ABE Principles of Business Law 2008-1
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agent on his/her behalf. However, as with any other contract, silence does not imply consent. Hence, where a person purports to act on behalf of another, the first will not be agent by implication, unless the other gives some indication of agreement.
Consent of an agent to act as such is perhaps easier to imply. It usually arises where he/she acts on behalf of the principal, although merely doing something that a person requires done does not, of itself, mean that that thing was done on behalf of the requester.
By Estoppel
This arises where the principal holds out a person as his/her agent for the purpose of making a contract with the third party, and the third party relies on that fact. By virtue of having held out the agent as his/her agent the principal cannot later claim that the agent had no authority to act or had exceeded his/her authority. The courts, however, have limited the scope of the estoppel in that there must usually be a course of dealing between the parties.
Agency of Necessity
The implied agency of necessity between husband as principal and wife as agent was done away with by the Matrimonial Proceedings and Property Act 1970. There are, however, circumstances where one person is deemed to act as the agent of another, even though no agreement or consent has been given by the principal, either expressly or by implication.
This can arise only in an emergency where it is necessary for a person to act on his/her own initiative to protect the property or interests of another which are in imminent jeopardy as a result of that emergency. This is called "agency of necessity".
If, as a result of such an emergency, a person does of necessity act without any authority to protect another's interest, that person is by operation of law vested with all the rights and immunities of a properly constituted agent. However, the emergency must be genuine, and the action taken necessary. Such a situation could arise from any number of causes, but most of the reported cases are those of shipmasters before the days of wireless or radio, or carriers of goods who could not contact the owners.
Now with modern systems of communication, agency of necessity has become a rare and very limited class of agency. You should also note that the courts have always been reluctant to extend the doctrine of agency of necessity.
It is probably easier for there to be agency of necessity where there is a pre-existing relationship between the parties. Agency of necessity very unusually covers the situation where a total stranger deals with the goods of the principal. It is also rare for the courts to find that agency of necessity exists where the goods are not perishable, though the High Court has a general discretion under the Civil Procedure Rules to order the sale of goods where it is reasonable to do so.
The following three rules have been developed as to what constitutes necessity.
It must be practically impossible – or, at least, impracticable – for the agent of necessity to contact the principal.
The action taken must be necessary and for the benefit of the principal. What is necessary is objective – what a reasonable person would consider necessary, not necessarily what the agent thought to be necessary.
The agent must have acted bona fide in the interests of the principal.
An important proviso is that this type of agency applies only where there already exists some relationship of a contractual nature between the principal and the person acting on his/her behalf. Thus, if A asks his neighbour, B, to keep an eye on his house while he is on holiday, this might be construed as a contractual relationship, depending on the facts. However, in the absence of such a request from A, B cannot claim to have acted as an agent of
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necessity when she arranged for the repair of A's greenhouse which was severely damaged in a storm while A was on holiday. The fact that A might rightly be considered to owe a moral obligation to B does not, in itself, constitute an agency of necessity.
The following case amplifies the requirement of an actual commercial emergency or necessity.
Prager v. Blatspiel Stamp & Heacock Ltd (1924)
In 1915 and 1916, S, as agents for P, bought skins to the value of £1,900, to be dispatched to P, a fur merchant in Bucharest. P paid for the skins. Owing to the occupation of Rumania by the German forces, it was impossible to send the skins to P or to communicate with him. In 1917 and 1918, S sold the skins, which had increased in value.
HELD: As the skins were not likely to deteriorate in value if properly stored, there was no necessity for the sale, and S was liable in damages to P.
Formalities of Appointment
In general, no special formalities are needed for the appointment of an agent. The appointment may be under seal, or in writing, or oral. However, statute decrees that certain appointments must be made in a certain way.
For example, the Powers of Attorney Act 1971 (as amended) S.1(1) requires that any instrument creating a power of attorney must be made under seal. The Law of Property Act 1925, Ss.53 and 54, requires certain instruments to be in writing, and written authorisation is to be given to an agent to sign on behalf of the principal.
Under the common law, the authority of an agent to execute a deed on behalf of a principal must, itself, be given under seal (Steiglitz v. Eglinton (1815)).
C. RATIFICATION
As we have said, the agent must be authorised by a principal to act on the principal's behalf. Such authorisation may be express or implied. However, if an agent does an act without authorisation, the principal can always "ratify" the act afterwards. If he/she does so, the act then binds him/her to exactly the same effect as if it had been properly authorised in the first place. This applies equally whether the person purporting to act as agent was, indeed, an agent but was merely exceeding his/her authority or whether he/she had no authority to act at all.
In general, the ratification of an act serves to authorise only that particular act, and does not serve to give the agent implied authority to do any other acts – or, indeed, the same type of act again. However, a series of ratifications may well serve to imply an authority to do similar acts in the future.
What Can Be Ratified?
Any lawful act which can be done by an agent can be ratified by the principal. Also, most (but not all) unlawful acts can be ratified. By "unlawful" we don't necessarily mean "criminal" but tortious acts, or contractually unlawful acts (you will remember that a tort is a civil wrong not arising out of a contract).
The principle is that, if an act which is unlawful or voidable when done by an agent can be made lawful (or no longer voidable) by ratification, then that ratification will be valid, whereas if the act was initially totally void or of no legal effect then no purported ratification can cure what is incurable.
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Some acts done by an agent which were a wrong against the principal can be converted into lawful acts if the principal ratifies them. Say, an agent sells goods belonging to the principal which he/she has no authority or right to sell. This amounts to the tort of conversion.
However, plainly, the principal can ratify the transaction and, by so doing, exonerate the agent from liability. Alternatively, if neither principal nor agent has a right to sell those goods, ratification by the principal relieves the agent of liability for conversion, and substitutes the principal as the party liable. The wrong could be righted.
On the other hand, an act which is totally void from inception cannot be ratified. If the directors of a company make a contract which is ultra vires – that is, outside the scope of the Memorandum of the company – then it is not possible for the shareholders to ratify that contract (Ashbury Railway Carriage Co. v. Riche (1875)). (Note, however, that the
Companies Act 1989 has now largely abolished the ultra vires rule as between companies and outsiders. The validity of something done by a company cannot be questioned on the ground that there is no power to act in the company's Memorandum of Association and anyone dealing with the company in good faith is entitled to assume that there are no limits on the directors' powers.) In this instance, the directors would be acting as agents for the company, as principal. Equally, a forgery cannot be ratified. A principal cannot ratify a document which is null and void from its inception.
Some illustrations may make this clearer.
Hilberry v. Hatton (1864)
A, purporting to act as B's agent but without any authority, bought an article from C. C had no right to sell it, and A's purchase amounted to conversion. B ratified A's purchase.
HELD: B was liable for conversion.
Eastern Counties Railway v. Broom (1851)
The agent of a company assaulted a person on behalf of the company. The company ratified the assault.
HELD: The company incurred a civil liability for the assault.
Brook v. Hook (1871)
An instrument was signed by A in B's name, and without his authority. A's intention was to defraud.
HELD: B could not ratify the act.
Who Can Ratify an Act?
Only the person on whose behalf an act was purported to be done can ratify that act. That person – the principal – must be in existence and capable of being ascertained at the time the act was done, and must – both at the time of the act and at the time of ratification – be competent to ratify.
The fact of being in existence normally refers to companies. An agent cannot do an act on behalf of a company which has not yet been formed, and subsequently have that act ratified by the company after its incorporation (Kelner v. Baxter (1866)).
In Newborne v. Sensolid Ltd (1954), the claimant, Newborne, formed a limited company called Leopold Newborne Ltd. Before the company was registered as a limited company, a document bearing the name and address of the company was submitted to Sensolid Ltd. The document was signed "Yours faithfully, Leopold Newborne (London) Ltd" with the name of Leopold Newborne underneath. Sensolid Ltd signed the document and thereby agreed to purchase certain goods from Leopold Newborne Ltd: they later failed to accept the goods.
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The claimant's solicitors then discovered that Leopold Newborne Ltd had not been registered at the time of the contract, and so they substituted the name of Leopold Newborne for that of the company. Sensolid Ltd contended that Newborne was in fact trying to sue on a contract which he had not personally made, but which purported to have been made by a limited company which had not been registered.
HELD: No valid contract was formed upon which the claimant could sue. The company did not legally exist when the contract was made and Newborne himself could not sue as agent on behalf of a non-existent legal person.
The position has now been clarified by S.36 of the Companies Act 1985 which makes the company promoter personally liable on any pre-incorporation contracts.
It is not necessary that the purported principal is actually named at the time the act is done but it must be possible – if necessary – to describe him/her as the person who will be bound
– or, at least, the type of person (e.g. "I act on behalf of a well-known firm of London estate agents").
The intended principal must be competent at the time of the act. In Boston Deep Sea Fishing & Ice Co. v. Farnham (1957), a trawler owned by a French company was lying in an English harbour. The German occupation of France in 1940 turned the French owners into an alien enemy. A person, without the authority of the company, acted as manager of the trawler.
HELD: As the French company was an alien enemy at the time of the act, it was not lawfully competent to contract with a British subject. It could not, therefore, ratify the acts of the manager.
The principal must also be competent to ratify at the time of ratification. A mentally disordered person, for example, cannot ratify while still mentally disordered. Although the Companies Act 1989 has now largely abolished the ultra vires rule for contracts made by the company with outsiders, it still applies to internal matters within the company, e.g. if the directors are exceeding their powers. Thus, as principal the company can ratify an ultra vires act if the contract was made with an outsider.
Rules and Conditions of Ratification
(a)Ratification by a principal can have a retrospective effect – that is, the principal is, in effect, bound by the contract from the time when it was made by the agent, even though it was ratified only later. This is known as the rule in Bolton Partners v. Lambert (1888). It was held in this case that a ratification was effective notwithstanding the fact that a third party had given notice to the principal (between the time when the contract was made by the agent and the time it was ratified) that he was withdrawing from it.
This rule is subject to the proviso that, in the event that the agent made the contract specifically or by necessary implication subject to ratification by the principal, the offer or acceptance can validly be withdrawn prior to ratification (Watson v. Davies (1931)). The reason for this is that, if the contract is made "subject to ratification", this is a condition precedent to validity. It is, hence, not a fully valid contract until ratified.
(b)Even if the principal initially refuses to recognise a contract purported to be made on his/her behalf by an agent, and then subsequently changes his/her mind, this latter ratification will be as effective as if made in the first place – provided, however, that any third party could not be unfairly prejudiced by the principal's change of mind.
(c)However, ratification is not allowed in any case where a third party would be unfairly prejudiced by it. For example, if an act has to be done by or within a certain time, then it cannot be ratified after this time if to do so would be detrimental to a third party.
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Where there is no contractual term as to date of performance, ratification of a contract must be effected within a reasonable time – and, in any event, before the time for performance by the other party to the contract (Metropolitan Asylums Board Managers v. Kingham & Sons (1890)).
(d)A principal must have full knowledge of all relevant circumstances relating to the contract before he/she can properly ratify it – unless, that is, it can be shown that he/she intended to ratify the agent's act regardless of the surrounding circumstances.
For example, in Freeman v. Rosher (1849), an agent had his principal's authority to distrain for rent – that is, to seize a person's belongings for non-payment of rent.
The agent seized a fixture (which he was not entitled to do), sold it, and paid the proceeds to the principal. The principal received the money without knowing that it was a fixture that had been sold.
HELD: The principal had not, thereby, ratified the wrongful act of his agent.
What Constitutes Ratification?
There are a number of rules as to what constitutes ratification.
It may be either express or implied. Ratification by implication will occur if the principal, by his/her conduct, shows that he/she has adopted all or part of the contract. The receipt and retention of money derived from the contract with knowledge of the circumstances will count as adoption. Likewise, if the principal uses or disposes of goods derived from the contract, it will amount to ratification by implication.
If an agent exceeds his/her authority, mere silence by the principal after knowledge of the act will amount to ratification.
If the principal adopts part of a contract, this will serve to ratify the whole.
Oral ratification of a written contract is valid. However, if the contract is under seal, it can be ratified only by a document in writing and under seal.
Effect of Ratification
As we have seen, ratification is the adoption of the act of an agent who was not previously authorised to do that act, by the principal, so as to bind the principal. It serves to place all the parties involved in the transaction in the same position as they would have been in had the agent been properly authorised from the outset – that is, with the same rights, duties and liabilities.
Buron v. Denman (1848)
The Royal Navy, at the time, was bent on suppressing the slave trade. The captain of a British warship released the slaves and destroyed the property of a Spanish subject resident in Africa and carrying out slave-trading. The Foreign Secretary ratified the act of the captain.
HELD: Ratification turned the act into an Act of State, from which the aggrieved Spanish subject had no legal redress.
A more commercial example is Cornwal v. Wilson (1750). A factor (that is a person similar to a "land agent") contracted to buy goods on his principal's behalf. The contract price exceeded the limit of authority of the factor as agent. The principal subsequently took the goods and disposed of them.
HELD: By disposing of the goods, the principal had effectively ratified the contract, and he was, therefore, bound to pay the factor the full contractual price.
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D. CATEGORIES OF AGENTS
The scope for agency relationships is, of course, infinitely wide. Wherever one person acts in matters of contract for or on behalf of another, he/she is an agent. An agent can act for profit or reward, or can act gratuitously. However, there are various categories of commercial agent who, broadly speaking, earn their living by being agents for others. Some of these act solely as agents; others include agency duties within a wider sphere of activity.
Factors and Brokers
A factor is a person who is entrusted with the goods of another – with both their possession and their control – for the purpose of sale. A broker, on the other hand, buys and sells goods, or "things in action", such as stocks and shares, but he/she does not, normally, have physical possession or control over the items in which he/she deals.
Factors – or "mercantile agents", as they are sometimes called – had a very important commercial role in the 19th century, but this is less true today. As a result of instant communication and rapid transport, their function has, to a large extent, been taken over by brokers. However, an understanding of the law relating to factors is important, as it impinges on both sale of goods and on agency. Furthermore, a person who carries out the functions of a factor, by whatever name he/she uses, is governed by the law relating to factors. Such people may, nowadays, call themselves "brokers", or "shipping agents", or "commercial agents", or whatever. However, if they have the goods of another in their possession and under their control for the purposes of sale, or if they purchase such, they are factors. New regulations were introduced in 1993 concerning commercial agents and their contracts and these are covered later in this unit.
Factors Act 1889
The law relating to factors – partially statute and partially common law – was consolidated and amended by the Factors Act 1889. S.1 of the Act defines a factor or mercantile agent, as follows.
"The expression mercantile agent shall mean a mercantile agent having in the customary course of his business as such agent authority either to sell goods, or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods."
So, he must act as a mercantile agent in the course of a business as such. The mere fact of having the goods of another for sale does not, of itself, make that person a factor, and so, enable him to enjoy the benefits and incur the liabilities. He must be in the course of a business as such a factor.
The main provisions of the Act are outlined below.
(a)Where a mercantile agent is in possession of goods or documents of title thereto with the consent of the owner, then any sale or other disposition of those goods by him/her in the ordinary course of business is as valid as if he/she had the express authority of the owner to make that disposition.
In other words, as far as the purchaser is concerned, the agent's authority is unimpeachable, and the owner cannot claim that the agent had no authority to make the sale or disposition.
There are additional provisions to safeguard a purchaser in the event of the agent's authority having been withdrawn without the purchaser's knowledge, and in the event of sale by a clerk or other such person with the authority of the agent.
(b)Where a person, or a mercantile agent acting for him/her, who has either sold goods, or bought them, and is in possession of them, redisposes of them, then the
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subsequent buyer of those goods acquires as good a title as if the original owner had expressly authorised the sale. Again, this ensures the protection of third parties dealing with mercantile agents acting in the ordinary course of their business as such.
A broker or other person who does not have goods in his/her possession is subject to the normal law of agency, and third parties dealing with him/her have no special protection. We shall be discussing this issue later.
Estate Agents
A person employed by the seller of a house to effect a sale is commonly called an estate agent and she is only a limited agent. Of course, by express agreement she can be invested with full agency powers, but her implied authority is far less. She has implied authority to describe the property, and to bind the vendor in respect of statements as to its value, but she does not have implied authority to conclude a contract of sale on behalf of the vendor. Nor does she have implied power to receive a deposit. In the event that the vendor instructs an estate agent to sell, the agent has implied power only to sign a standard contract of sale, and not one containing special conditions. The agent has a duty to inform her principal of the highest offer received at all times before a binding contract has been entered into.
Auctioneers
An auctioneer is the agent of the seller. We have outlined earlier the provisions contained in the Sale of Goods Act 1979 relating to auction sales. In addition to these, at common law, an auctioneer does not have implied authority to give any warranties on the goods he sells, unless he is expressly so authorised. He does, however, have implied authority to accept deposits where it is the custom of the trade so to do (e.g. in sales of land or houses at auction). Furthermore, he has a lien on the goods he sells for the purchase price.
Bankers
Bankers are good examples of people who act as agents for their customers in respect of certain transactions, while acting in the capacity of debtor and creditor in other aspects of their duties.
Other Examples
We can now consider eight classes of people who are agents in respect of all or part of their duties.
Masters of Ships
These are, in many respects, the agents of the owners. They can, in certain circumstances, also act as agent for the cargo owners.
Solicitors
These have implied authority as agents to appear for a client, and accept service of writs, etc. Clients are bound by the actions of solicitors done on their behalf, carried out in the ordinary course of the practice. Both solicitors and barristers have an implied authority as agents to effect compromises on behalf of their clients on matters connected with litigation.
Travel Agents
These are, generally, agents of the client for the purchase of travel tickets and the making of travel arrangements. They may also be the authorised agents of the carriers (e.g. airlines, rail companies) to sell tickets.
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Insurance Brokers
These are, prima facie, the agents of the client to effect insurance. The fact that the broker's commission is paid by the insurance company does not affect this presumption, nor does the fact that he/she may solicit business on behalf of an insurance company – provided, that is, he/she is acting on his/her own initiative and not under instructions from the insurance company.
Stockbrokers
These are, essentially, the agents of the client. They have considerable implied authority as such but their function is outside the scope of this course.
Shipbrokers
Shipbrokers are agents who are employed by shipowners to negotiate ships' charters and to carry out all the transactions connected with the vessels while they are in port. The shipbroker attends to the entering and clearing of the ships, and to the collection of freights from the charterers.
Patent Agents
As a general rule, an inventor who wishes to patent an invention employs a patent agent on his/her behalf. This is, no doubt, owing to the fact that the law and procedure in connection with patents are extremely complicated. All patent agents must be registered.
Commission Agents
Commission agents are, generally, employed by foreign principals to buy and sell goods for a fixed commission. There are many types of commission agent, and no hard and fast rule can be applied to all cases. In some instances, the commission agent is, actually, a principal – but he/she takes his/her reward in the form of a fixed percentage instead of the best profit obtainable.
Del Credere Agents
These are special agents who (for an additional commission) are responsible to their principal for the solvency of and payment of the price by the buyer. The normal agency rule, as we shall see later, is that an agent who effects a sale on behalf of a principal is not liable to the principal if the buyer fails to pay. A del credere agent assumes this liability towards his/her principal. If the buyer fails to pay, the del credere agent must do so out of his/her own pocket.
E. DUTIES OF AGENTS TO THEIR PRINCIPALS
A paid agent owes various duties to his/her principal. Some of these arise out of the contract of agency, others apply in varying degrees, depending on whether the agency is for reward or gratuitous, and are implied by the common law or equity.
Contractual Agents
(a)Duty to Perform
The fundamental duty of an agent appointed under a contract is to carry out the agency contract in accordance with its terms, express or implied, and not exceed his/her authority. In Ferrers v. Robins (1835), an auctioneer was instructed to sell goods for cash only. Instead, he sold them, and accepted a bill of exchange in payment. The bill was later dishonoured.
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HELD: The agent was liable for the price.
If the principal's instructions (or the terms of the contract) are ambiguous, the agent will not be liable for breach if he/she fairly and in good faith interprets them one way, and acts accordingly. However, if the ambiguity is apparent, the agent must (if practicable) seek clarification before acting.
(b)Duty to Obey Instructions
An agent is required to comply with all reasonable and lawful instructions given by the principal in connection with the subject-matter of the agency, or the manner of carrying out his/her duties. This duty can, of course, be modified (or even excluded altogether) by the terms of the agency contract – and it is, in many cases, subject to the custom and usages of the trade. This is especially so in the case of a professional person acting as agent, who normally has a higher duty in respect of the rules and ethics of his/her profession.
(c)Trade or Professional Custom
The custom or usages of the particular trade or profession often serve to imply terms into a relevant agency contract.
However, before such a term will be implied, evidence must be given concerning the custom. It must be a genuine custom of the trade, and not merely what is normally done in the ordinary course of business. The courts will apply an objective test to ascertain whether the parties must have intended to contract subject to the particular custom or usage alleged to have been incorporated – that is, "would a reasonable person have expected it to apply?". In Hutton v. Warren (1836), Parke B had this to say:
"It has long been settled that, in commercial transactions, extrinsic evidence of custom and usage is admissible to annex incidents to written contracts, in matters with respect to which they are silent. The same rule has also been applied to contracts in other transactions of life, in which known usages have been established and prevailed; and this has been done on the principle of the presumption that, in such transactions, the parties did not mean to express in writing the whole of the contract by which they intended to be bound, but a contract with reference to those known usages."
However, before a custom will be inferred into an agency contract, the party who asserts it must provide evidence that it is:
Reasonable
Universally accepted in the trade or profession, or in the locality concerned
Certain, i.e. not ambiguous or vague
Not unlawful.
Nor must the custom be inconsistent with other terms of the contract.
A further use of custom is to explain technical terms of the contract, or to clarify terms which may be used in a different sense from the ordinary meaning of those words.
An example of an alleged custom not being implied was provided in Gibbon v. Pease (1905). An architect claimed he was entitled to retain plans and drawings after his work had been completed and he had been paid. He alleged that it was the custom.
HELD: If such a custom indeed existed, it was unreasonable, and would not be implied into the contract.
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(d)Duty to Perform the Contract with Diligence
It will, normally, be implied in every agency contract that the agent will carry out his duties with reasonable diligence. If he is unable to carry them out within a reasonable time, or is not prepared to, then he has a duty to notify his principal of this fact.
This is no more than the requirements placed on a party to any contract to perform it within a reasonable time if the contract does not specify a time for performance. Time is not of the essence of a contract unless the contract provides for it to be so.
Reasonable diligence is, of course, a matter dependent on the circumstances of the case. In Barber v. Taylor (1839), an agent was instructed to purchase goods from abroad, and send the bill of lading to his principal. He failed to release the bill of lading until several days after the vessel had arrived in the UK.
HELD: The agent was in breach of contract by failing to deliver the bill of lading within a reasonable time; 24 hours after arrival was considered a reasonable time.
(e)Duty to Exercise Due Skill and Care
The common law duty of an agent acting for reward is to exercise such skill and care in performing his/her duties as is reasonable and normal in the trade, profession or business in which he/she is engaged.
This common law duty now has statutory force by virtue of the Supply of Goods and Services Act 1982, S.13. We have already mentioned this Act in an earlier module, with regard to the supply of goods. Part II of the Act covers the supply of services, and the performance of an agency contract is one of service, even though the service entails the supply or purchase of goods. S.13 states:
"In a contract for the supply of a service where the supplier is acting in the course of a business, there is an implied term that the supplier will carry out the service with reasonable care and skill."
S.14 of the Act provides, likewise, that, in default of any stipulated time for performance, the service must be carried out within a reasonable time. In the context of an agency contract, this relates to the common law duty of diligence.
The duty of skill and care is a contractually implied term. However, failure to exercise reasonable skill and care also constitutes the tort of negligence. A long line of cases involving different types of person has established that (in most instances) claims for failure to exercise the necessary degree lay in contract and not in tort. A leading case is Bagot v. Stevens, Scanlon & Co. Ltd (1966), where the Court of Appeal held that, in the case of an architect, the duty lay primarily in contract.
Whether a claim against a professional person for failure to use proper skill and care is pursued in contract or in tort may seem to be of academic interest only. However, this is not necessarily so. There are different rules in contract and in tort as to which damages can be claimed (remoteness of damage) and when a cause of action arises (affecting the limitation period, i.e. over what period an action may be brought). Hence, there may be advantages for a principal to proceed against his/her agent who has failed to exercise proper skill or care under one or other of the heads. However, until recently, there was no option. The action lay in contract only – unless, in certain cases, the aggrieved party could claim that a professional person, as well as failing to exercise due care, had also failed in his/her duty to exercise professional competence.
However, in Batty v. Metropolitan Property Realisations Ltd (1978), the Court of Appeal held that to restrict the right to sue in either contract or tort to cases involving strictly professional negligence was illogical. It seems, therefore, that the breach of a
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