Relationship Between Agent and Principal

Contents

AGENCY

Relationship between Agent and Principal

Authority of Agent

Duties Agent owes to Principal

Duties Principal owes to Agent

Liability of P for Torts Committed by their Agents

Termination of Agency Relationship

Third Party Relationships

Suing Principle – Breach of Contract

Suing Agent - Breach of Warranty of Authority

Ratification – P chooses to accept what agent has done without authority:

Undisclosed Principle

Sole Proprietorship

Pure Knowledge objectives

Registration requirement for SP Name

PARTNERSHIPS

Basics

Existence of Partnership:

Test for if Partnership exists – S.2

Section 4

Policy Reasons for Finding Partnership Exists

Lender Subordination

- S. 5 does not apply to the extent that a security interest is taken out.(Suckloff v. Rushforth)

Legal Status of Partnership

Registration of Partnership

Partnership Agreements

Dissolution of Partnership

Liabilities of Partners in Contract and Tort

Retirement of Partners

Post-retirement liability

Unless the creditor agrees otherwise, a partner who retires from a firm is still liable for the debts incurred before his retirement (s.19(2)). However, in certain circumstances, a partner may be found liable for the debts incurred after his retirement.

What Partner should do when retiring:

LIMITED PARTNERSHIP

Pure knowledge:

Existence of LP and Liability Question

LIMITED LIABILITY PARTNERSHIPS

CORPORATIONS

Overview

History

THE CONSTITUTIONAL PROCESS

THE INCORPORATION PROCESS

Why Incorporate? And Critical Evaluations

Why pick CBCA or BCBCA

Reincorporation / Continuance

Naming Process:

Extra-Provincial Registration under BCBCA

PRE-INCORPORATION CONTRACTS

The common law position on Pre-Incorporation contracts is:

Which statute to apply:

CBCA:

BCBCA

There are other, more creative, ways to enforce pre-incorporation at common law:

LEGAL STATUS OF CORPORATIONS

Potential Problems with notion of limited liability + corporation’s separate personality

LIABILITY: Disregarding the Corporate Entity (aka Piercing the Corporate Veil)

Legal Rhetoric and its Basis in the Salomon Case:

Policy reasons behind Court’s decision to pierce the corporate veil:

General Theories for Disregarding the Corporate Entity

Other Ways of Disregarding the Corporate Entity

CORPORATE OBJECTS AND POWERS AND RESTRICTIONS ON MANAGEMENT AUTHORITY

Ultra Vires

Constructive Notice Doctrine (CND) and Indoor Management Rule (IMD)

DIRECTORS AND OFFICERS

Authority and Powers of Directors

Removal of Officers – Trade Offs

SHAREHOLDER VOTING RIGHTS

Shareholder Powers Under CBCA:

Who gets to vote? See above

Significance of Voting Rights

SHAREHOLDER MEETINGS

Chairs of SH Meetings

Shareholder Requisitioned meetings

Meetings by Order of Court

Proxy Solicitation

Access to List of Shareholders

CLOSELY-HELD CORPORATIONS

Shareholder Agreements – method to constrain SH voting

Business & The Stakeholders in a Business

-“Business”: Involves the provision of goods or services

-Must obtain funds to acquire assets (inventory, equipment, land, etc.)

-Definition not constrained to for-profit activities and can extend to NFP activities and organizations (charities, gov’t organizations, etc.)

-Stakeholders: Anyone affected by conduct of business (investors, C’s, managers, Ee’s, customers, suppliers, competitors, local community, etc.)

Different Forms of Association

-Agency:

-Person (agent) can affect another person’s (principal) legal relations by entering into contracts or the disposing of property with strangers.

-1. A-P Relationship: Person carrying on business (P) gives another person (A) legal authority to conduct business on his behalf

-2. A-3P & P-3P Relationships: Raises issues of relationship b/w P & A, P & 3P, A & 3P

-Sole Proprietorship (SP):

-1. Single equity investor (the SP) w/ ultimate management authority

-2. SP can engage agents & hire Ee’s

-3. C’s (who may impose management constraints): SP usually obtains some funds on credit, so normally one or more C’s

-4. SP not a separate legal entity: SP owns assets of business and K’s personally w/ C’s, Ee’s, suppliers, and customers of busines

-5.SP extinguished on death of SP (may continue for administering deceased’s estate, but only until assets distributed)

-Partnership:

-1. More than One Equity Investor: known as partner, normally has some say in how business is managed

-2. Agents & Employees: Partners may conduct business through A’s or hire Ee’s. Partners may be A’s for eachother.

-3. Creditors (with possible constrains): Partnership normally borrows funds, so usually one or more C

-4. Partnership is Not a Separate Legal Entity: Partnership cannot enter into Ks w/ other persons, only partners can

-Where torts arise, partners liable either directly for their part in commission of tort or vicariously

-Assets of business are owned by partners

-5. Continued Existence: Relationship b/w partners extinguished upon death or bankruptcy of any partner

-Partnership may be reconstituted afterwards, and may be statutory or agreed-upon provisions for reconstitution or continuation among remaining partners, but partnership that existed before ceases to exist

-Limited Partnership:

-1. Limited Partners w/ Limited Liability(L=investment) and One or More General Partners w/o Limited Liability

-2. Involvement of Limited Partners in Management: Limited partners may not have substantial stake in partnership business

-3. C’s, A’s, & Ee’s: Limited partnership similar to partnership in terms of having creditors, agents, and employees

-4. Legal Status: Not a separate legal entity

-Limited Liability Partnership:

-AB,ON,SK,QU – Partners not liable for acts of fellow partners or employees unless they were supervising activity that caused loss

-Still liable for debts of partnership

-BC – Partners not liable for non-supervised activities or debts of the firm.

-Corporations:

-1. Separate Legal Entity: Forms own K’s, hires own Ee, commits own torts, owns the assets

-2. One or More Equity Investors: Known as shareholders/members in NFP. Shares = bundle of rights (but no title to assets)

-3. Limited Liability of Equity Investors: Shareholder liability limited to amt of their investment

-4. Potential Perpetual Existence: B/c corp is separate legal entity, its existence can be perpetual

-5. Management: Directors/Officers manage corp. Can be shareholders

-6. Can have creditors, agents, employees.

-Limited Liability Companies

-US corp that gives flow-through tax treatment with separate legal entity status, but with limited duration and share restrictions

-Unlimited Liability Companies

-Shareholders are fully liable. Form in Al/BC/NS for US tax advantage purposes

-Business Trusts:

-1. Business Trust: Trust set up as form of association for carrying on business

-2. Express Trust: One or more persons (settlors) who put title to property in trust in hands of one or more persons (trustees) w/ instructions that trustees hold that property for benefit of other persons (beneficiaries)

-Trust Instrument: Sets out details of operation of a trust (law flexible as to how the trust can operate)

-Trust not a separate legal entity (trustees have title to assets and can transact wrt those assets on behalf of beneficiaries)

-3. The Business Trust Form of Association:

-(a) Investors as Settlors and Beneficiaries : Equity investors can invest by settling funds on one or more trustees charged w/ managing funds for beneficiaries (beneficiaries = the investors)

-(b) Creating Equivalents to Shares, BOD, and Officers : Investor beneficial interests can be divided into units that resemble shares

-Trust instrument can provide for election of trustees by the beneficiary-investors; replicates corp BOD

-Trustees can be given authority to delegate aspects of their management duties to others; allows them to engage A’s and hire persons who can be given management duties similar to those given to officers of corp’s

-(c) Limited Liability: Trustees are liable for K they enter. Beneficiaries/investors not normally liable

-Two main sources of liability risk for investors:

-1. Implied right of trustees to be indemnified for their losses by beneficiaries in some situations

-2. Possibility that trustees will be considered agents of the investors in some situations

-Trustees can waive right to indemnification and likelihood of trustees being considered agents for investors is small as long as they do not have significant control over business (means risk of personal liability of investors should be small)

-Co-operative Associations:

-Corporation with members instead of shareholders; members use corps services; no dividend, profits used for developing association or providing services to members.

-Societies or NFP Corporations:

-Separate legal entity for non-for-profit operations.

-Unincorporated Associations:

-1. More than One Person, Carrying on NFP Activities in Common: = Partnership w/o profits

-2. No Corporation Formed:

-3. Not a Separate Legal Entity: Members personally liable, can be agents for another = vicarious liability

-Mutual Organization

-Corp/NFPC/Trust/UA raises capital through membership fees, provides services for members

-E.g. Credit union/ mutual insurance

-Social Enterprise

-Corp form where activities include both for profit and NFP (public benefit mission)

-Joint Ventures:

-No precise legal meaning. May be a partnership, corp, or just a contractual relationship where person combine resources for a common objective.

-Franchises:

-Nature – Franchisor licenses rights to IP and products

-Basic Elements: Franchises usually contain one or more of three basic elements:

-(i) Provision of know-how by franchisor

-(ii) Image recognition provided by franchisor’s marketing support

-(iii) Benefits of joint purchasing power allowing for quantity discounts

-Legal Nature: Franchise/Franchisor can be set up as corp, P, SP

-Multiple Ks:

-Possible to just form multiple Ks, but high transaction costs (negotiating, monitoring, enforcing), so go with another form to reduce costs.

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Some Simple Accounting

Four commonly used financial statements are:

-(i) The balance sheet;

-(ii) The income statement (often called a “statement of profit and loss”);

-(iii) The statement of retained earnings; and

-(iv) The statement of changes in financial position (or, instead, a statement of sources and uses of funds).

The Balance Sheet:

-Lists:

• Assets (continuing value to a business for more than a year)
• Liabilities (Fixed obligations – loans, trade credit)
• Equity (Residual obligations – what is left over after liabilities are paid)

-These show the source of funds from the business and how they were used. Equity + Liability = Assets, they must balance out.

-Provide idea of the Business:

• Amount of equity investment vs credit; helps make investment decisions
• How management uses assets (dividends, re-investments)

The Income Statement:

-Shows the revenue of the business less the expenses of the business. Revenues could be from “sales” of goods or services, “royalties,” “licence fees,” “rental income,” etc. These are listed first and totaled.

-Then expenses are listed and totaled and the total expenses are deducted from the total revenues to arrive at a net income.

Trade Credit, Accounts Payable and Accounts Receivable:

-Trade Credit: Goods or services acquired on credit (ie buy now and pay later (+interest).

-Accounts Payable – what business owes (in liabilities section of balance sheet)

-Accounts Receivable – what business owed (asset on balance sheet)

AGENCY

An agent is a person who affects the legal relations of the “principal” by entering into contractual relationships on behalf of the principal. P can be vicariously liablefor tort’s committed by their A’s

Relationship between Agent and Principal

Authority of Agent

An agent may have actual authority and/or ostensible authority.

1. Actual Authority:

-An A can bind a P through exercising “actual authority”. Actual authority can be express or implied.

-1) Express Actual Authority: is granted expressly or can be inferred from an oral or written agreement.

-2)Implied Actual Authority: is theAuthority that P and A would have understood the A to have in the circumstances. It is composed of usual or customary authority.

• 1. Usual Authority:
• The authority that this particular principal has allowed this particular agent to do in the past. (Freeman & Lockyer = BoD let one director act like he was managing director)
• Policy: Unfair for principle to allow agent to do certain things on his behalf several times and then turn around and say the agent will not be compensated for his acts because he did not have express authority.
• 2. Customary Authority:
• The authority that agents of this type are normally given.
• Implied authority cannot override express provisions that restrict the activity.

2. Ostensible Authority:

-If an agent does not have actual authority, it may still have ostensible authority when dealing with third parties that can bind the P in certain ways.

-An agent is said to have ostensible authority when there is representation and reliance: (Freeman & Lockyer)

-1) Representation:

• Alleged P made a representation to the 3P, or permitted a representation to the 3P that the alleged A had authority to act on behalf of the alleged P.
• Representation can be express or implied from words, conduct or the circumstances.
• If A acted like it had authority to 3P, and P permitted this, representation occurred (Freeman & Lockyer)

-2) Reliance:

• 3P reasonably relied on the representation to his detriment.

-Policy for allowing Ostensible Authority:

• Protects 3P reasonable reliance.
• Least cost avoidance – Easiest for P to take steps to avoid misrepresentation from occurring.

Benefit of agency would be destroyed if 3P had to check with P for every reasonable reliance on A.

Duties Agent owes to Principal

1.An A must perform Agency Obligations

-Perform tasks that have been assigned by terms of agreement or instructions of P.

2. An A owes certain fiduciary duties to the principal.(Duties are subject to amendment by implication from circumstances or express agreements)

1. Duty of Loyalty – Duty to act in best interests of the principal, which includes:
2. Avoid conflicts of interests – (Remedy = accounting of profit/void contract/damages/injunction)
3. Not to make secret profits – (Remedy = accounting of profits)
4. Perform with Reasonable Care – (Remedy = damages)
5. Must meet standard of care of skill and diligence of an agent in their usual position would have used.
6. Not to delegate – (remedy = damages, injunction)
7. Principle engaged specially with A, not with anyone. Can be overridden expressly or implicitly
8. Keep Proper Accounts – (remedy= evidentiary presumption against agent who fails to keep proper accounts in any dispute)

Duties Principal owes to Agent

1. P must pay A remuneration (most of the time)

-Though there is no CL duty to pay remuneration, the duty arises where there is an express agreement to do so, or an agreement is implied by the agent acting in a manner where compensation would be expected.

-The agent must be performing the obligations under the agreement. If paid by commission – A must be cause of the sale, contract, etc. However, exclusive agents (by express agreement) get paid whether cause or not.

2. P must pay the A’s expenses and indemnify the agent against losses

-That incur thought the scope of the A’s actual authority and not through fault of agent.

Liability of P for Torts Committed by their Agents

The P can be liable for torts committed by their A if:

-Test: The A committed the tort while acting within the scope of his authority (actual or ostensible).

• This does not mean that the agent authorized the tort itself, but rather, the A committed the tort while doing the kind of things that would be within the scope of the A’s authority. (Lloyd)
• Ernst & Young v. Falconi - Partner (agent to other partners) used facilities of law firm to perform services normally performed by a law firm in a way that resulted in a tort.
• Ex: Lloyd v Grace, Smith and Co (1912):
• Clerk employed at a law firm defrauded a client of her sole remaining assets: mortgaged plf’s property to a bank, kept mortgage using the funds to pay off personal debts. Client sued the parter of the law firm. Held: Although P did not authorize cleark to commit fraud, P’s must be held liable for the fraud of their A b/c fraud committed while doing the kinds of things in the scope of his authority (filling mortgage papers)

-Policy reasons for liability against P for the torts committed y A

• 1. Deterrence/Least Cost Avoidance: If particular activity can cause harm, then imposing cost of harm on that activity can deter it
• Imposing the loss of P gives him incentive to take steps to avoid the loss.
• P might be more careful in choosing the agent in assessing his trustworthiness, more careful in monitoring A’s activities, dismissing A if there are early signs he may commit fraud.
• P might obtain insurance against liability for frauds committed by his agents. (Lloyd v Grace
• 2. Allocation of the loss to the activity causing the loss
• Allocating the loss to the activity that causes loss increases in the price of the goods or services because of the added costs of harm prevention and compensation for losses. The price of the activity will then more closely reflect the full cost to society of the particular good or service
• Ex. Lloyd v Grace, Smith and Co: Cost of law firm of monitoring clerk’s activities and compensating those who suffer losses should be reflected in price of legal services.
• 3. Concern for compensation of the victim
• P more likely to be able to pay than A
• 4. Other Concerns:
• Lloyd v Grace: Court may have been influenced in part by the effect such as case might have on the accessibility of legal services. It is considered important that people feel comfortable with seeking out legal advice, and if compensation had not been given in that case, people might become reluctant to seek legal advice for fear of being defrauded.

Termination of Agency Relationship

The agency relationship can be terminated by the act of the parties or by operation of law.

1. Termination by act of the parties:

-Agency agreement states that agency is terminated, or

-Agency is unilaterally terminated by P or A on notice (no reasonable notice required)

2. Termination by operation of law:

-Bankruptcy of A or P (both need money to fulfill their end of relationship)

-Frustration = Whole purpose of agency relationship no longer exists, so relationship ends.

-Death of A or P

Third Party Relationships

WHEN SOMETHING GOES WRONG: 3P can sue the alleged principle for breach of contract on the basis that the agent had authority (ostensible or actual), or can sue the alleged agent on the basis of breach of warranty of authority.

Suing Principle – Breach of Contract

1. Establish the agent was actually an agent, and actual authority existed OR Establish ostensible authority existed. Principle is party of contract with 3P.

Suing Agent - Breach of Warranty of Authority

A third party can make a claim against an A for breach of warranty of authority when the agent warranted that he had authority to enter into a contract, but he had neither actual nor ostensible authority.