ABE Principles of Business Law 2008-1

Law of Agency 2: Authority, Liability and Termination 295

If the Agent Contracts Personally

When a person contracts as agent for another it does not necessarily follow that he did not also contract personally, whether by accident or design. The third party must know with whom he is contracting, and who is liable to him on the contract. Hence, if he thinks that the agent is fully liable, or he is led to believe this, then, in general, the agent will be personally liable. Alternatively, the agent may intend to perform the contract himself, and make himself liable in respect of it, either solely or jointly with the principal.

So, having stated the general rule that the agent is not liable, we must now look at the cases where he is (or may be) so liable.

The first and obvious instance is that of a totally undisclosed principal, where the agent contracts on the basis of personal liability. Whether, in any particular case, he has done so can be ascertained only from the contract itself or the surrounding circumstances.

Partners are automatically liable jointly with all their other partners for the debts and obligations of the firm (Partnership Act 1890, S.9).

Furthermore, "every partner is an agent of the firm and his other partners for the purpose of the business of the partnership" (Partnership Act 1890, S.5).

Hence, every partner who does any act within the scope of the usual business of the partnership is, in the first place, an agent and, in the second place, is personally liable (together with the other partners) for the consequences.

The agent may guarantee or stand surety for the obligations of his principal. This will, obviously, have the same effect as if he had contracted personally, albeit his liability is secondary to that of his principal.

The agent may disclose the fact that he is acting as an agent but not identify the principal. Cases in this instance hinge on whether the identity of the principal matters. In some contracts, it is plainly essential that the third party knows precisely who the principal is. It may be that performance by the principal involves special skill or expertise, or perhaps that it involves substantial liability. In the first such example, the third party will want to be satisfied that the principal possesses such skill. In the second, he will need to know whether the principal is sufficiently substantial to be able to meet any likely liability. So, in all cases where the identity of the principal is a material factor, if the agent fails to disclose the name of his principal, he will be deemed to be personally liable on the contract, in addition to the liability of his principal.

On the other hand, in certain types of contract, the identity of the principal is irrelevant. Such a case would be at an auction. The auctioneer is agent for the vendor. A prospective buyer bids, and it is plainly of no significance whatsoever who the vendor is. Hence, the agent is not personally liable if he does not disclose his principal's identity.

It all depends on the construction of the contract and the surrounding circumstances.

There used to be a very strong presumption that an agent who contracted on behalf of a foreign principal was contracting personally. This dated from the days before rapid communications, and when details of foreign businesses were not readily available in England. However, (as we saw earlier), in Teheran-Europe Co. Ltd v. S T Belton (Tractors) Ltd (1968), it was held that this rule was out of date. The fact that the principal is foreign is merely a factor to be considered if the question of the personal liability of the agent arises. It may, perhaps, indicate that the agent intended to undertake liability in addition to the principal.

©ABE and RRC

296 Law of Agency 2: Authority, Liability and Termination

Del credere agents always undertake personal liability. They are agents of the seller, and they guarantee to their principals that, if the buyer does not pay, they will do so. In this respect, their liability is not, of course, to the third party. They do not guarantee to him that the principal will perform.

Contracts under Seal and other Written Contracts

Because of the importance of and strict rules regarding deeds and other contracts under seal, the rules as to the agent's personal liability are correspondingly strict.

The rule here is that, if an agent executes a deed, it must be perfectly clear that what she is doing is executing the principal's deed. Hence, if she executes it in her own name, she is personally liable. It does not matter that she may have been described as acting for a named principal. The deed must make it absolutely clear that the agent is the properly authorised agent or attorney of the principal for the purposes of executing the deed.

When drawing, endorsing or accepting a cheque, a bill of exchange or promissory note, an agent who writes after her signature words indicating that she is doing so as agent for a named principal is not personally liable on the instrument.

However, if she merely writes the word "agent" or similar, without disclosing the name of the principal, she will be personally liable in respect of it.

In the case of written contracts other than deeds or negotiable instruments, it is a question of the proper construction of the contract as to whether personal liability will fall on the agent.

If an agent signs a contract in her own name without stating that she does so as agent, she will be personally liable, unless the contract itself plainly indicates that she is signing in a representative capacity. However, merely describing herself as "secretary", "director", "agent", etc. does not, of itself, indicate that she is not intending to contract personally. Once again, depending on the wording of the whole document it is usually necessary for the principal or person on whose behalf she purports to contract to be named.

In the case of a person signing on behalf of a company, he is usually signing as the company, and not merely as an agent for it. In the former case, personal liability will not arise.

Non-existent Principals

Apart from straightforward criminal fraud, with which we are not concerned, the instances where an agent contracts on behalf of a non-existent principal are likely to arise where he/she purports to contract on behalf of a company which has not yet been formed. This problem will arise when you study company law but it is not always possible to keep legal matters in watertight compartments, so a brief survey here will not come amiss.

The principle is that a company is a legal person. Before it is "born" (or, to be accurate, properly registered according to the law of the country in which it is formed), it does not exist. However, acts and things often need to be done by the promoter of the company before it is actually formed. It may be that the intention is that the company shall purchase certain property, or exploit certain patents, or other rights. Whatever it is, the promoter may wish to tie things up before actually forming the company. If he/she does this, it cannot be done on behalf of, or as agent for, a non-existent entity. The principal is always personally liable on such contracts, and the company (when it is formed) cannot be bound by them (Re English and Colonial Produce Co. Ltd (1906)). Nor can the company itself, when formed, enforce a contract made before its incorporation, against the other party to it (Natal Land, etc. Co. v. Pauline Colliery Syndicate Ltd (1904)). Strictly speaking, a company cannot, after its formation, ratify a contract made before incorporation (Kelner v. Baxter (1866)).

©ABE and RRC

Law of Agency 2: Authority, Liability and Termination 297

What happens is that the promoter makes the contract in his own name, and then, when the company is duly formed, he assigns the contract to it. He may protect himself at the time of originally making the contract by inserting a provision that it will be a condition precedent to the validity of the contract that the company duly does adopt it.

However, usually through ignorance, people often do purport to enter into a contract as agent for a non-existent company – in other words, for a non-existent principal.

The common law rule in such an event is that the agent is personally liable. This is reinforced by statute. The Companies Act 1985 states:

"Where a contract purports to be made by a company, or by a person as agent for a company, at a time when the company has not been formed, then subject to any agreement to the contrary the contract has effect as one entered into by the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly."

Where the Agent is really the Principal

Sometimes, a person will describe himself as an agent when he is, in fact, the principal himself. Such a situation arose in Gardiner v. Heading (1928). A builder had, in the past, done work for a company, the order for it being signed by Mr Heading, a director. Then, Mr Heading ordered further work, purporting to do so on behalf of the company. The work was duly done, and part of the charges were paid by the company. The builder was then told that the work was not for the company at all but for other principals. It was held that Mr Gardiner was the person who gave the order, and he was the true principal. He was, accordingly, personally liable.

By the same token, of course, if the agent is the real principal, he is entitled himself to sue in respect of the contract.

Breach of Warranty of Authority

An agent may be liable to a third party in respect of a contract, if it can be shown that she warranted to the third party that she had an authority which she did not, in fact, possess. There is a general presumption that, if a person purports to act as agent for or on behalf of another, she is deemed to represent that she is duly authorised. This is, in reality, an offshoot of the law of misrepresentation, which we have discussed in a previous study unit. Consequently, if a person is induced to contract, and does, in fact, contract as a result of a representation of agency, then, if he suffers loss or damage by reason of the representation being untrue, the purported agent will be liable.

For example, in Yonge v. Toynbee (1910), it was held by the Court of Appeal that an agent was liable for breach of warranty of authority after his authority had, unbeknown to him, been terminated by the insanity of his principal. It was, at one time, thought that this liability was a tort, and could arise only if the agent had been negligent. However, this is not so, as Yonge v. Toynbee shows. It stems from the contractual relations of agent and third party.

The agent warrants only that he has authority to contract for his principal. He does not warrant that the principal is solvent, or that he will properly perform the contract, or even that he will perform at all.

Of course, if an agent does not have actual or apparent authority, he will normally be personally liable anyway, so the question of imposing an additional head of liability, called "breach of warranty", is not likely to be necessary. However, this will not always be so, and it is, therefore, a "fallback" position for an injured third party to take. For instance, in Starkey v. Bank of England (1903), a stockbroker, acting in good faith, induced the Bank of England to transfer some consols (i.e. funds emanating from the Consolidated Fund) to a purchaser, on the strength of a power of attorney which was, in fact, forged. The holder of the consols

©ABE and RRC

298 Law of Agency 2: Authority, Liability and Termination

had a right of action against the bank for restitution. The stockbroker, as agent, was held liable to indemnify the bank against the claim by reason of his breach of warranty of authority.

Liability of Agents in Respect of Money

Normally, if an agent receives money for her principal, she is not liable to repay it to the third party. However, in certain circumstances she may be:

The obvious case is where the agent has contracted personally (by accident or design). In that event, the third party who paid the money looks to the agent as principal and, therefore, the agent is liable for any repayment that may be due.

If the agent has acted fraudulently or has obtained the money by means of duress, then she is liable to repay it.

Liability of Agents for Wrongs they Commit on the Principal's Behalf

Should loss or injury be suffered by a third party as a result of some wrongful act or omission of an agent, then the agent is liable for it to the third party. This applies regardless of whether the agent was acting with the principal's authority or not, and the liability is the same as if the agent were acting purely on his own behalf.

This form of liability will usually arise as a result of a tort committed by the agent. If, for instance, he is negligent, or if he deceives the third party, he will be liable.

Of course, as we have already mentioned, if the agent is also a servant, his employer will be vicariously liable if the tort was committed in the course of the agent's employment. However, if he is not a servant, or was not in the course of his employment, then the agent is personally liable.

Bennett v. Bayes (1860)

A distress warrant was signed by an agent (a distress warrant is a warrant for the seizure of property after a judgment debt has not been paid). The warrant was issued but, before it was executed, a tender of payment was made by the debtor. The agent wrongfully refused it.

HELD: The agent was personally liable for the damage caused by the illegal distress.

F. TERMINATION OF AGENCY

By Revoking the Agent's Authority

An agent who is appointed by contract may be appointed under numerous circumstances and conditions. The appointment may be for a specific task (e.g. to sell a house), or for a limited time (e.g. for one year only) or it may be indefinite. Consequently, the agency contract may terminate under equally diverse circumstances. As between principal and agent, the termination of the contract serves to revoke the agent's authority. However, as between agent and third party this may not necessarily be the case. The agent's actual authority will be revoked – but, if the third party is unaware of the revocation, then the agent's apparent authority may subsist.

The seven circumstances under which an agent's actual authority is revoked are set out below.

©ABE and RRC

Law of Agency 2: Authority, Liability and Termination 299

(a)Agreement

Like any other contract, an agency can be terminated by agreement between principal and agent. This is self-evident.

(b)Completion

If the agency is for a specific task, the authority of the agent automatically ends when that task is completed.

For example, in Blackburn v. Scholes (1810), a broker was employed to sell goods for the principal. It was held that, immediately the sale was completed, his authority ceased, so he could not subsequently alter the terms of the contract by agreement with the purchaser without new authority from the principal.

Likewise in Gillow & Co. v. Lord Aberdare (1892), an estate agent was commissioned either to sell or to lease a house. He succeeded in letting it but then later negotiated the sale of it. It was held that, having let it, his job was done, and he had no authority to sell. He was not entitled to commission on the sale.

(c)Expiration

If the agency is for a specific period of time, it is determined when that time has expired.

Equally, if it can be reasonably inferred from the circumstances that the agency was for a limited (although not specific) time then it will lapse after a reasonable time.

For instance, in Lawford & Co. v. Harris (1896), a stockbroker was instructed to buy shares subject to fixed limits. It was held that his authority ceased at the end of the current account period.

(d)Specified Event

It may have been agreed, or be inferred, that the agency will cease if a certain event occurs. Then, it will terminate if and when that event does occur.

(e)Frustration

The frustration of the contract of agency will serve to terminate the authority of the agent. This is likely to occur if the subject-matter of the agency is destroyed (e.g. if an estate agent is commissioned to sell a house and, before sale, it is burnt down). Or if something happens which makes either the agency or its objects illegal or impossible (e.g. an agent in a foreign country becoming an alien enemy owing to outbreak of war between the UK and that country).

(f)Death/Winding-up

The authority of an agent, is, normally, terminated by the death or insanity of either the principal or the agent, or the bankruptcy of either. (Re insanity, see Yonge v. Toynbee (1910). However, under the Enduring Powers of Attorney Act 1985, it is now possible to create an enduring power of attorney, which will not be brought to an end by the donor’s mental incapacity). In the case where either party is a limited company, the winding-up of the company has the same effect.

(g)Revocation

Lastly, if either the principal or the agent revokes the agency or renounces it (whether or not the act of so doing is in breach of the contract), the agent's authority will be revoked. If it is done in breach of contract, then the innocent party – principal or agent

– will have the right to seek damages for breach of contract. However, this will not affect the fact that the authority of the agent is terminated. In certain circumstances, the innocent party may also be able to get an order of specific performance from the

©ABE and RRC

Law of Agency 2: Authority, Liability and Termination 301

sense. If, in reliance on his/her legal right to be reimbursed or indemnified by the principal, the agent incurs a liability, it would, plainly, be most unjust to allow the principal to escape from the bargain by withdrawing the agent's authority.

Effect of Revocation on Third Parties

As we said earlier, a revocation serves to terminate the actual authority of the agent, whether that revocation is or is not in breach of contract. The only exceptions are those mentioned above. However, the withdrawal of actual authority will not necessarily destroy the apparent authority of the agent. Nor will his/her usual authority necessarily be removed.

The principle involved is that, if a principal has held out to third parties that his agent has authority to do certain things, then the principal will not be allowed to deny that the agent was so authorised to third parties who have dealt with the agent in good faith and without knowledge of his lack of authority. The holding out of the agent's authority may be by words or by conduct, or it may be by permitting some other person to so hold out, without dissenting. So, if the agent's authority is withdrawn, it is up to the principal to notify all third parties who may be affected of this fact. If he neglects to do so, he will be bound by the acts of his former agents.

This, in principle, is no different from the situation where the agent is acting under apparent authority in other circumstances – where, for example, he/she has exceeded his actual authority but it becomes more difficult where the authority of the agent is revoked owing to the death, bankruptcy or insanity of the principal. In the case of death or bankruptcy, the principal is in no position to notify third parties. As a result, the doctrine of apparent authority does not apply. In Blades v. Free (1829), a man who was living with a woman held out to certain tradesmen that she had authority to pledge his credit. She duly did so and, for some years, she purchased goods in his name. Then he went abroad, where he died. The woman continued to run up bills for his account.

HELD: The man's estate was not liable for the debts incurred to tradesmen who were not aware of his death.

Logically, the same should apply in the event of the insanity of the principal but it appears that this is not so. In Drew v. Nunn (1879), a husband held out that his wife had authority to pledge his credit (see the previous study unit, Section A). He subsequently went insane. A tradesman, relying on the authority originally given by the husband, and without knowledge of his insanity, supplied goods to the wife on credit.

HELD: The husband was liable for the price.

Of course, in all these instances the innocent third party is not totally without redress. Provided the agent was aware at the time she made the contract that her authority had been revoked, for whatever reason, the third party will have grounds to sue the agent for breach of warranty of authority. The effect will be the same: he will get his money, indirectly by way of damages instead of directly by way of debt.

In the case of powers of attorney, the Powers of Attorney Act 1971, S.5, provides that, where a power is revoked, any person dealing with the attorney without knowledge of the revocation is protected, in the sense that the transaction is deemed to be valid to the same extent as if the power were still in existence. Likewise, the attorney is protected if he/she is not aware of the revocation. He/she incurs no liability to the donor of the power (the principal), nor to any other person.

©ABE and RRC

302 Law of Agency 2: Authority, Liability and Termination

©ABE and RRC

©ABE and RRC

304 Employment Law 1: The Contract of Employment

A.DISTINCTION BETWEEN INDEPENDENT CONTRACTOR AND EMPLOYEE

Definitions

(a)Contract of/for Service

The basis of the employer/employee relationship is the contract of employment, which in general is an agreement whereby an employee agrees to provide work or a service in return for remuneration by the employer. The contract of employment is a contract of service and not for services.

Under a contract of service a person places his/her labour at the disposal of another and a relationship is constituted which in past days was called that of master and servant.

In the contract for services, on the other hand, a person who operates an independent business agrees to carry out a task for another and the relationship is that of employer and independent contractor.

X's chauffeur is her employee, but a taxi-driver is an independent contractor. If Y wants to build a garage on his land, he has two courses open: he can employ a bricklayer and other tradespeople under contracts of employment or he can entrust the work to a builder as an independent contractor.

(b)Employment by a Corporation

The majority of employers in the UK are corporations, whether a corporation set up by statute, e.g. a limited company under the Companies Acts, or by charter, e.g. the British Broadcasting Corporation. Try to remember the following points which will help you to identify who the employer is:

A corporation is a legal entity which is totally separate from the persons who actually form the company. Therefore, no matter which particular individual gives orders or carries out acts on behalf of the company, it is the company which is responsible.

A director of a company, even though he/she may be one of the owners of the company, is not the employer. The company is the employer. A director is merely acting on behalf of the company.

A manager, no matter how high in the managerial hierarchy, is not the employer. He/she may well have the authority to act for the employer, or even as the employer in certain situations. Because a corporation is an abstract legal entity, it must carry out its actions through various individuals; in practical terms it can do nothing of itself. Therefore in many cases a manager or director, because of his/her actions, may appear to the employees to be the employer. Nevertheless, the corporation is the employer, and normally must accept ultimate responsibility for the actions of its delegates.

It is important to distinguish between employees and independent contractors, although the distinction is sometimes hard to draw. Over the years, the courts have formulated various tests for deciding between employee and independent contractor.

©ABE and RRC