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Scenario A: Liability in Agency Law

1. Tina appoints Brad as checkout operator at her independent garage which she operates as a sole trader. The business operates both as a service station and as a used-car lot.

Tina contracts glandular fever, and during the four months she is off work, she tells Brad that he can order petrol while she is sick. During this period, Brad negotiates supplies with Caltex. Brad orders fuel from Caltex every fortnight. Tina returns from her illness, and tells Brad that he should no longer order petrol and that matters will be conducted as they were before she was ill. However Brad, who enjoys the increased status of dealing with the oil companies, ignores Tina's instruction, phones Caltex and orders 30 000 litres of fuel. When the truck arrives to deliver the fuel, Tina is furious (as she has already entered into a more advantageous arrangement with BP). She phones Caltex, and denies that there is a contract between her and Caltex, stating that Brad was acting contrary to instructions when he placed the order.

Tina employs Paul as a salesman of the used vehicles. Paul has several years experience in the second hand vehicle market. Tina has a number of vehicles on display, including a 2012 Holden Commodore Wagon, priced at $ 19 000. She does not realise that the vehicle could easily fetch $ 25 000. Paul however does know this, and also that his next door neighbour, Fred, wants to purchase just such a vehicle. Paul says that he needs a vehicle himself, and buys the wagon from Tina for $ 19 000. He then sells it to Fred for $ 25 000;Tina is furious when she finds out what has happened.


Advise Tina as to her legal position in relation to the above situations, citing relevant authority.

2. Simon, George, Sara and Mary were all employed by different IT companies. However, they felt that they could do better if they went into business themselves. They pooled their available cash and drew up a partnership agreement, which stated that each partner had authority to enter into transactions on behalf of their IT firm, which they called Computer Solutions. The firm operates in Sydney and provides a service of storing data for customers. The agreement states that partners have authority to enter into contracts of up to $ 10 000, but that any contract for more than that must be approved unanimously by all partners.

George, Sara and Mary approach you for legal advice in relation to two transactions entered into by Simon, who had acted without referring back to the partners. On was for a 500TB storage drive, bought by Simon on behalf of Computer Solutions, from Sunstar Computer Hardware Ltd, costing $ 12 000.

The other was for a second-hand ute, costing $ 9 000, which Simon ordered for the firm from You Beaut Ute Ltd, on the basis that the partnership should branch into the freight business.

George, Sara and Mary have refused to accept delivery of both the storage drive and the ute and the partnership has been sued by both Sunstar Computer Hardware Ltd and You Beaut Ute Ltd. Give George, Sara and Mary legal advice, referring to relevant statutory and case law authority.

Scenario A: Liability in Agency Law

Can Tina be held liable for the purchase of fuel made by Brad and would she be liable to reimburse Caltex for the same?

The agency law is one of the common laws in the nations, which helps in governing the relationship between the principal and the agent of such a principal. Further, this common law helps in establishing the liability of an agent towards the acts undertaken to the third party, upon the principal. The principal is held accountable for the actions conducted by the agent, and this accountability is towards the third party (Busch, Macgregor and Watts, 2016, p. 37). This is because the third party has to be given some sort of safeguard for the acts which the agent undertaken with them. The reason for this is that the third party has no idea about the magnitude of relationship or authority between the principal and the agent, and so, for all acts done by an agent, as per his authority, the principal would be bound by the same (Munday, 2010, p. 13).

Actual authority and the apparent authority are the two forms in which the authority given under the agency law is classified. Under the apparent authority, the perception is made which leads the third party into forming a view that the agent has the necessary authority to conduct the work being done by him. Though, the principal had never given such an explicit permission to the agent to carry on such work (Patterson Law, 2012). The other form is the express or actual authority. In this form, the principal clearly and expressly tells his agent to do certain thing, and the agent has to conduct the work as per this express authority imparted on him by the principal (Murdoch, 2014, p. 5).

There are a number of established case laws which can help in clarifying how and when the authority makes the principal accountable for the agent’s actions. One of such cases is the case of Watteau v Fenwick [1893] 1 QB 346. In this particular matter, a beer house was being operated by Humble in which the plaintiff used to supply cigars. After the interest was assigned by Humble to the defendant, the cigars were continued to be supplied. And Humble remained the manager of the beerhouse. The cigar supply continued and Humble has no clue about Fenwick’s participation. Humble never had the authority to work on behalf of Fenwick. When the payment was not made, Fenwick was sued for 25 pounds by Watteau. The Country Court held that Humble had the general authority, which made the defendant liable for the claims initiated by the plaintiff, as a result of the implied authority (Smith, 2012).  

Another case in this matter is the case of Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 4. In this case, the defendant and the director of the company, Shiv Kapoor was indulged in a legal battle with Freeman and Lockyer for the architecture work fee which was outstanding. Shiv was never specifically appointed as the managing director of the company and yet he portrayed that he held this position. The other directors knew that such a portrayal was being made. This knowledge ultimately led to the court holding the defendant liable for the fee for architecture work and the defendant was ordered to pay the required amount to Freeman and Lockyer (PQ Magazine, 2017).

Scenario B: Authority in Partnership Agreements

Applying these laws here, an express authority was given by Tina to Brad for ordering the fuel from Caltex when she was not present. However, when she came back, she revoked this permission. However, this revocation was not communicated to Caltex, and they continued to supply fuel to Brad when he ordered again. As per Watteau v Fenwick, Tina would be liable for the acts done by her agent, even when she was not aware that Brad continued to hold himself as the agent, due to the agency law. Moreover, even as per Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd, Tina would have to reimburse Caltex, due to the applicability of the apparent authority held by Brad as still being the agent of Tina, and having the requisite authority.

Conclusion

In short, Tina would be held liable for the purchase of fuel made by Brad and she would be liable to reimburse Caltex for the same

Can the money be recovered by Tina from Paul?

The agency law puts certain duties on the agents who act out on behalf of the principal. As the agent works on behalf of the principal, they get to know a lot of things. This particular information has to be properly used by the agent and no secret profits are allowed to be made by the use of such information. The agents have the obligation of acting in good faith and ensuring that they deal in a fair manner (Jones, 2014).

In Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111, the defendant, as an agent was held to have violated his good faith duty towards the plaintiff by stating false information to the plaintiff. In this matter, the plaintiff was given the exclusive rights to sell the Manchester United fragrance in certain nations. Due to the false information provided by ITC, they were held to have breached the good faith principle (Maughan and Wells, 2013).

Here, crucial information was withheld by Paul pertaining to both the interest of his neighbor and the actual price which could be attained for the vehicle. Instead of telling Tina about this, he made a secret profit of $6,000. Due to the applicability of principle of good faith, Tina, as a principal, can sue her agent for the dishonesty and claim the amount of secret profit made by him.

Conclusion

In short, Tina can recover the secret profits made by Paul.

Can the three partners, apart from Simon, be held accountable to You Beaut UTE Ltd for $ 9,000 and to Sunstar Computer Hardware Ltd for $ 12,000?

A partnership can be defined in terms of a mutual arrangement, entered into between two or more individuals, whereby they have a common interest and want to earn profits. These individuals are given the name of partners. The governing legislation for the partnerships in New South Wales is the Partnership Act, 1892. Section 1 of this act defines the purpose of the partnership, as earning profits, with mutual interest (NSW Legislation, 2012).

Section 53B of this act provides that a partnership can be formed with or without a partnership agreement. The partnership agreement is a document, where the terms which form the foundation of the partnership, are stated and act as the governing document for the partnership firm (Commins Hendriks Solicitors, 2017). Being an agreement, which is drawn in written manner, containing the terms of partnership, it is treated as a contract (Williams, 2011, p. 335).

Hence, when a partner does something, which is beyond what has been stated in the partnership agreement, not only can a case be made for working beyond this agreement, but also for a breach of contract. A breach of contract depicts the failure of party or parties of contract, in keeping their promised aspect and opens the possibility of claiming damages which are in form of monetary compensation (Latimer, 2012, p. 469). A claim can also be made for the equitable remedies, where by the contract could be rescinded, or a specific performance or the injunction in doing particular task can be attained (Clarke, 2016).

The principles of agency law are also applied on the partnership. As a result of this, each and every partner, along with the partnership firm, is held liable for the work done by one of the partner. This is because the partners are the agent of other partners and of the partnership firm. And so, for the claims raised by the third party, the partnership firm and the other partners become legally responsible (Parisi, 2017, p. 415). These provisions are further provided in section 5 of the Partnership Act, 1892 (NSW). As per this section, both the partnership firm and the other partners are liable for the work done by the particular partner.

Under section 8 of this act, in case of a notice being given to the partners, whereby the partners are restricted from holding the partnership firm liable for the acts done by them, and even when such an act is done by the partner, the firm would not be bound by the same and instead, the same would be conceded as a contravention of this act. Section 9 of this act helps in fixing the legal responsibility of the partners, pertaining to the obligation of the partnership firm, which are derived from the acts of the partners (NSW Legislation, 2012). The raison d'être behind this view of the law was aptly stated in Lang v James Morrison & Co Ltd (1911) 13 CLR 1. It was stated in this case that the partners as the partners conduct the work on the partnership firm’s behalf, and the partners act for each other, the liability arises of the partners towards each other, which gives rise to the accountability (Jade, 2011).

Another landmark case is that of Phillips-Higgins v Harper [1954] 1 QB 411. The court stated that the partners hold a fiduciary duty towards each other, as they are the agent of such a firm, where all of them are partners. So, a duty of care is owed by the partner to such other partners, and the same is true vice versa (Swarb, 2015a). In the legal matter of Mercantile Credit Co Ltd v Garrod [1962] 3 All ER 1103, the partners were held responsible for each other and the court stating its verdict, provided that the sale was as per the usual course of trade and commerce of the particular partnership, and this made the partners liable for the undertaken sale (Swarb, 2015b).

However, an entirely different ruling was given in National Commercial Banking Corporation of Australia Ltd v Batty (1986) 60 ALJR 379. In this matter, it was held by the court that the partnership firm could not be held legally responsible for the actions of the partner, when such actions were wrongful in nature and were done by exceeding the scope of authority which has been imparted over the partner. This was in addition to the money which the firm attained as the same was not in the usual course of the firm’s business, the partnership firm could not be made responsible for such an action of the partner, as this was out of the given authority (Jade, 2017).

Here, the partnership was created between Simon, George, Sara and Mary. And a partnership agreement was formed which governed this partnership. This agreement provided that beyond the amount of $ 10,000. And yet, Simon formed a contract with Sunstar Computer Hardware Limited, the value of which was $ 12,000 for a storage drive. This was beyond the authority provided by the partnership agreement to Simon. Applying the case of National Commercial Banking Corporation of Australia Ltd v Batty, this was in the usual course of the trade of the partnership. But to the applicability of section 8 and other provisions of this act, the firm would not be held accountable for the acts done by Simon.

But, the agency law also has to be applied. This agency law holds the other partners liable for the act of fellow partner. So, as per Phillips-Higgins v Harper, the partners would be jointly liable to Sunstar Computer Hardware Limited. Though, the other partners can initiate claims for a breach of contract against Simon, and get an injunction order to stop Simon from doing the same in the future.

In the matter of You Beaut Ute Ltd contract, the purchase of UTE the partner had the authority to enter into a contract with this value. But, this was not in the usual course of partnership firm’s business, hence, the firm cannot be held liable for the same. So, Simon would be personally liable for the contract undertaken with You Beaut Ute Ltd.

Conclusion

Hence, Simon would be held accountable to You Beaut Ute Ltd for $ 9,000; and to Sunstar Computer Hardware Ltd, the three partners would be liable for $ 12,000.

References

Busch, D., Macgregor, L., and Watts, P. (2016). Agency Law in Commercial Practice. Oxford: Oxford University Press, p. 37.

Clarke, P. (2016). Remedies for Breach of Contract. Retrieved from: https://www.legalmatch.com/law-library/article/breach-of-contract-equitable-remedies.html

Commins Hendriks Solicitors. Written Partnership Agreements – Why All Partnerships Should Have One. Retrieved from: https://www.comminshendriks.com.au/written-partnership-agreements-%E2%80%93-why-all-partnerships-should-have-one

Jade. (2011). Lang v James Morrison and Company Ltd. Retrieved from: https://jade.io/j/?a=outline&id=62121

Jade. (2017). National Commercial Banking Corporation of Australia Ltd v Batty. Retrieved from: https://jade.io/j/?a=outline&id=67268

Jones, D. (2014). Implied duty of good faith - what is the current position for distributors?. Retrieved from: https://www.agentlaw.co.uk/site/briefing_notes/implied_duty_of_good_faith_what_is_the_current_position_for

Latimer, P. (2012). Australian Business Law 2012, 31st ed, Sydney, NSW: CCH Australia Limited p. 469.

Maughan, A., and Wells, S. (2013). UK: Good Faith Obligations In English Law. Retrieved from: https://www.mondaq.com/x/252158/Contract+Law/Good+Faith+Obligations+In+English+Law

Munday, R. (2010). Agency: Law and Principles. Oxford: Oxford University Press, p. 13.

Murdoch, J. (2014). Law of Estate Agency, 5th ed, London: Routledge, p. 5.

NSW Legislation. (2012). Partnership Act 1892 No 12. Retrieved from: https://www.legislation.nsw.gov.au/inforce/f9dfc85e-8f91-e79f-99e5-8042677519f3/1892-12.pdf

Parisi, F. (2017). The Oxford Handbook of Law and Economics: Volume 2: Private and Commercial Law. Oxford: Oxford University Press, p. 415.

Patterson Law. (2012). The Doctrine of Ostensible Authority. Retrieved from: https://pattersonlaw.ca/NewsArticleView/tabid/179/ArticleId/169/The-Doctrine-of-Ostensible-Authority.aspx

PQ Magazine. (2017). A Quick Look At… Freeman & Lockyer V Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480. Retrieved from: https://www.aiaworldwide.com/international-accountant/editors-blog/quick-look-%E2%80%A6-freeman-lockyer-v-buckhurst-park-properties

Smith, J.C. (2012). Watteau v Fenwick. Retrieved from: https://h2o.law.harvard.edu/collages/1557

Swarb. (2015a). Phillips-Higgins v Harper: QBD 1954. Retrieved from: https://swarb.co.uk/phillips-higgins-v-harper-qbd-1954/

Swarb. (2015b). Mercantile Credit Co Ltd v Hamblin: CA 1964. Retrieved from: https://swarb.co.uk/mercantile-credit-co-ltd-v-hamblin-ca-1964/

Williams, G. (2011). Corporations and Partnerships in New Zealand. The Netherlands: Kluwer Law International, p. 335.

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