Advanced Contract Law: Module B: Law of Agency
Advanced Contract Law: Module B: Law of Agency
Advanced
contract law
LWM83B
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Contents
Contents
Chapter 1: Introduction..........................................................................................1
1.1 Advanced contract law............................................................................................1
1.1.1 Structure of the course...................................................................................1
1.1.2 Study sequence................................................................................................ 2
1.2 The law of agency.................................................................................................... 2
1.3 How to use this Study Guide................................................................................ 3
1.3.1 Reading.............................................................................................................. 3
1.3.2 A suggested study method..........................................................................4
1.4 Keeping up to date.................................................................................................. 5
1.5 Allocating your time............................................................................................... 5
1.6 Online resources......................................................................................................6
1.7 The examination......................................................................................................6
1.7.1 Preparing for the examination.................................................................. 7
1.7.2 Taking the examination............................................................................... 7
Chapter 2: What is agency?................................................................................. 11
Introduction...................................................................................................................11
2.1 General considerations........................................................................................ 12
2.1.1 Definition........................................................................................................ 12
2.1.2 Theories of agency........................................................................................13
2.2 Internal aspects of agency................................................................................. 15
2.3 External aspects of agency................................................................................. 15
2.4 The boundaries of agency.................................................................................. 16
Chapter 3: Formation of agency......................................................................... 21
Introduction ................................................................................................................. 21
3.1 Conferring express or implied authority....................................................... 21
3.2 Agency by ratification.........................................................................................22
Summary................................................................................................................. 25
Chapter 4: The external effects of agency.........................................................27
Introduction.................................................................................................................. 27
4.1 Express and implied actual authority............................................................28
4.2 Usual authority.....................................................................................................29
4.3 Apparent or ostensible authority................................................................... 30
4.4 Agency by statutory authority......................................................................... 32
Summary................................................................................................................. 32
Chapter 5: Different types of agency ................................................................35
Introduction.................................................................................................................. 35
5.1 General and special agents................................................................................36
5.2 Mercantile agent/factors....................................................................................36
5.3 Brokers......................................................................................................................36
5.4 Del credere agent...................................................................................................36
5.5 Auctioneer...............................................................................................................36
5.6 Confirming house.................................................................................................36
5.7 Estate agents........................................................................................................... 37
5.8 Gratuitous agents................................................................................................. 37
5.9 Commercial agents.............................................................................................. 37
5.10 Agent of necessity..............................................................................................38
Summary.................................................................................................................39
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Advanced contract law: Module B
ii
Chapter 1: Introduction
Chapter 1: Introduction
2
Chapter 1: Introduction
1.3.1 Reading
The Study Guide refers you to various reading resources. These are
divided into Essential reading and Useful further reading.
Essential reading
Much of the Essential reading for this module is drawn from the
following textbook:
Clarke, M.A., R.J.A. Hooley, R.J.C. Munday, L.S. Sealy, A.M. Tettenborn and
P.G. Turner Commercial law: text, cases, and materials. (Oxford: Oxford
University Press, 2017) 5th edition [ISBN 9780199692088] (referred to
as ‘Clarke’ in this Guide).
This will be supplied in hard copy.
In addition, the Guide refers you to various other Essential readings.
We try to ensure that these are freely available to you. Most will be
available in the Online Library (see ‘Online resources’ below); others
may be available via other free to access websites; and other material
may be available as scans which you can download from the VLE.
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Advanced contract law: Module B
Research skills
The Study Guide is designed to provide you with a framework for your
studies: pointing you to key issues and cases. But, as Postgraduate Laws
students, it is also important that you read beyond the Study Guide.
You need to acquire the skills of identifying and reading law materials
and distilling the relevant information. Which are the important cases
and what makes them important? What have commentators said about
the law? The Study Guide helps this process, but it is vital that you read
as much as you can.
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Chapter 1: Introduction
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Advanced contract law: Module B
Activity 1.1
Before you start your studies, locate the following resources (you will need to
have obtained your Athens password):
1. Yasuda Fire & Marine Insurance Co of Europe Ltd v Orion Marine Insurance
Underwriting Agency Ltd [1995] QB 174.
2. Misrepresentation Act 1967.
3. The journal Modern Law Review.
4. The ebook: Peel, E. Treitel on the law of contract.
Feedback on this exercise can be found at the end of this chapter.
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Chapter 1: Introduction
8
Chapter 1: Introduction
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Advanced contract law: Module B
Notes
10
Chapter 2: What is agency?
Introduction
A person (principal) may appoint an agent to enter into contracts on
behalf of the principal with third parties. The contractual rights and
obligations are between the principal and the third party. However, the
agent is instrumental in creating the contractual relationship between
the principal and the third party.
Learning outcomes
By the end of this chapter, and having completed the Essential reading and
activities, you should be able to:
• define agency
• explain whether consent between principal and agent is necessary to create
an agency relationship
• explain the three types of relationships which arise as a result of an agency
• explain the three main theories for the creation of an agency relationship
• explain the internal and external aspects of the agency relationship
• explain the boundaries of agency.
Essential reading
• Clarke, Chapter 4 Introduction.
• Garnac Grain Co Inc v HMF Faure & Fairclough Ltd [1968] AC 1130.
• Branwhite v Worcester Works Finance Ltd [1969] 1 AC 55.
• Kennedy v De Trafford [1897] AC 180.
• Potter v Customs and Excise Commissioners [1985] STC 45.
• Boardman v Phipps [1967] 2 AC 46.
• Yasuda Fire & Marine Insurance Co of Europe Ltd v Orion Marine Insurance
Underwriting Agency Ltd [1995] QB 174.
• Chaudhry v Prabhakar [1989] 1 WLR 29.
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Advanced contract law: Module B
consent between two people for one (the agent) to act on behalf of the
other (the principal). The consensual relationship is important in that the
authority of the agent is given by the principal. The principal entrusts to
the agent to act on behalf of the principal in a transaction or a part of his
business, where the agent has to represent the principal’s interest (Billins,
R. Agency law. (London: Sweet & Maxwell, 1993)). An agent acts so as to
create, modify or terminate a contractual relationship between the
principal and a third party (Dobson, P. and R. Stokes Commercial law.
(London: Sweet & Maxwell, 2008)).
Although a consensual relationship is recognised as important (Garnac
Grain Co Inc v HMF Faure & Fairclough Ltd [1968] AC), in Boardman v
Phipps [1967] 2 AC 46 it was said that consent is not always necessary to
create a principal/agent relationship. An agency can arise by apparent
authority, irrespective of consent. In agency of necessity, which arises
by operation of law, there is no consent. In an agency relationship
there is a principal who empowers an agent to act on his behalf and
issues instructions for the agent to follow; an agent representing his
principal creates a contractual relationship between his principal and a
third party who enters into a contractual relationship with the principal
based on representations and negotiations with the agent.
Activity 2.1
‘Consent is a requirement to establish a principal/agent relationship’. Discuss.
Feedback: see p.81.
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Advanced contract law: Module B
Power/liability theory
Dowrick states:
This is a legal rule which comes into effect when the principal and
agent do the acts necessary to bring the rule into operation. Once the
legal rule comes into operation the agent acquires the power to alter
the principal’s relationship with a third party, and the principal acquires
liabilities. Even if the principal does not confer authority on the agent
or the agent exceeds their power, the rule can come into operation. The
principal’s intention as it appears to a third party is important (i.e. the
objective intention). According to this theory, the agency relationship
is a matter of law. This theory avoids the definitions of agency based on
consent. However, this theory concentrates on the external relationship
between principal and third party, rather than the internal relationship
between principal and agent. This theory is criticised in that some
types of agency cannot be explained by this theory. For example,
estate agents do not have the power to bind buyers and sellers.
Activity 2.2
a. Explain the power/liability theory.
b. Can all types of agency be explained by this theory?
Feedback: see p.81.
Consent theory
According to this theory, if the principal consents to the agent acting
on their behalf, the principal is bound. This theory concentrates on
the internal relationship between principal and agent – their fiduciary
relationship. In Garnac Grain v HMF Faure & Fairclough and Bunge [1968]
AC 1130 Lord Pearson said:
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Chapter 2: What is agency?
The significant words, for the present purpose, ‘are if they have
agreed to what amounts in law to such a relationship…’ These
I understand as pointing to the fact that, while the agency
must ultimately derive from consent, the consent need not
necessarily be to the relationship of principal and agent itself
(indeed the existence of it may be denied) but may be to a state
of fact upon which the law imposes the consequences which
result from agency. It is consensual, not contractual.
Activity 2.3
What do you understand by the term ‘internal aspects of the agency’?
Feedback: see p.81.
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Advanced contract law: Module B
Activity 2.4
What do you understand by the term ‘external aspects of agency’?
Feedback: see p.81.
2. Indirect representation
This is a type of relationship in civil law countries. Internally, the agent
acts as agent as regards the principal, but externally the agent deals on
their own account, which means that the third party cannot deal with
the principal. This type of agency does not exist in English common
law.
Self-assessment questions
1. How would you define an agency?
2. Is consent between principal and agent a requirement to create an agency?
3. What are the three legal relationships in a situation where there is an agent?
4. Can an agency be non-contractual?
5. Are there formalities required for the creation of any agency?
6. Can a minor be an agent?
7. What are three main theories to explain the agency relationship?
8. What do you understand by the internal aspects of agency?
9. What do you understand by the external aspects of agency?
10. What are the boundaries of agency?
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Chapter 2: What is agency?
Summary
• An agency is where the agent acts on behalf of a principal.
• The agent enters into transactions with third parties and the
principal is bound by the transactions.
• There is a legal relationship between principal and agent.
• There is also a legal relationship between principal and third party.
• Consent between principal and agent is required for most types of
agency.
• Consent is not required where there is an agency by apparent
authority and an agency by necessity.
• An agency can be contractual or non-contractual.
• Formalities are not necessary for the creation of an agency.
• The three main theories to explain the agency relationship are:
power-liability theory, consent theory and qualified consent theory.
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Advanced contract law: Module B
Notes
18
Chapter 3: Formation of agency
Introduction
This chapter examines the various ways in which agency can be
formed: by the principal conferring authority on the agent, expressly
or impliedly. Sometimes, when the agent acts they might not have
authority, but the principal can ratify the act and confer authority.
Learning outcomes
By the end of this chapter, and having completed the Essential readings and
activities, you should be able to:
• explain the formation of agency by express authority
• explain the formation of agency by implied authority
• explain the formation of agency by ratification.
Essential reading
• Clarke, Chapter 5 Creation of agency, and the authority of the agent.
• Garnac Grain Co Inc v H M F Faure & Fairclough Ltd [1968] AC 1130.
• Yasuda Fire & Marine Insurance Co of Europe Ltd v Orion Marine Insurance
Underwriting Agency Ltd [1995] QB 174.
• Roberts v Ogilby (1821) 9 Price 269.
• Kelner v Baxter (1886) LR 2 CP 174.
• Grover v Matthews [1910] 2 KB 401.
• Keighley, Maxsted v Durant [1901] AC 240.
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Advanced contract law: Module B
Formalities
Generally, no formalities are necessary and the agency agreement
can be in writing, verbal or even implied by conduct. Exceptionally, an
agency has to be created in writing (e.g. for the agent to deal with land
(ss.53 and 54 Law of Property Act 1925). A power of attorney has to be
created by deed (s.1(1) Powers of Attorney Act 1971).
Activity 3.1
Tom enters into an oral agreement with Malik, for Malik to be his agent in
entering into a sale of goods contract. Is this a valid agency agreement?
Feedback: see p.81.
Capacity
The principal has to have capacity, but the agent does not need to have
capacity.
The only person who can ratify is the person on whose behalf the
act is done. An act cannot be ratified if the ‘principal’ lacked capacity
when the original act was done, was not born, or where the person
or company existed, but did not fit the description of the ‘principal’
given by the agent. In Kelner v Baxter (1886) LR 2 CP 174, before a
hotel company was formed, the directors to be of the company
ordered some wine. After incorporation they purported to ratify the
transaction. It was held that they could not do so, as the company had
not yet been formed. In Grover v Matthews [1910] 2 KB 401 an agent,
without authority, insured the principal’s property. When the principal’s
property was destroyed, the principal purported to ratify the agent’s
act. It was held that he could not do so, as he could not have taken
out the insurance himself at the time the agent acted. There may be
instances where a principal who is to come into existence in the future
may ratify an act, for example, where an insurance contract specifically
says that it is made on behalf of present and future sub-contractors
(Burrows).
An agent can act for an unidentified principal where the agent does
not name or identify the principal to the third party. In such a case
there can be a later ratification by the principal (National Oilwell (UK)
Ltd v Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582). Where, however, the
agent acts for an ‘undisclosed principal’, without disclosing to the third
party that they were acting for a principal, the ‘undisclosed principal’
cannot later ratify. In Keighley, Maxsted v Durant [1901] AC 240 the
principal had authorised the agent to buy corn at a certain price. The
agent bought corn at a slightly higher price in his own name without
revealing that he was buying as an agent. The court held that the
principal could not ratify.
When the agent’s act is subsequently ratified, it gives retrospective
validity to the agent’s act. Ratification cannot divest a property right.
Ratification is not possible after a time limit has expired. Ratification is
not possible where it would cause unfair prejudice to the party against
whom it is invoked.
If an agent enters into a transaction with a third party, subject to
ratification, if a third party withdraws from the transaction before the
ratification, the ratification is ineffective.
When the principal ratifies, the agent is protected against the third
party. If the principal does not ratify, the agent could be sued for
breach of warranty of authority. Once the principal has ratified the
agent’s act, the principal has to pay commission to the agent and pay
the agent’s expenses.
It is essential that at the time the agent acted, they professed to act on
behalf of the principal who subsequently ratifies the transaction. The
principal should have been competent to perform the contract at the
time the agent acted on the principal’s behalf. It should be possible to
establish the identity of the principal at the time of the agent’s act.
The principal is liable for all the acts of the agent which are
within the authority usually confided to an agent of that
character, notwithstanding limitations, as between the principal
and the agent, put upon that authority. It is said that it is only
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Advanced contract law: Module B
Activity 3.2
Jane enters into a contract with Tim on behalf of Paul. At the time of the contract
Jane has no authority to act on behalf of Paul.
What is the legal position in the following circumstances?
a. Paul refuses to ratify Jane’s act.
b. Paul ratifies Jane’s act.
c. At the time Jane acted Paul did not have capacity to enter into the contract.
Feedback: see p.81.
Self-assessment questions
1. What are the ways in which agency can be formed?
2. What do you understand by conferring authority on an agent?
3. Is consent between principal and agent necessary to form an agency?
4. Is consideration essential to form an agency agreement?
5. What are the exceptional situations when formalities are necessary to create
an agency agreement?
6. Is there a requirement that the principal and agent should have capacity to
enter into a contract?
7. What do you understand by agency by ratification?
8. Must a ratification be communicated to the agent and the third party?
9. Can a void act be ratified?
10. Can a principal ratify an act, if they did not have capacity when the agent
entered into the transaction with the third party?
11. If a principal ratifies, is an agent protected against a third party?
12. If the principal does not ratify, can the third party sue the agent?
13. Does the principal have to pay commission to the agent after the agent’s act
is ratified?
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Chapter 3: Formation of agency
Summary
• Agency can be formed by express or implied authority.
• There has to be an agreement between principal and agent to form
an agency by authority.
• Consent between principal and agent is necessary to form an
agency by authority.
• Consideration is not essential to form an agency by authority.
• Generally, no formalities are needed to create an agency by authority.
• The principal should have capacity to enter into a contract.
• The agent does not need capacity to enter into a contract.
• Agency by ratification is where the agent has no authority at the
time of the transaction with the third party, but subsequently the
principal approves the agent’s act.
• A void act cannot be ratified.
• Once a principal ratifies the agent’s act, the agent cannot be sued
by the third party.
• If the principal does not ratify the agent’s act, the third party can
sue the principal for breach of warranty of authority.
• The principal has to pay commission and expenses to the agent
after ratification.
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Advanced contract law: Module B
Notes
26
Chapter 4: The external effects of agency
Introduction
This chapter explains the various kinds of authority: express and implied
actual authority, usual authority, apparent (ostensible authority) and
agency by statutory authority.
Learning outcomes
By the end of this chapter, and having completed the Essential reading and
activities, you should be able to:
• explain express and implied actual authority
• explain usual authority
• explain apparent or ostensible authority
• explain agency by statutory authority.
Essential reading
• Clarke, Chapter 5 Creation of agency, and the authority of the agent.
• Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549.
• Garnac Grain Co Inc v H M F Faure and Fairclough Ltd [1967] 2 All ER 353.
• Freeman & Lockyer (a firm) v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB
480.
• Ireland v Livingstone (1872) LR 5 HL 395.
• Robinson v Mollett (1875) LR 7 HL 802.
• Watteau v Fenwick [1893] 1 QB 346.
• Rama Corpn Ltd v Proved Tin and General Investments Ltd [1952] 2 QB 147.
• ING Re (UK) Ltd v Versicherung AG [2006] EWHC 1544 (Comm).
• Summers v Solomon (1857) 7 El & Bl 879.
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Advanced contract law: Module B
Activity 4.1
Robin, who was going abroad, asked Mandy to sell his business. Mandy
fraudulently represented to Jack that Robin’s business was successful. In fact,
his business was making a loss. Relying on the misrepresentation, Jack bought
Robin’s business. Jack has now discovered the fraud and wishes to sue Robin.
Advise Robin.
Feedback: see p.82.
The principal is liable for the agent’s acts, only if the acts were within
the authority granted to the agent. An agent who exceeds his actual
authority commits a breach of contract as against the principal and the
third party can sue the agent for breach of warranty of authority.
An agency can arise when there is an express or implied agreement
between principal and agent. Although most agreements will be
contractual, a contract is not essential to create an agency. It is essential
that the principal consents to the agent exercising authority on their
behalf and the agent consents to exercising such authority (Yasuda
Fire & Marine Insurance Co of Europe Ltd v Orion Marine Insurance
Underwriting Agency Ltd [1995] QB 174).
Where there is an agency agreement the agent has actual authority. Lord
Denning MR in Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 said:
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Advanced contract law: Module B
uses the services of another, say a solicitor, that person (the solicitor)
has the authority to do acts normally done by other people performing
that service (solicitors). A solicitor’s authority to compromise litigation
is an example of this form of authority (Waugh v HB Clifford & Sons Ltd
[1982] Ch 374).
According to Dobson and Stokes, ‘usual authority is primarily a sub-
division of actual implied authority and thus emanates from, and
enlarges the scope of, the actual authority which exists in its own right
as an independent category of authority.’ The test of usual authority
is ‘what authority would a reasonable person in the agent’s position
believe they possessed’ (Furmston).
Wills J in Watteau v Fenwick [1893] 1 QB 146 said:
…the principal is liable for all the acts of the agent which
are within the authority usually confided to an agent of that
character, notwithstanding limitations, as between the principal
and the agent, put upon that authority. It is said that it is only
so where there has been a holding out of authority – which
cannot be said of a case where the person supplying the goods
knew nothing of the existence of a principal. But I do not think
so. Otherwise, in every case of undisclosed principal, or at least
in every case where the fact of there being a principal was
undisclosed, the secret limitation of authority would prevail and
defeat the action of the person dealing with the agent and then
discovering that he was an agent and had a principal.
Activity 4.2
Rajan instructs his solicitor Amy to appear in a court case instituted against him
by Shami. Shami has now offered to settle the matter out of court.
What action can Amy take with regard to this offer?
Feedback: see p.82.
In Rama Corpn Ltd v Proved Tin and General Investments Ltd [1952] 2 QB
147 Justice Slade said:
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Chapter 4: The external effects of agency
for jewellery obtained on credit from the third party. The agent bought
jewellery on credit from the third party after leaving employment. The
principal was liable to the third party as the principal had not informed
the third party that the agent was no longer employed by him.
Activity 4.3
Alan represents to Jay that Liz has authority to negotiate a sale of an antique
table. Unknown to Jay, Alan instructs Liz not to sell the table below £2,000. Liz
sells the table to Jay for £1,900.
Advise Alan.
Feedback: see p.82.
Self-assessment questions
1. What do you understand by the authority of the agent?
2. What do you understand by express authority of the agent?
3. What do you understand by the implied authority of the agent?
4. Is the principal liable for a fraudulent misrepresentation committed by the
agent?
5. Is the consent of both parties essential to create an agency agreement?
6. Give examples of situations where an agent has implied authority.
7. What do you understand by usual authority?
8. What do you understand by apparent (ostensible) authority?
Summary
• Authority is the agent’s ability to effect legal relations between the
principal and third party.
• The principal is bound by the agent’s acts even if the agent is
fraudulent, provided the agent has authority.
• An agent who exceeds their authority can be sued for breach of
contract by the principal and is liable for breach of warranty of
authority to the principal.
• An agency is created by express or implied agreement between
principal and agent.
• Actual authority could be implied by the conduct of the parties, the
conditions of the case, trade or custom.
• An agent has the usual authority to do acts which other such
agents can do.
• When a principal represents to a third party that a person has
authority to act, the agent has apparent authority even if they may
not have actual authority.
• When a representation has been acted on, the principal is estopped
from denying that their agent has authority.
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Chapter 4: The external effects of agency
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Advanced contract law: Module B
Notes
34
Chapter 5: Different types of agency
Introduction
This chapter introduces different types of agency such as general and
special agents, mercantile agents/factors, brokers, del credere agents,
auctioneers, a confirming house, estate agents, gratuitous agents,
commercial agents and agents of necessity.
Learning outcomes
By the end of this chapter, and having completed the Essential reading and
activities, you should be able to:
• explain general and special agents
• explain mercantile agents/factors
• explain brokers
• explain del credere agents
• explain auctioneers
• explain a confirming house
• explain estate agents
• explain gratuitous agents
• explain commercial agents
• explain agents of necessity.
Essential reading
• Clarke, Chapter 5 Creation of agency, and the authority of the agent.
• Section 2(1) Factors Act 1889. Available via LexisLibrary in the Online Library.
• Section 1(1) Estate Agents Act 1979. Available via LexisLibrary in the Online
Library.
• Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053).
Available via LexisLibrary in the Online Library.
• Yasuda Fire & Marine Insurance Co of Europe Ltd v Orion Marine Insurance
Underwriting Agency Ltd [1995] QB 174.
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Advanced contract law: Module B
5.3 Brokers
A broker is an agent who ‘negotiates contracts for the sale and
purchase of goods and other property but does not have possession
of the goods’ (Bradgate, 2005). Unlike a factor, a broker cannot sell the
principal’s goods in their own name.
5.5 Auctioneer
An auctioneer has authority to sell at an open sale, but has no authority
to provide a warranty unless expressly authorised to do so. Auctioneers
are agents of the seller, but may be agents of the buyers for certain
purposes.
contract with the seller agreeing to be liable for the solvency of the
overseas buyer; buy from the seller as principal, but be an agent to the
overseas buyer.
• The agent is under a duty to look after the interests of the principal
and act dutifully and in good faith and the agent must make proper
efforts to negotiate and conclude transactions. The agent must
communicate to the principal all the necessary information and
comply with reasonable instructions given by the principal.
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Chapter 5: Different types of agency
i. Empire Co buys goods on the domestic market in the UK and sells to overseas
buyers.
j. Peter is self-employed and has continuing authority to negotiate and
conclude sales of the farm products of Lina.
Feedback: see p.82.
Self-assessment questions
1. Who is a general agent?
2. Who is a special agent?
3. Who is a mercantile agent/factor?
4. Who is a broker?
5. Who is a del credere agent?
6. Who is an auctioneer?
7. What is a confirming house?
8. Who is an estate agent?
9. Who is a gratuitous agent?
10. Who is a commercial agent?
11. What is an agency of necessity?
Summary
• A general agent is authorised to act generally for the principal.
• A special agent is appointed to undertake a specific task on behalf
of the principal.
• A mercantile agent/factor is given possession of the principal’s
goods and can sell them to third parties.
• A broker negotiates contracts of sale and purchase on behalf of the
principal.
• A del credere agent, for an additional commission, guarantees
payment of the price to the principal in the event of default or
insolvency of the buyer.
• An auctioneer is authorised to sell the principal’s goods at an open
sale.
• A confirming house acts as an agent for an overseas buyer who
wishes to import goods.
• An estate agent is entrusted with describing and valuing the
principal’s property and finding buyers.
• A gratuitous agent is an agent who does not have a contract with
the principal, but nevertheless agrees to act as an agent.
• A commercial agent is a self-employed person who has continuing
authority to negotiate the sale or purchase of goods on behalf of
another.
• An agency of necessity arises where a person has to act on behalf
of another in an emergency situation.
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Advanced contract law: Module B
40
Chapter 6: Relations between a principal and an agent
Introduction
This chapter discusses the duties and rights of an agent.
Learning outcomes
By the end of this chapter, and having completed the Essential readings and
activities, you should be able to:
• explain the duty to obey the principal’s instructions
• explain the duty to exercise due care and skill
• explain the duty to perform contractual obligations
• explain the duty not to allow any conflict of interest
• explain the duty not to make a secret profit
• explain the duty to act as a fiduciary
• explain the duty not to take a bribe
• explain the duty to account
• explain the right to commission and remuneration
• explain the right to an indemnity
• explain the right to a lien.
Essential reading
• Clarke, Chapter 7 Relations between principal and agent.
• The Hermione [1922] P 162.
• Turpin v Bilton (1843) 5 Man and G 455.
• Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp [1979] Ch 384.
• Solomon v Barker (1862) 2 F & F 726.
• Chaudhry v Prabhakar [1989] 1 WLR 29.
• Ireland v Livingstone (1872) LR 5 HL 395.
• European Asian Bank AG v Punjab & Sind Bank (No. 2) [1983] 2 All ER 508.
• Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461, 471; [1843–60] All ER Rep
249, 252.
• Boardman v Phipps [1967] 2 AC 46.
• Armstrong v Jackson [1917] 2 KB 822.
• McPherson v Watt (1877) 3 App Cas 254.
• Gibson v Jeyes (1801) 6 Ves Jun 266.
• Bentley v Craven (1853) 18 Beav 75.
• North and South Trust Co v Berkley [1971] 1 WLR 470.
• Kelly v Cooper [1993] AC 205.
• Hippisley v Knee Bros [1905] 1 KB 1.
• Bristol & West Building Society v Mathew [1998] Ch 1, 18.
• Parker v McKenna (1874) LR 10 Ch App 96, 118.
• Industries and General Mortgage Corp v Lewis [1949] 2 All ER 573, 575. 41
Advanced contract law: Module B
42
Chapter 6: Relations between a principal and an agent
Activity 6.2
Sirima has just passed her driving test and asked Andy to find her a second
hand car which had not been involved in an accident. Andy found her a car
which Sirima bought. A few months later Sirima took the car to a motor dealer
and offered her car as part exchange to purchase another car. The motor dealer
informed her that her car had been involved in an accident prior to her buying it
and that Andy could have discovered this by carrying out some checks.
Advise Sirima whether she could sue Andy.
Feedback: see p.83.
If the agent has disclosed all material facts to the principal, and the
principal consents, the agent is not in breach of duty regarding a
conflict of interest (North and South Trust Co v Berkley [1971] 1 WLR 470).
The no conflict rule may be excluded by express or implied agreement
between principal and agent (Kelly v Cooper [1993] AC 205).
Activity 6.3
Jim was a football player from Trinidad and Tobago. He appointed Rani to
negotiate a contract for him to play in a UK Club and to apply for a work permit
for him. The club paid Rani £3,000 to apply for the work permit (which would
have cost £750). When Jim found out about the £3,000 he refused to pay any
commission to Rani. Rani seeks your advice.
Feedback: see p.83.
The agent has to deliver a full set of accounts to the principal. The
accounts must be accurate regarding all transactions entered into on
behalf of the principal. The agent must be ready to produce them,
when the principal requires them (Pearse v Green (1819) 1 Jac & W 135).
If the agent fails to do so, there is a presumption against the agent
(Gray v Haig (1855) 20 Beav 219).
The duty to keep accurate accounts arises from the fiduciary nature of
the relationship, so that the duty survives (unless expressly excluded
by the contract) even on the termination of the agency (Yasuda Fire and
Marine Insurance Co of Europe Ltd v Orion Marine Underwriting Agency
Ltd [1995] QB 174).
Where the agent is appointed to buy property for the principal and the
agent buys it in their own name, they hold the property in trust for the
principal (Lees v Nuttall (1829) 1 Russ & M 53).
Subject to the right of lien of the agent, the agent must hand over the
principal’s documents to the latter (Gibbon v Pease [1905] 1 KB 810).
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Advanced contract law: Module B
Activity 6.6
Alan appointed Jessica as agent to sell his car. The contract states that Jessica is
entitled to £100 as expenses, the commission being payable at the discretion of
Alan. Jessica has now sold the car. Is she entitled to commission on a quantum
meruit basis, in addition to the £100?
Feedback: see p.83.
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Chapter 6: Relations between a principal and an agent
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Advanced contract law: Module B
Self-assessment questions
1. What do you understand by the duty to obey the principal’s instructions?
2. What do you understand by the duty to exercise due care and skill?
3. What do you understand by the duty to perform contractual obligations?
4. What do you understand by the duty not to have a conflict of interest?
5. What do you understand by the duty not to make a secret profit?
6. What do you understand by the duty to act as a fiduciary?
7. What do you understand by the duty not to take a bribe?
8. What do you understand by the duty to account?
9. What do you understand by the duty of non-delegation of authority?
10. What do you understand by the agent’s right to commission and
remuneration?
11. What do you understand by the agent’s right to an indemnity?
12. What do you understand by the agent’s right to a lien?
Summary
• The agent is under a duty to obey the principal’s instructions.
• Contractual and gratuitous agents owe a duty to exercise due care
and skill.
• Agents are under a duty to perform contractual obligations.
• The agent should not allow their personal interest to conflict with
their duty to the principal.
• The agent should not use their capacity as an agent to gain a
benefit, unknown to the principal.
• The duty to act as a fiduciary arises in equity.
• A bribe is a payment made by a third party to the agent in
connection with their agency duties, unknown to the principal.
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Chapter 6: Relations between a principal and an agent
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Notes
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Chapter 7: Relations with third parties
Introduction
This chapter deals with disclosed and undisclosed principals. A
principal is disclosed where at the time of contracting the third party is
aware that there is a principal on whose behalf the agent is contracting.
The principal may be named or unnamed. However, if the third party is
unaware of the existence of a principal at the time of contracting, the
principal is undisclosed.
Learning outcomes
By the end of this chapter, and having completed the Essential readings and
activities, you should be able to:
• explain disclosed principals, their rights and liabilities
• explain undisclosed principals, their rights and liabilities.
Essential reading
Legislation is available via LexisLibrary in the Online Library.
• Clarke, Chapter 6 Relations with third parties.
• Section 7(1) Powers of Attorney Act 1971, as amended by s.1, Sch.2, para.7(1)
Law of Property (Miscellaneous Provisions) Act 1989.
• Section 56(1) Law of Property Act 1925.
• Section 1(1) Contracts (Rights of Third Parties) Act 1999.
• Sections 23, 9(1) Bills of Exchange Act 1882.
• Misrepresentation Act 1967.
• Section 51(1) Companies Act 2006.
• Re International Contract Co, Pickering’s Claim (1871) 6 Ch App 525.
• Moody v Condor Insurance Ltd [2006] EWHC 100 (Ch).
• Harmer v Armstrong [1934] Ch 65.
• Montgomerie v United Mutual Steamship Association [1891] 1 QB 370.
• Butwick v Grant [1924] 2 KB 483.
• Barker v Greenwood (1837) 2 Y & C Ex 414.
• Lloyd v Grace, Smith & Co [1912] AC 716.
• Refuge Assurance Co v Kettlewell [1909] AC 243.
• Armstrong v Strain [1952] 1 KB 232.
• Gosling v Anderson Times, 8 February 1972. Summary available on the VLE.
• Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465.
• AMB General Holding AG v SEB Trygg Liv Holding AB [2005] EWCA Civ 1237.
• Lilly, Wilson & Co v Smales, Eeles & Co [1892] 1 QB 456.
• Keighley, Maxted & Co v Durant [1901] AC 240.
• Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199.
• Humble v Hunter (1848) 12 QB 310.
• Said v Butt [1920] 3 KB 497.
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Chapter 7: Relations with third parties
statement was false, the principal is not liable for deceit if they were
unaware that the agent had made the misrepresentation (Armstrong v
Strain [1952] 1 KB 232). However, in these circumstances the third party
could sue the principal under s.2(1) Misrepresentation Act 1967 if the
third party relied on the misrepresentation in entering the contract with
the principal (Gosling v Anderson Times February 8 1972). The principal
may also be liable to the third party in negligence (Hedley Byrne & Co Ltd
v Heller & Partners Ltd [1964] AC 465), or liable for a negligent statement
made by the agent acting within their authority, if the third party is owed
a duty of care by the principal/agent. The principal can raise all defences
arising out of the transaction with the agent.
In oral contracts, it is a question of fact whether the agent can sue and
be sued. An agent who contracts by deed in their own name and is a
party to the deed, is personally liable, even if they are described in the
deed as acting on behalf of a named principal.
At common law an agent may be liable if they contract for a non-
existent or fictitious principal. If a person enters into a contract on
behalf of a company which is not yet formed, the agent is personally
liable (s.51(1) Companies Act 2006). Where the agent is their own
principal, the agent is personally liable.
The agent can sue the third party in the following circumstances: where
parties intend that the agent should have rights as well as liabilities;
where the agent has a collateral contract with the third party; where the
agent has a special property in the subject matter of the contract, has a
lien over it or has a beneficial interest in completion of the contract; and
where the agent acts on behalf of a company not yet formed.
When the agent is liable for breach of warranty of authority, their
liability may be based on a collateral contract with the third party (AMB
General Holding AG v SEB Trygg Liv Holding AB [2005] EWCA Civ 1237).
An agent may be liable for breach of warranty of authority whether
they are fraudulent, negligent or innocent. However, the agent will not
be liable where the third party knew or ought to have known that the
agent was not warranting their authority (Lilly, Wilson & Co v Smales,
Eeles & Co [1892] 1 QB 456). If the donee of a power of attorney acts
without knowing their authority has been revoked, they are not liable.
Activity 7.1
Best Oil Co employed Anish, a broker, to purchase oil for them. Anish bought
the oil from Super Oil Co with payment to be by ‘cash on or before delivery’. At
the time of the purchase Anish informed Super Oil Co that he was buying for
principals, although he did not reveal the name of his principals. Super Oil Co
delivered the oil to Anish without payment. Best Oil Co, who did not know that
Super Oil Co had not been paid, in good faith paid Anish. Anish did not pay and
Super Oil Co sued Best Oil Co for the price. Discuss the legal position.
Feedback: see p.84.
held that for the principal to be liable, in entering into the contract the
agent must intend to act for the principal; the agent could also sue and
be sued by the third party. The Privy Council also held that the third
party can raise any defence they have against the agent against the
principal; and the terms of the contract, expressly or impliedly, may
exclude the principal’s liability to be sued and to sue.
In Humble v Hunter (1848) 12 QB 310 the mother owned the ship but
the son entered into a charterparty describing himself as owner. The
mother was not permitted to sue as an undisclosed principal as this
would be inconsistent with the son being described as ‘owner’ in the
charterparty. If the agent has given an implied undertaking that there
is no principal behind them, the principal cannot sue. If the third party
only intended to contract with the agent, the undisclosed principal
cannot sue (Said v Butt [1920] 3 KB 497).
The third party can sue either the agent or the undisclosed principal.
When an undisclosed principal sues the third party, the latter could set
up any defence available against the agent. In Cooke & Sons v Eshelby
(1887) 12 App Cas 271 it was held that an undisclosed principal would
not be bound by the third party’s rights of set-off against the agent,
unless the principal had misled the third party by allowing the agent to
appear as principal.
An undisclosed principal can avoid liability to the third party by making
a settlement with the agent. A third party who pays or settles with
the agent when unaware that there was a principal, is not liable to the
principal.
An agent who contracts with a third party on behalf of an undisclosed
principal can sue and be sued on the contract. A third party who is
sued by an agent can set up against them any defence they could
have set up against the undisclosed principal. An undisclosed principal
cannot ratify the agent’s act (Keighley, Maxsted v Durant [1901] AC 240).
For a third party to be conferred a right of action under the Contracts
(Rights of Third Parties) Act 1999 the third party must be identified
at the time of the contract, an undisclosed principal cannot take
advantage of this Act.
Activity 7.2
Camilla was selling tickets for a fashion show for a specially invited audience.
Diana, knowing that Camilla would not sell her a ticket, instructed Janet to
purchase a ticket for her. When Diana turned up at the fashion show, Camilla
prevented her entry.
Advise Diana.
Feedback: see p.84.
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Self-assessment questions
1. Who is a disclosed principal?
2. Can a disclosed principal sue and be sued on the contract?
3. When the agent executes a deed inter partes with the third party, can the
disclosed principal sue?
4. When can a disclosed principal be liable on a bill of exchange?
5. Generally, when the principal is disclosed, can the agent sue and be sued?
6. Where the disclosed principal has paid or settled with the agent, can the third
party sue the principal?
7. Is a third party who pays or settles the agent discharged from liability to the
disclosed principal?
8. What is an undisclosed agency?
Summary
• A disclosed principal is when an agent makes it clear to the third
party that they are acting as an agent.
• A disclosed principal can sue and be sued on the contract.
• Where an agent executes a deed inter partes the disclosed principal
cannot sue.
• A disclosed principal can be liable on a bill of exchange if they have
signed it or their signature has been written on it by an authorised
person.
• The disclosed principal who has paid or settled with the agent
cannot be sued by the third party.
• A third party who pays or settles the agent is discharged from
liability to the disclosed principal if the agent had actual or
apparent authority to receive payments on behalf of the principal.
• An undisclosed agency is when the agent does not disclose to the
third party that they are acting for a principal.
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Chapter 8: Termination of agency
Introduction
This chapter discusses various ways in which agency can be
terminated, where agency is irrevocable, the effects of termination of
agency, the termination of the authority of commercial agents and the
rules as to termination and third parties.
Learning outcomes
By the end of this chapter, and having completed the Essential reading and
activities, you should be able to:
• explain the various methods of termination
• explain when the agency is irrevocable
• explain the effects of termination of agency
• explain the rules relating to termination of the authority of commercial agents
• explain the rules as to termination and third parties.
Essential reading
Legislation is available via LexisLibrary in the Online Library.
• Clarke, Chapter 7 Relations between principal and agent.
• Sections 4 and 5 Powers of Attorney Act 1971.
• Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053).
• Section 14 Mental Capacity Act 2005.
• Heaton’s Transport (St Helens) Ltd v Transport and General Workers’ Union [1973]
AC 15.
• Blackburn v Scholes (1810) 2 Camp 341.
• Dickinson v Lilwal (1815) 4 Camp 279.
• Heyman v Darwins Ltd [1942] AC 356.
• Rhodes v Forwood (1876) 1 App Cas 256.
• Marshall v Glanvill [1917] 2 KB 87.
• Pacific and General Insurance Co Ltd v Hazell [1997] BCC 400.
• Campanari v Woodburn (1854) 15 CB 400.
• Drew v Nunn (1879) 4 QBD 661.
• Martin Baker Aircraft Co Ltd v Canadian Flight Equipment Ltd [1955] 2 QB 556.
• Frith v Frith [1906] AC 254.
• Chappell v Bray (1860) 6 H & N 145.
• Rhodes v Forwood (1876) 1 App Cas 256.
• Turner v Goldsmith [1891] 1 QB 544.
• Crane v Sky In-Home Service Ltd [2007] EWHC 66 (Ch).
• Moore v Piretta PTA Ltd [1999] 1 All ER 174.
• Fryer Joinery Services v Ian Firth Hardware [2008] EWHC 767 (Ch).
• Watson v King (1815) 4 Camp 272.
• Scarf v Jardine (1882) 7 App Cas 345.
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Chapter 8: Termination of agency
Activity 8.1
Manoj entrusted a painting to Adam and told the latter that if he sold the
painting he would pay him £200. Before Adam sold the painting Manoj died.
Adam sold the painting in ignorance of Manoj’s death. Adam has now become
aware of Manoj’s death and claims the £200 from Manoj’s estate.
Is Manoj’s estate liable to pay £200 to Adam?
Feedback: see p.85.
Activity 8.2
Kusum asked Jamal to get an electrician to rewire Kusum’s house (in Kusum’s
absence abroad). Jamal got the work done and paid the electrician. Kusum then
terminated the agency agreement between her and Jamal.
Advise Jamal.
Feedback: see p.85.
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burnt down and the principal closed his business. The agent sued for
breach of contract and succeeded as the court held that the principal
could have given the agent shirts manufactured by someone else or
given some other goods to sell.
Activity 8.3
Jane appointed Brad as her agent for five years to sell dresses made by her. After
five years, when the agency had ceased to exist, Jane discovered that Brad had
been negligent in carrying out his duties and that the fall in profits since Brad
took over as agent was owing to his negligence.
Advise Jane.
Feedback: see p.85.
The reason for the payment of indemnity to the agent after the
termination is to take account of the work done by the agent to
establish goodwill. The idea behind granting compensation is to
compensate the agent for the loss.
The indemnity or compensation scheme can be utilised in a wide
variety of circumstances, including the death of the agent or the
agency ending owing to the end of a fixed period. However, the
right to compensation or indemnity is lost
a. where the principal terminates the agency for the agent’s
repudiatory breach or
b. the commercial agent terminates the agreement (unless the
termination is justified by circumstances attributable to the
principal or the age, infirmity or illness of the agent) or
c. the agent, with the principal’s consent, assigns the agency to
another (reg.18).
In Fryer Joinery Services v Ian Firth Hardware [2008] EWHC 767 (Ch) the
agent failed to produce the weekly reports despite numerous requests
and warnings from the principal. It was held that the principal could
terminate the agency.
The commercial agent loses the right to compensation or indemnity if
they do not inform the principal of their claim within one year of the
termination of the agency (reg.17(9)).
If the agency agreement specifies that the agent is entitled to
indemnity, this is calculated as one year’s commission (reg.17). If
the agency agreement does not state that the agent is entitled to
indemnity, the agent is entitled to compensation.
The parties cannot contract out of regs 17 and 18 to the detriment of
the commercial agent before the agency agreement expires (reg.19).
Activity 8.4
What are the main differences between indemnity and compensation?
Feedback: see p.85.
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Activity 8.5
Charlie appointed Suraj as his agent to buy wine from Manus on credit and
informed Manus that Suraj was his agent. However, after a few months Charlie
terminated the agency agreement with Suraj, but did not inform Manus. Suraj
continued to buy wine on credit from Manus who sent the invoices to Charlie
who has refused to pay.
Advise Manus.
Feedback: see p.86.
Self-assessment questions
1. What are the various methods of termination?
2. When is an agency irrevocable?
3. What are the effects of termination of agency?
4. What are the rules relating to the termination of a commercial agency?
5. What are the rules relating to termination and third parties?
Summary
• Revocation by the principal before the agent has fulfilled their
contractual obligations terminates the agency.
• The agent fulfilling their duties under the agency terminates the
agency.
• Fixed-term agency ends at the end of the period.
• Mutual agreement between principal and agent ends the agency.
• The agency ends where the subject matter of the agency is destroyed.
• Frustration terminates the agency.
• Death, insanity or bankruptcy of the principal or agent terminates the
agency.
• When the agent gives notice of renunciation of their agency to the
principal and the principal accepts the renunciation, the agency
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terminates.
Chapter 8: Termination of agency
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Advanced contract law: Module B
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Feedback
Feedback
Chapter 2
Activity 2.1
While consent is a requirement to create most agency relationships,
exceptionally there is no need for consent (e.g. agency created by
apparent authority and agency of necessity).
Back
Activity 2.2
a. When the principal and agent do certain acts, the agent has the
power to alter the principal’s relations with a third party. The power
to act on the part of the agent is conferred on the agent by a rule of
law and not by the principal.
b. No – estate agents do not have the power to bind the principal to
third parties.
Back
Activity 2.3
This is the relationship between principal and agent, such as the
duty to pay commission on the principal’s part and the duty to take
reasonable care on the part of the agent.
Back
Activity 2.4
This is the authority of the agent as it appears to the third party.
Back
Chapter 3
Activity 3.1
Yes – a valid agency agreement is created, as generally no formalities
are necessary to create an agency.
Back
Activity 3.2
a. Tim can sue Jane for breach of warranty of authority.
b. Jane cannot be sued by Tim.
c. Paul cannot ratify Jane’s act.
Back
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Chapter 4
Activity 4.1
Robin is liable for Mandy’s fraud even though he himself was not
fraudulent.
Back
Activity 4.2
Amy (in consultation with Rajan) can accept or reject the offer or
negotiate a more advantageous settlement to her client.
Back
Activity 4.3
Although Liz had no actual authority to sell the table below £2,000,
as Jay is unaware of the price restriction, Jay is entitled to the table at
£1,900.
Back
Chapter 5
Activity 5.1
a. Estate agent.
b. Auctioneer.
c. Gratuitous agent.
d. Agent of necessity.
e. Broker.
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Feedback
f. Mercantile agent/factor.
g. Del credere agent.
h. General agent.
i. Confirming house.
j. Commercial agent.
Back
Chapter 6
Activity 6.1
Marcel can sue Tom for breach of contract and recover his loss as Tom
has not obeyed his principal’s instructions.
Back
Activity 6.2
Sirima can sue Andy in tort for negligence as Andy has not taken due
care in carrying out the undertaking.
Back
Activity 6.3
Rani has acted in conflict of interest and has made a secret profit. She is
not entitled to the commission and will have to pay Jim the £3,000.
Back
Activity 6.4
Paula can sue Tim to recover the bribe. She could also dismiss Tim
without notice. She need not pay any commission to Tim.
Back
Activity 6.5
Jane has delegated her authority to Manuel without obtaining consent
from Ron. Ron does not have to pay a commission to Manuel. He can
sue Jane for negligence in entrusting the paintings to Manuel who did
not know the value of the paintings.
Back
Activity 6.6
Jessica is not entitled to commission on a quantum meruit basis, as the
commission is payable at the discretion of Alan.
Back
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Advanced contract law: Module B
Activity 6.7
According to trade custom estate agents are not entitled to recover
expenses and are not entitled to commission if the vendor decides to
withdraw the house from the market.
Back
Chapter 7
Activity 7.1
As Anish has informed Super Oil Co that he is buying for principals, it is
a disclosed agency.
Where the principal has been disclosed and the principal has paid
or otherwise settled with the agent, the third party is estopped from
suing the principal.
Back
Activity 7.2
Diana cannot sue Camilla for breach of contract, as she knew that
Camilla would not sell her a ticket – see Said v Butt.
Back
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Feedback
deed; where the agent signs a bill of exchange; where a trade custom
makes the agent liable; where the agent is the real principal; where the
agent has a collateral contract with the third party.
Undisclosed principal – in Siu Yin Kwan v Eastern Insurance Co Ltd
[1994] 2 AC 199 the Privy Council held that for the principal to be
liable, in entering into the contract the agent must intend to act for the
principal; the agent could also sue and be sued by the third party; the
third party can raise any defence they have against the agent against
the principal; the terms of the contract, expressly or impliedly, may
exclude the principal’s liability to be sued and to sue.
If the agent has given an implied undertaking that there is no principal
behind them, the principal cannot sue. If the third party only intended
to contract with the agent, the undisclosed principal cannot sue (Said v
Butt [1920] 3 KB 497).
The third party can sue either the agent or the undisclosed principal.
When an undisclosed principal sues the third party, the latter could set
up any defence available against the agent.
Back
Chapter 8
Activity 8.1
The estate is not liable as Manoj’s death terminated the agent’s
authority to sell the painting – see Campanari v Woodburn.
Back
Activity 8.2
Jamal’s agency cannot be revoked as he has a right of indemnity for the
money he paid the electrician.
Back
Activity 8.3
Jane’s right to sue Brad for negligence accrued before the agency was
terminated. So Jane could sue Brad for negligence.
Back
Activity 8.4
The right to indemnity arises where the agent has introduced new
customers to the principal and the agent has been deprived of the
opportunity to earn commission on business transacted with these
customers. An indemnity is payable when after the termination of the
agency the principal continues to do business with customers found by
the agent.
Claiming compensation is more advantageous to the agent as they can
claim compensation even when the principal has ceased to carry on
business.
Unlike compensation, there is a limit to the amount of indemnity an
agent can claim. But claiming an indemnity does not prevent the agent
from claiming damages.
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Activity 8.5
Manus is entitled to sue Charlie for the wine, as he was not informed of
the termination of the agency agreement with Suraj.
Back
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