Circumstances Of An Agency Relationship

An agency relationship arises when one party, known as the principal, authorizes another party, known as the agent, to act on the principal’s behalf and the agent agrees to do so.

“mutual consent" agency relationship is built on the mutual consent between the two parties (Garnac Grain Co. Inc. v HMF Faure & Fairclough Ltd [1968] AC 1130 at 1137), given by both of the parties, either expressly or by implication from their words and conduct

Apparent authority

Agent will have authority within the scope of what has been agreed, and the legal relations of the principal will be affected, usually by entering into a contract which is binding to the principal

When agent has acted in good faith, knowing to be exceeding their authority (Gordon), he might be liable to the third party for misrepresentation or breach of the agent’s warranty of authority  this is the case here, but Hebridean decides not to press charges against Gordon, given the weak financial condition of the agent

Third party is protected, since it can accuse the agent for misrepresentation and also can often look to the principal on the contract entered into, as this was what the third party had bargained for

There are circumstances in which the principal is bound by the unauthorized acts of its agent

“Reasonable expectations of honest men must be protected"  Lord Steyn in First Energy UK Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194 at 196. ( Steyn LJ said that a "theme that runs through our law of contract is that the reasonable expectations of honest men must be protected. It is not a rule or a principle of law. It is the objective which has been and still is the principal moulding force of our law of contract.), however, the difference wrt this case is that the principal had not accepted the offer by the time the third party had decided to withdraw;

Apparent authority: intended to protect the interests of the third parties who reasonably believed that the agent was authorized (D. H. Bester, The Scope of an Agent’s Power of Representation, 1972; GHL Fridman, The law of agency, 7th edn., London: Butterworths 1996) given that they had concluded transactions before, Hebridean reasonable believed that Gordon was authorized (again) by Scott to conclude contracts on the company’s behalf the principal, Scott, is nevertheless, bound

Gordon does not exceed its authority, but does not have authority to act on the behalf of Scott now

For apparent authority to be established, the principal must in some way have manifested to the third party that the agent had the power to enter into the transaction in question: in this case, Scott had already worked with Gordon as its agent in transactions with Hebridean, and it was reasonable for H to believe that G had authority this time as well, even though it had come in the office to present the products of a different principal, Dawson (he was entitled to work for more principals at the same time and Scott seemed to have agreed to this, given that they had already worked together) this representation of authority has been made implicitly: the agent was appointed in the normal position he had already been given; the principal has limited this authority, but this is unknown to the third party, who reasonably believes that G had authority (Gordon, on the other hand, has acted in bad faith) (Unauthorised Agent)

A representation that the agent has authority can only be made by the principal, and not any other person, including the agent, to avoid any person claiming to have authority and binding the principal this way. The agent himself cannot make representations as to what he is authorized to do (Armagas Ltd v Mundogas SA (The Ocean Frost) [1986] AC 717)

If a principal creates the impression that an agent is authorized but there is no actual authority, third parties are protected so long as they have acted reasonably. This is sometimes termed "agency by estoppel" or the "doctrine of holding out", where the principal will be estopped from denying the grant of authority if third parties have changed their positions to their detriment in reliance on the representations made.

Freeman & Lockyer (a firm) v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 at 503: the apparent authority exists to protect the ultimate expectations of third parties and as such the doctrine can only be invoked against a principal if the third party has in some way relied upon the representation made: Hebridean has relied on the representation, considering that Gordon had authority, given their previous agreements entered into on behalf of Scott third party changed its position by entering into a contract with Scott (sending the offer at least)

We know that Hebridean has relied upon Gordon’s having authority, given that H asked G if they could buy the products from Scott, the principal for whom G had worked before in contracts with H

Lloyd v Grace, Smith & Co. [1912], AC 716: the fact that the agent may have been acting fraudulently to benefit himself rather than his principal (given the case that G was concerned with the current situation in the airline industry and was afraid he could not make any profits or enter into profitable contracts) does not of itself mean that the principal is not bound if what the agent has done is within the scope of his apparent authority; as long as the third party reasonably believed that the agent was acting properly, the third party is deserving of the law’ protection

Estoppel: it is not a cause of action, it just applies to cases when a person, by his words or conduct, has led another to believe in a particular state of affairs; the former will not be allowed to go back on what he has said or done when it would be unjust or inequitable for him to do so (Moorgate Mercantile Co Ltd v Twichings [1976] QB 225 at 241)  the principal is stopped from denying the fact that the agent had authority, given that H reasonably believed to be the case and relied upon this; also estoppels means some change of position in reliance on a representation, the change in position being the entering into a contract

Ratification

Ratification provides a means by which the principal can take the benefit of an agent’s unauthorized acts. Ratification arises where the agent was initially unauthorized (Gordon) and the principal wishes to take the benefit of the agent’s act (enter into the contract for the manufacturing of a special item for Hebridean); the principal can do so by adopting what its agent has done and by so doing will retrospectively clothe the agent with authority from the outset

Ratification is “equivalent to antecedent authority" as mentioned in Koenigsblatt v Sweet [1923] 2 Ch. 314 at 325, per Lord Sterndale M.R. (Bowstead); the intention of the parties is given effect to retrospectively

Ratification can apply to cases where the person whose act is ratified is already an agent, and where he is not an agent at all

In contract law, the need for ratification can arise in two ways: where the agent attempts to bind the principal despite lacking the authority to do so, and where the principal authorizes the agent to make an agreement, but reserves the right to approve it. An example of the first situation is where an employee not normally responsible for procuring supplies contracts to do so on the employer's behalf. The employer's choice on discovering the contract is to ratify it or to repudiate it.

There is not much harm to the third party, insofar as the third party had originally given consent to the transaction  however, H is not affected by S’s decision to ratify, but by the fact that the conditions have changed and he cannot perform its part of the contract  irrelevant circumstances

No need to communicate it to the third party, however S does communicate this ratification; ratification need not to be in writing (Soames v Spencer [1822] 1 D&R 32)

The third party will only be unhappy with ratification if the market has moved against it, which is the case with H but third parties should not be placed in a worse position than other contracting parties because of ratification and, as such, ratification is subject to certain limits, some of which are principally intended to prevent unfairness to third parties

Prior to any ratification, the third party is not bound by the contract entered into with the agent. Where the agent has apparent authority, the third party can enforce the contract against the principal. A principal who wishes to take the benefit of the contract must ratify and cannot rely on apparent authority since, under English law, the basis for apparent authority is estoppels, which cannot be used to found a cause of action. Until ratification takes place, the third party may also claim damages against the agent for breach of warranty of authority (which H decided not to do)

Ratification may be express or implied from conduct  S ratifies expressly, by sending a letter to H and saying that G did not have authority, but he now wishes to adopt the contract, even if it need not to be communicated to the third party ( Harrisons & Crossfield Ltd v LNW Railway Co. Ltd [1917] 2 KB 755 at 758)

For ratification to be effective, the principal must have full knowledge of the agent’s unauthorized act (Lewis v Read [1845] 13 M & W 834), which is the case since Gordon himself called Scott to tell him the details of the contract he had entered into

The only person who can ratify unauthorized acts is the person on whose behalf the agent has acted

The effect of ratification is to clothe the agent with authority from the outset of the transaction in question. The contract entered into is therefore treated as valid from its inception and all the parties will derive right and obligations accordingly. The principal is bound by its ratification to perform the contract with the third party, but may continue to hold the agent liable for breach of duty with all the consequences that follow (Suncorp Insurance and Finance v Milano Assicurazioni SpA [1993] 2 Lloyd’s Rep 225 at 235)

Even if it said that almost all rules relating to ratification are directed towards protecting the third party against unfair results (Bowstead, 2-068, p 75), this is not clearly the case in Bolton Partners v Lambert (1889, 41 Ch D 295), the leading authority for ratification in English law: however controversial the decision might be, it helds that the retrospective nature of the ratification prevented the third party from validly withdrawing his offer before the principal’s affirmation of the agent’s act; Lambert made an offer to an agent of Bolton Partners, which agent, acting without authority, purported to accept on behalf of Boltons. Lambert then sought to revoke his offer. After this, Boltons ratified the agent’s act and Lambert was bound by the contract, because ratification related back to the agent’s acceptance, so that Lambert’s revocation was too late – and he repudiates it on totally different grounds than the lack of authority from the agent, just like in this case

As written under 2-082 (3) of Bowstead&Reynolds on Agency, “ratification of a contract is effective, notwithstanding that the third party has given notice to the principal of his withdrawal from it (Bolton Partners v Lambert), unless the contract was made by the agent expressly or impliedly subject to ratification.." which is not the case

under English law, a third party does not have a unilateral right of withdrawal because the principal's subsequent ratification is given a retroactive effect, reaching back to the agent's unauthorized act and skipping over the third party's interim attempt to withdraw (Ratification: useful but uneven, Deborah A. DeMott)

Bolton Partners has been severely criticized; in Fleming v Bank of New Zealand ([1900] AC 577 at 587) Lord Lindley, who was one of the judges in Bolton Partners and who delivered the judgement in Fleming, said there that Bolton Partners ‘presents difficulties’; however wrong or difficult to understand it maybe, it is still the leading authority on this subject-matter; it is binding to any court other than the Supreme Court (Bowstead, p86), which has not yet found an overruling case in agency

Bolton Partners has been severely criticized by scholars (Bowstead & Reynolds on Agency, p 85, rule (3)) as giving an inappropriately full effect to the doctrine of relation back

Bolton Partners is difficult to reconcile with two earlier cases, Kidderminster Corporation v Hardwick (1873) LR 9 Exch 13 and Walter v James (1871) LR 6 Exch 124: in the former, the two of three judges expressed the view that, even if the principal’s act amounted to ratification, it had come too late, as it had taken place after the withdrawal from the contract by the defendant; in the latter one, the agent and the third party agreed to cancel the transaction and it was held that no ratification could take place thereafter.

The only most recent case citing Bolton Partners and somehow showing a slight disagreement with the ruling is Presentaciones Musicales SA v Secunda [1994] Ch 271 at 280 Dillon LJ said that overruling Bolton Partners was not a course open to the Court of Appeal; as such, Bolton Partners will be regarded as good law unless overturned by the Supreme Court

The rule in Bolton Partners can potentially create great injustice to third parties, not because he will be held to what has been agreed but that the very existence of an enforceable contract is a matter which is solely within the control of the principal  very little protection to the third party or the agent

Bowstead on agency mentions that the matter is not clear how to be solved in the case where the third party, not being aware of the lack of authority and believing himself to be bound, withdraws from the contracts, as he is unable to perform (due to the economic changes), but however he breached his contractual obligations (p 86)

Ratification must take within a reasonable time and what constitutes a reasonable time will depend on all the circumstances (Metropolitan Asylums Board v Kingham & Sons [1890] 6 TLR 217 at 218)

It is not the case like in Presentaciones Musicales, where a time limit is fixed for doing of an act, in which case ratification cannot be allowed to take place after such time because this will have the effect of lengthening the time for the doing of the act in question

However, Presentaciones Musicales was binding on the Court of Appeal in Smith v Henniker-Major & Co [2003] Ch 182 at 206, where it held that the Secunda case was binding on the court to the effect that ratification of proceedings is not automatically barred after the expiration of the limitation period; the crucial element is whether the ratification will cause any unfair prejudice to the third party (Owners of the Borvigilant v Owners of the Romina G [2003] 2 Lloyd’s Rep 520); it is difficult to see why there would be unfair prejudice to a third party if a principal was allowed to ratify an action begun without authority after the limitation period has expired no limitation period in this case, but we might argue that the period was not reasonable given the circumstances and ratification in this case would prejudice the third party given the changes in the market condition; reasonable time he avoided and played the market

There is no absolute rule that where a time limit is fixed for doing of an act, ratification cannot be allowed to take place after such time

The limits rule has to be seen as a part of the more general rule that ratification must take place within a reasonable time (Tan, Principle in Bird v Brown, p 636-639)

2-087 (3) Bowstead on Agency, p 88: ratification is not effective where to permit it would unfairly prejudice a third party, in particular that ratification of a contract can only be relied on by the principal if effected within a time after the act ratified was done which is reasonable in all circumstances (Re Portuguese Consolidated Copper Mines Ltd [1890] 45 Ch D 16)

(Bowstead on Agency, p 91, 2-090): dictum by Fry LJ that ratification must be done within a reasonable period of time, which can never extend after the time at which the contract is to commence

(Commercial Law, Ian Brown, p 37): the court has never tried to draw the line between retroactivity and its exceptions, which line is not easy to detect (Presentatciones Musicales v Secunda)

From the perspective of the third party, the contract is binding from the moment in which the agent accepted his offer (GHL Fridman, The law of agency)

In determining what a reasonable period of time is, courts are entitled to take into account all circumstances, including whether a time limit was stipulated (not the case) and whether there is ultimately any unfair prejudice to the third party (which is the case, the principal avoided the ratification and kept on postponing it, in order to play the market, and the current financial situation of the third party would make it go bankrupt if it had to pay for the product); as a general rule, there will be a need to establish unfair prejudice to the third party before ratification is precluded/prevented (Reynolds, Bowstead and Reynolds on Agency, 2-087) since the presence of unfair prejudice will be an important determinant of whether ratification has taken place within a reasonable time (though probably not in all cases; for example it has been said that if the third party tells the principal that the third party wishes to withdraw from the transaction – which was the case, this will shorten what would otherwise be a reasonable time for ratification, in Re Portuguese Consolidated Copper Mines Ltd [1890] 45 Ch D 16 – which was the case, since Scott did not reply immediately to this letter either)

Also, recent cases (Smith v Henniker-Major & Co [2003] EWCA Civ 762; [2003] Ch 182 and The Borvigilant [2003] EWCA Civ 935; 2 Lloyd’s Rep 520) have accepted the fact that the ratification must not cause unfair prejudice

(Ian Brown, p 37): is it submitted that all exceptions to Bolton should be based solely upon prohibiting identifiable hardship accruing to the third party from a material change in circumstances, ie he must not be worse off as a result of retroactivity identifiable hardship: European Tax Directive + inability to economically justifiably raise prices for customers due to economic conditions and the volatility of the market; cases on testing the identifiable hardship: Walter V james (1871) LR 6 Ex 124 – exemplifies hardship which could result from retracotivity; Fleming Plaintiff v Bank of New Zealand Defendants 1900; Presentaciones Musicales v Secunda

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