Legal Blog

Agency

No doubt there are many times when laypeople have trouble understanding why the law is so complex. Actually, there are many times when lawyers feel the same way. Unfortunately, our society is complex and the laws have been fashioned to attempt to meet the needs of society. We are referring not to governmental legislation but to common law, the law made by judges in their decisions rendered in court cases.

The Problem 

Agency is the means by which someone (the “principal”) appoints someone else (the “agent”) to do something. “Go buy me a beer.” The person who makes the request is the principal. The person who carries it out is the agent. If the person selling the beer does not know that the agent is buying the beer for the principal, the principal is undisclosed. When the beer seller hands it over, with whom is the contract: the principal, the agent, or both of them? What happens if the purchase is for 1,000 cases of beer and the agent cannot pay? Whom does the vendor sue for the price of the goods delivered?

Agency Law 

The law of agency fills textbooks with its complexity. However, here are a few simple rules to keep in mind.

1.   When an agent acts on behalf of an undisclosed principal, the third party (the beer seller) thinks that it is dealing with the agent on the agent’s own behalf. If the third party subsequently finds that the agent was acting on behalf of the undisclosed principal, the third party can sue the principal (for the price of the beer) only if the agent acted within the scope of the actual authority that the principal gave to the agent. For example, if the principal authorised the agent to buy 100 cases, not 1,000 cases, it is liable only to pay for 100 cases.

2.   An agency contract is ratified when the principal agrees, either expressly or by implication, to be bound by it. It can only be ratified under certain circumstances. The third party must have known that the agent was acting as an agent, but need not know the name of the principal.

3.   If an agency contract is subsequently ratified, then the principal is liable not just for the actions of the agent carried out with actual authority, but also for the actions of the agent carried out with apparent authority. For example, the principal cannot complain about those extra 900 cases of beer because the agent had apparent authority to buy them.

These rules seem to be relatively simple but, unfortunately, there are always exceptions to rules. That is why there are textbooks on the subject. Take heart, we will spare you the exceptions.

Real Life 

As always, there is a case to illustrate the point: John Ziner Lumber Ltd. v. Kotov, a 2000 decision of the Ontario Court of Appeal.

An owner hired a project manager to build his house. The project manager was to supply the owner with all bids, obtain the owner’s approval, and then enter into contracts in the name of the owner. The project manager obtained a bid from a lumber supplier, obtained the approval of the owner, but entered into the contract in the project manager’s own name.

Part way through the project, the lumber supplier learned that the project manager was not the owner and, although the supplier did not know exactly who the owner was, knew that there was an owner and invoiced both the project manager and a corporation with whom the owner was associated. Towards the end of the project, the owner fired the project manager making all sorts of nasty allegations against him.

The owner stated that he had given the project manager authority only to purchase approximately $83,000 of lumber. He argued that the remaining $46,000, for which the supplier invoiced, was outside of the project manager’s authority and that, accordingly, the owner, as an undisclosed principal, ought not not be liable for it.

Unjust Enrichment 

The owner had a number of problems. 

First, the invoices of the lumber supplier totalled approximately $83,000 at the time that the supplier learned that there was a principal. Accordingly, the owner was liable for all of the invoices delivered to that date because the project manager had actual authority to purchase that amount of lumber.

Second, for the remaining $46,000, the owner had, by implication, ratified the contract. He had accepted delivery of all of the lumber and, even though he knew that the amounts claimed exceeded $83,000, had paid some of the invoices rendered to his corporation. Accordingly, it was irrelevant that the amount of the purchase may have exceeded the actual authority of the project manager; it was within the apparent authority of the project manager.

The court held that the owner was liable for all of the invoices.

Moral 

Had the supplier not determined that the project manager was an agent only, the supplier would have lost. A contract with an undisclosed principal in which the third party does not even know that there is a principal, much less its name, cannot be ratified.

Know the person with whom you are dealing.