BUSN9123 Principles of Commercial Law
Workshop 4
Topic: Contracts: agency and authority
Aims:
- Practice legal problem solving in the context of a contract formed by an agent
- Identify the authority of an agent in a commercial transaction, liability for actions of an agent.
- Review some example contract templates and discuss the risks involved in using these documents without appropriate professional advice
Part A – Problem Question
David owns and operates a menswear store in Adelaide City. David gets most of his stock from wholesalers in Melbourne. Sometimes it is difficult for David to go to Melbourne so he engages a buying Agent, Steve, to purchase stock on his behalf. David and Steve enter an Agency Agreement where Steve is paid a small per cent of the value of the stock he purchases (once it is eventually sold by David). Initially, the terms of the Agency Agreement provide that Steve can enter into transactions valued up to $5000. The Agency Agreement also states that David is permitted to increase or decrease this limit whenever he wants to (so long as David gives notice to Steve).
Steve places orders (valued between $4000 and $5000) on behalf of David on a number of occasions and David pays for those orders. Most of these orders were placed with a company called PlonkyMenzwear Pty Ltd (“PlonkyMenz”). David later decides it is better to source some stock from overseas and that, commercially, it is better to limit the amount of stock he buys from Australian based wholesalers. Following this decision, David sends Steve an email telling him that he is now only permitted to make purchases up to $2000 in value. Steve ignores David’s email and makes a purchase of $4500 from PlonkyMenz. David receives an invoice from PlonkyMenz for $4500. David refuses to pay because Steve wasn’t authorised to place an order for this amount. However PlonkyMenz insists that David is liable and wants to sue David for breach of contract?
Who is liable to pay the $4500 to PlonkyMenz?
Principal – David
Agent – Steve
Third party – PlonkyMenzwear Pty Ltd
Example Answer
I – Who is liable to pay the $4500 to Plonky Menz Pty Ltd (“PM”
R – As a general point, a Principal is liable for acts done by the Agent on behalf of the Principal. Even where there is no actual authority, an agent may have “apparent authority” in the eyes of a third party, so that the Principal will still be liable for contracts with third party. Apparent authority may be present based on a previous course of dealings which suggests an agent has authority. (Summers v Solomon)
A – David’s liability pay depends on whether Steve has apparent authority. Here Steve previously had authority to enter into these types of transactions, ie transactions between $4000-$5000. David paid for these orders previously. This indicated to PM that Steve had authority. As per the agency agreement, David can reduce Steve’s limit. He did this according to the agreement, but didn’t notify PM. From the perspective of PM, Steve still had authority to enter into this type of transaction.
However, in exercising their authority, the agent is obliged to obey the lawful instructions of the principal. If they fail to do so they will be personally liable to the principal for any harm caused to the principal as a result of the agent’s breach of duty. (Bertram Armstrong & Co v Godfray). The facts tell us Steve “ignored” David’s instructions regarding the reduced limit. This means Steve liable to pay David for loss arising as a result of breaching with duty to obey David’s instructions.
C – Based on this, David is liable to PM for the $4,500. However, David should consider pursuing Steve (ie seek reimbursement for loss) for failing to obey instructions.
Disclaimer! Please note: This is an example only. There are multiple ways to word an answer to these types of questions. This example merely demonstrates how you follow the IRAC method and the level of detail expected for answering this type of question in this topic. In other words, this is not “the” answer, it is “an” answer. Each problem scenario depends on the particular facts. Each problem question needs careful consideration of the facts and careful thought about what is actually being asked.
Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711
The company secretary of Fidelis Furnishing Fabrics (FFF) hired cars on behalf of FFF from Panorama Developments. Some of these cars were hired by the company secretary for his private use, and FFF refused to pay for these cars because the company secretary had hired them without actual authority. The court decided that the company secretary had acted with FFF’s apparent authority, and FFF was therefore liable to pay for the cars. The court explained that by appointing the person as company secretary, FFF was holding him out as having the authority to do all the things that company secretaries normally do, including making contracts on behalf of the company that fall within the normal day-to-day business of the company.
Summers v Solomon (1857) 7 El & Bl 879; 119 ER 1474
The agent was employed as a manager of a jewellery shop, and authorised to order stock on behalf of the owner. The owner terminated the agent’s employment. The agent ordered more jewellery and took it with him when he left. The owner refused to pay the supplier for the jewellery, arguing that the agent did not have actual authority to order that jewellery. The court decided, however, that because the supplier did not know that the agent’s employment had been terminated, the agent had acted with the owner’s apparent authority, and the owner was therefore liable to pay for the jewellery.
Tooth v Laws (1888) 9 LR (NSW) 154
Laws was the owner and licensee of a hotel, and was named as such on a sign above the door of the hotel. Tooth regularly supplied liquor to the hotel. Laws sold the hotel to Kinchela, but the sign was not changed and Tooth was not informed of the change in ownership. Tooth continued to supply liquor to the hotel. When Kinchela failed to pay for the liquor, Tooth sought to recover the amount owing from Laws. Laws insisted that he was not liable since he was no longer the owner of the hotel, but the court decided that Laws was liable to pay for the liquor because when Kinchela ordered it, Kinchela was acting with Laws’s apparent authority.
Essington Investments Pty Ltd v Regency Property Pty Ltd [2004] NSWCA 375
The agent was acting on behalf of the principal in negotiating a contract with the third party. The principal had signed the contract but before faxing it to the third party for their consideration, the agent had made a number of handwritten changes to the contract. The third party signed the contract with the handwritten changes, but the principal later insisted that it was not bound by the handwritten changes because they had been made by the agent without the principal’s actual authority. The third party insisted that the changes had been made with the principal’s apparent authority and that the principal was therefore bound by them. The court decided that the agent had not acted with the principal’s apparent authority: the principal had done nothing to hold the agent out to the third party as having authority to make changes to the contract on the principal’s behalf.
Bertram Armstrong & Co v Godfray (1830) 1 Knapp 381; 12 ER 364.
In exercising their authority, the agent is obliged to obey the lawful instructions of the principal. If they fail to do so they will be personally liable to the principal for any harm caused to the principal as a result of the agent’s breach of duty.
Part B – Contract Example: Agency Agreement
Please have a look at the two sample Agency Agreements on the following website:
We will use these agreements as a prompt to review some contract law concepts, and also discuss the risks involved in using template legal documents.
