Q6:

A principal-agent problem arises when there is a conflict of

interest between the agent and the principal, which typically
occurs when the agent acts solely in his/her own interests. Arya
(A) may be Pete’s (P) Agent. Whether the various contracts Arya
negotiates bind Pete depends on whether Arya had actual,
apparent authority from Pete to conclude those contracts. Arya
and Pete’s liabilities are also affected by whether the agency
relationship was disclosed to the third party or not.
Agency is defined as a relationship created by contract or by law
where one party principal grants authority to another party agent
the agent acts on the behalf of and under control of the principal
to deal with a third party. However, recent cases suggest that
control is not the crucial factor, but whether the Agent is
financially accountable to the Principal (Kieran Mullin case). In an
agency relationship, principal is defined as the person who gives
authority to the agent (Montgomerie v UK). An Agent is someone
who acts on behalf of another person (the Principal) to negotiate
contracts between the Principal and a third party (Queen v Kane).
There are two types of agencies i.e disclosed agency and
undisclosed agency. Where the third party knows that it is dealing
with an agent and the principal is identified the agency will be
disclosed. There is no legal requirement that agency be disclosed.
So, where the third party did not know that it is dealing with the
agent it is undisclosed agency. Principal will only be liable for
actions of the agent if there exist a relationship between the
principal and agent.
From the above definition of agency it can be concluded that an
agency relationship can be created expressly or impliedly by
agreement, under the doctrine of apparent authority or by
operation of law. No formalities are necessary. Here, Arya was ex
owner but after Pete acquired the shop Arya continued as the
manager. And hence it means that Pete and Arya agree that Arya
will negotiate with third parties for Pete. This is an express
agreement for agency relationship between Pete and Arya. Pete is
the principal and Arya is the general agent.
In absence of P, A negotiated and concluded various contracts as
given in the scenario. P will be advised by considering two
factors. Firstly, the nature of the agency P has given to A to
manage the restaurant in her absence. Secondly, does A have the
authority to bind P to these various contracts or not. Each
contract will be discussed separately.
(1) P has instructed A to negotiate with the suppliers to reduce
the prices to at least 12%. But has agreed to accept deliveries
weekly instead of daily and buy an agreed minimum per week. It
is no where mention in the facts that suppliers didn’t know that A
is agent of P so the nature of agency here is disclosed agency. P
will be liable if A has actual or apparent or usual authority to
contract on his behalf.
Whether an agent has actual authority to enter into a particular
contract is a question of the fact. Actual authority is where the
principal has given prior consent to the agent acting on his behalf
(Jacob v Morris). The agent will act under the terms of the
contract and will do what is prescribed. Where the agent has
authority expressly given by the principal it is express actual
authority (Aviva Life & Pensions UK Ltd case). P appointed A as
the manager of the coffee shop and instructed her to renegotiate
with suppliers for 12% reduction in their prices. So, A has the
express actual authority to renegotiate with the suppliers and
make sure 12% prices is reduced. However, actual authority may
also be implied by the parties conduct. For instance, the
appointment of someone to the role of Managing Director of a
company authorized him to do anything that was within the usual
scope of that office (Hely-Hutchinson v Brayhead Ltd).
Accordingly, courts will imply any authorisation necessary to
allow the Agent to do anything ordinarily incidental to carrying
out the role he has expressly been given. As a manager ordinarily
can buy and negotiate deals with suppliers and accept few things
to fulfill a given task, this could give A the implied authority to
conduct this transaction. P instructed her expressly to renegotiate
to the suppliers, so A renegotiated with the suppliers but she also
agreed and accepted weekly deliveries instead of monthly and to
buy an agreed minimum per week which P did not instructed her.
For that it can be argued that A had implied actual authority
because it is necessarily incidental to the execution of A’s express
actual authority as per the express instructions. And hence here
usual implied actual authority may be applied because A as an
agent (manager) is implied to do something which is usual in A’s
profession for the purposes of carrying out A’s express actual
authority. In case of Rosenbaum it was decided that to sign to
end contracts was implied actual authority because without that
agent cannot buy the land on behalf of principal who expressly
asked him to do so. However, it is for the courts to decide if A’s
acceptance of weekly deliveries instead of daily and agreement to
buy the agreed minimum per week on behalf of P was necessarily
incidental to make sure 12% reduction in supplier’s prices or not.
Because on the contrary to Rosenbaum in case of Bryant, Powis &
Bryant Ltd with the express actual authority of agent to buy
goods did not have implied actual authority to borrow money. It’s
more likely that A did not have implied actual authority because
facts don’t mention that without accepting weekly deliveries
suppliers and to agree to buy agreed minimum per week
suppliers would not have agreed to reduce their prices.
An agent cannot have actual authority when (1) he exceeds an
express limit on his authority or (2) do something which is
expressly prohibited by the principal (Waugh v HB Clifford and
Sons Ltd). P did not expressly prohibited or restricted something
in particular which A was not supposed to do. But exceeding the
express limit by accepting what was not asked by the P or
prescribed by P can be argued. P can argue that A’s conduct is
not within the limits of her authority and if accepted by courts it
will cancel out A’s implied actual authority as well.
Now if not actual authority A may have apparent authority.
Apparent/ostensible authority is where the third party dealing
with the agent did not know the terms of the contract of the
principal and agent (Hely-Hutchinson case). To establish apparent
authority the four elements provided by case of Freeman and
Lockyer v Buckhurst Park Properties Ltd has to be established.
(1) Representation by the principal. Agent must be represented
by the principal to the third party that he can act on his behalf.
Representation can be express, implied, written or oral. If
representation comes from the agent than principal will not be
bound (Nayyar v Sapte) with the exception of case First Energy
Ltd v Hungarian International Bank. If the representation of
“authority” comes from the agent himself even than principal will
not be bound (Armagas case). P makes no express
representations. However, by placing someone in a position, a
principal impliedly represents to the whole world that the Agent
has the usual authority of someone in that position. So, A’s
authority was impliedly represented by P. (2) Reliance on the
representation by the third party. The third party (suppliers)
agreed for reducing the cost and selling her on agreed minimum
per week with A which means that it relied on the representation.
The third party cannot say that they wouldn’t have relied on the
representation if they didn’t know about the restriction on A’s
authority. (3) The third party alters their position to detriment.
Not necessarily financial detriment has to be shown. The only
detriment that is required is that of entering into the contract
(The Tatra case). Which the third party did in the given scenario.
(4) The agent did not purport to act as principal. In the given sets
of facts it is no where suggested that A purported to act as the
principal. So, as a result it can be concluded that even if A did not
have actual authority due to lack enough supportive argument
that A acted reasonably and did what was necessarily, A had
apparent authority. And hence P will be bound by the contract
even if it has been established that A went and acted beyond his
authority. This is because the concept of agency is based on the
concept of estoppel and not the consent of the principal.
(2) A bought a new refrigerator for £500. P clearly wanted the
shop to be more profitable by reducing the cost. A tried to get a
the refrigerator repaired but couldn’t get it done because of the
reason mentioned in the facts. A saved food worth £300 from
getting wasted. The nature of the agency for this purchase
between A and T (third party) is disclosed because facts does not
suggest the opposite.
A did not have actual authority to buy the refrigerator because P
no where asked him to do so expressly.
The fact that if A wouldn’t have bought a new refrigerator it
would have caused a loss of £300. This attracts discussion on
agency of necessity. For agency of necessity certain conditions
have to be fulfilled. (1) Principal’s property is in possession of
agent. In P’s absence A had the control of the coffee shop being
the manager which means has P’s property in possession. (2)
Agent is unable to obtain instructions from the owner. P went for
holidays which no where means that he became unreachable.
This criteria is now a lot more difficult to establish than it was
before because of modern ways of communication. Now a days
communication is so fast and easy that it is all most impossible
for anyone to prove that the person was unreachable and could
not be contacted. So, A could have contacted and made P aware
of the situation first before just making a purchase by going out
of her authority. (3) An emergency threatening the property.
Mere hardship or inconvenience is not enough (Sachs v Miklos).
Wastage of food worth £300 will be argued that it was an
emergency situation. But on the contrary A bought a new
refrigerator for £500 means it’s a loss for P as the refrigerator
could be repaired. Where than will come the fact that the repairer
didn’t because of the fact that A asked the suppliers to reduce the
cost. It is for the courts to decide if it was really a situation of
emergency or not. (4) Agent takes action in good faith which is
commercially reasonable, proportionate and in interest of
principal (Prager v Blatsipel). The action taken by B may be
commercially reasonable but may be in interest of P but P would’t
like it because P wanted to reduce the cost which it didn’t.
Despite al this agency of necessity derives from peculiar position
of the master of a ship and affords no analogy on the case of
ordinary agent (Hawtayne v Bourne). In case of The Choko Star
the master (agent) of a ship commissioned salvors from Europe
to save his ship, which was sinking in an Argentinian river. Courts
held that it was not out of necessity and agents can only use
agency of necessity when it is actually necessity. So, here agency
of necessity will not be created because of it’s strict approach.
A may have apparent authority. For A to have apparent authority
the above mentioned four conditions of the Freeman case have to
be satisfied. A is P’s manager so representation is implied. T sold
the refrigerator which means that T relied on it. Mere contract is
sufficient as far as detriment is concerned. There’s nothing
suggestive on the facts that A purported to act as the principal.
So, it is more likely that A will have apparent authority.
(3) A terminated contract with cleaning company and entered
into another cleaning contract with the company she worked
before. Nature of the agency will be discussed below. A did not
have actual authority to do this because P did not instructed her
to do so.
As far as apparent authority is concerned four conditions have to
be satisfied. There are 2 main problems. (1) Saying that it’s been
my shop for years can amount to her being making the
representation. Which means if it is so the argument for apparent
authority will collapse because representation has to be from P.
Although there’s an exception to this in case of First Energy
Hungarians International Bank in which despite the fact agent
made representation principal was liable and apparent authority
existed. But this is not applicable here. (2) The fact that the
company (T2) with whom A contracted was in contract with A
earlier when she was the owner. Which means they would have
considered the owner. And hence it is may be undisclosed agency
and so apparent authority will be impossible.
The rare case of Watteau v Fenwick might apply because the
facts are similar. A was the ex-owner. T2 was dealing with A
when she was the owner so they might have assumed that she is
still the owner. However, the facts are silent whether they
assumed her to be still the owner or not because her statement
to the manager creates a doubt. Anyhow apply the principle of
Whatteau it will be said that in case of an undisclosed agency A
had usual authority given to a character of that nature. This case
is a bad law (per incarium decision) not overruled yet never
applied (in case of Jerome judge said it is difficult to apply it’s
reasoning) and criticized a lot. The first decision in Kinahan v
Parry was the only instance when this decision was supported.
The law is no longer applicable in Canada and some academics
have suggested that soon it will be overruled in UK too if a same
case appears. A lot of controversy and puzzlement surrounds this
decision so it is hard to say that if courts would re-apply
Whatteau following the precedent or will overrule it and correct
the mistake developing a certainty in this area of law.
Conclusion:
For the first contract it is more likely to be apparent authority
which will bind P. However, actual and apparent authority can co-
exist and coincide (Sealy) so it may be both. For the second
contract it will be again more likely to be apparent authority
which will bind. For the third contract it is uncertain to say a final
verdict because the law on usual authority is very uncertain and
unpredictable.