an agency relationship for fear that they will be bound to obligations created by the other parties to the relationship. As we have learned, a principal can be liable for obligations created by an agent with actual or apparent authority or by a partner in a general partnership. Accordingly, it is important to avoid such risks.
Summary
You should now have a good understanding of how to create an agency relationship, the duties and liabilities of each party, how to terminate the relationship, and how principals can manage the risks associated with using agents.
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