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Concise Australian Commercial Law

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Question:

Using the Common Law of Agency, advice Paratol Ltd on their legal position?
 
 

Answer:

Issues

According to the scenario of the case, the Australian based pharmaceutical wholesaler PharmCo negotiated a distribution agreement with Paratol Ltd in the month of January 2015 in keeping with which Paratol was required to release a large stock of painkillers for distribution to PharmCo for a valuation of $2,00,000. The company was given a grace period of six months to pay off the amount. The major issue that was identified in the case was related with providing of guarantee letter from the asset manager in order to ensure that if default is made by PharmCo, liquidating its assets would amount to $2,00,000. The guarantee was signed by the Processing and Payment Department of Goldman Asset Management (GAM), which manages the complex finances of PharmCo. After it was received by Paratol Ltd, it commenced its delivery of stock to PharmaCo. However, PharmCo defaulted on the payment on December 2015 due to its insolvency and the company was found to be operating under huge loss since the past eight months. In this context, Paratol Ltd claimed its debts against GAM that did not accept the liability of paying off the same. It stated that the Guarantee and Valuation Department is responsible for signing the guarantee rather than the Processing and Payment Department. Furthermore, the manager also claimed that the document was signed by GAM for verifying the signature of PharmCo but not to ensure its liquidity and accept its guarantee. There was no such information mentioned in the guarantee document regarding the acceptability of guarantee that through which GAM would be held liable. In practice, the signature of the manager was for verifying the signature of PharmCo for limited purpose that was unknown by both the companies. 

 

Rules

Analyzing the case scenario, it is revealed that there is an applicability of common law of agency that will help in advising Patrol Ltd on their legal position. The law of agency completely deals with contractual, non-contractual and quasi-contractual fiduciary relationships involving an individual known as agent[1]. The individual is generally given the authority to take action on behalf of a party for the purpose of creating legal relationships with a third party. The law represents equal relationships between an agent and principal through which the principal implicitly or explicitly provides authorization to the agent to work on behalf of him/her[2]. The agents are required to negotiate with the third parties on the principal’s behalf for entering into a contractual relationship[3]. The common law of agency in Australia comes under Victorian Legislation and the Agents Act 2003[4]. The law further states that the liabilities and reciprocal rights between an agent and principal reflect legal and commercial realities. The law categorizes agents into three different classes that include universal agents, general agents and special agents. Universal agents possess the authority to perform on behalf of the principal and they may also have professional relationships or hold power of attorney[5]. General agents possess limited authority for conducting transactions for a continuous time period and finally the special agents possess the authority for conducting specified or single transaction over a limited time period[6]. There are various statutes formulated by the Australian government that generally regulate the activities of the agents and these include:

  • Auctioneers: Auction Sales Act 1958 (Victoria);
  • Estate agents: Estate Agents Act 1980 (Victoria);
  • Finance brokers: Consumer Credit (Victoria) Act 1995 (Victoria);
  • Travel agents: Travel Agents Act 1986 (Victoria);
  • Mercantile agents: Goods Act 1958 (Victoria); and
  • Insurance agents: Instruments Act 1958 (Victoria), Credit Act 1984 (Victoria)        

The law also demonstrates the liability of agents to the third parties and principal and the liability of principal to the agent. In context to liability of agent to third party, if the agent possesses apparent or actual authority, the agent will not be liable for the acts being performed within the authority’s scope until the disclosure of principal’s and agency’s identity[7]. In case the agency is partially disclosed or not disclosed at all, the principal and the agents both will be held liable. Similarly, with regard to the liability of agent to principal, if the actions of agent are without actual authority and the principal is bound because of possessing apparent authority, it is the liability of agent in indemnifying the principal for damage or loss occurred[8]. However, in context to the liability of principal to the agent, if the actions of the agent are within the range of provided authority, the agent must be indemnified by the principal for transactions made.       

The law of agency can be demonstrated with the help of a popular case, [Tooth v Laws (1888) 9 LR (NSW) 154]. According to the case, Laws (principal) held the position of hotel licensee who kept his name over the hotel door even though he did not possess any interest in the business. The agents who were conducting the business were supplied liquor by a third party, Tooth & Co. that took legal actions for the cost of liquor. As Tooth & Co. was not provided with the information that Laws was not conducing the business, he could not deny that the individuals who were conducting the business were acting as his agents. Thus, Laws was held liable for the particular action[9]. According to the law, the apparent authority may not be considered more important than the actual authority as at a majority of the circumstances the third party remains unaware of the agent’s actual authority. The similar incident can be demonstrated through the case of [Pacific Carriers Limited v BNP Paribas (2004) HCA 35] in which BNP Paribas was held responsible for the loss caused to Pacific Carriers Ltd due to arresting of their vessel for not providing relevant bills against the indemnity letters[10].  The Law of Agency also states that the agent possesses the authority to act for the principle only after having the actual authority to do so. This can be demonstrated through the case [Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480], in which Buckhurst Park Properties was held responsible for the damage caused to the opponent party[11]. The third parties are usually unaware of the agreements between the principle and the agent, thus they are also unaware of the agent’s actual authority that can be demonstrated through the case [Crabtree-Vickers Pty Ltd v Australian Direct mail Advertising and addressing co pty ltd][12].        

Application

Application of the above stated rules in relation to the particular case scenario would serve beneficial for Paratol Ltd as an effective advice on its legal position that will further help in resolving the identified issues. Applying the common law of agency in the case scenario, GAM would not be held responsible for the failure to repay the credit amount to Paratol Ltd rather PharmCo is liable to pay off its debts to the company. GAM signed the letter of guarantee at the authority of PharmCo in which the company was considered to possess enough liquid amounts to pay of the debts if any default is made. According to the Law of Agency Act, the agent is not held liable for performing any type of acts under the authority of the principal rather the principal would be held responsible for the act. The law is only applicable if the name of the principal and the agents both are disclosed to the third party. It is advisable to Paratol Ltd to claim the due amount from PharmCo even though it has become insolvent. The company may make use of the reserves or the personal savings/current accounts of the business partners of PharmCo in order to pay off the debt of Paratol Ltd. Furthermore, the manager of GAM also claimed that she did not sign the guarantee for ensuring the liquidity of the company rather the signature was for the verification of PharmCo’s signature. Paratol Ltd is thus advised to act legally against PharmCo to recover the debt amount that was due as a result of insolvency. A similar scenario can be found in the case of [Watteau v Fenwick [1893] 1 QB 346] in which the principal was held responsible for all the acts that were conducted by its agent as regards to  the third party involved in the agreement[13]. 

 

Conclusion           

From the overall case scenario, it is evident that the Paratol Ltd is advised to claim the credit amount of $2,000,000 from PharmaCo itself rather than considering GAM liable for the loss being suffered due to the insolvency of PharmaCo. GAM was the agent who was given the authority to act on behalf of PharmaCo and the law considers the principal as liable of any damages or defaults made in the contract. Thus, according to the law the agent is not responsible for any type damages caused to the third party of the contract if it is given complete authority by the principal company to act on its behalf. 

 

References

“Australia,” Fox Williams, Last modified June 10, 2016, 

Anson, William Reynell, Jack Beatson, Andrew S. Burrows, and John Cartwright. Anson's Law of Contract. United Kingdom: Oxford University Press, 2010.

Anyanwu, Chika. "Challenges to privacy law in the age of social media: An Australian perspective." Australian Journal of Communication 40, no. 3 (2013): 121.  

Barton, Charmian. "Status of the Precautionary Principle in Australia: Its Emergence in Legislation and as a Common Law Doctrine, The." Harv. Envtl. L. Rev. 22 (1998): 509.

Braithwaite, John, John Walker, and Peter Grabosky. "An enforcement taxonomy of regulatory agencies." Law & Policy 9, no. 3 (1987): 323-351.

Cheer, Ursula. "How the law attempts to deal with hoaxes and pranks in the media that lead to harm." Findlaw (2012): 21-48.

Donaldson, Lex, and James H. Davis. "Stewardship theory or agency theory: CEO governance and shareholder returns." Australian Journal of management 16, no. 1 (1991): 49-64.

Eisenberg, Melvin Aron. "The responsive model of contract law." Stanford Law Review (1984): 1107-1167.

“Freeman & Lockyer -V- Buckhurst Park Properties.” First Mag. Last modified June 23, 2016,

Granville, Johanna. "Dot. con: the dangers of cyber crime and a call for proactive solutions." 

Hawkins, Keith. Law as last resort: Prosecution decision-making in a regulatory agency. United States: Oxford University Press on Demand, 2002.

King Edward, V. I. I. "Prank call with tragic consequence." LAMP (2013): 31.

Mulheron, Rachael. The class action in common law legal systems: a comparative perspective. London: Bloomsbury Publishing, 2004.

Paul, Simone, Peter K. Smith, and Herbert H. Blumberg. "Investigating legal aspects of cyberbullying." Psicothema 24, no. 4 (2012): 640-645.

“Pacific Carriers v. BNP Paribas.” Clark, David Martin. Last modified June 23, 2016, 

Turner, Clive, John Trone, and Roger Gamble. Concise Australian Commercial Law 3rd edition. United States: Thomson Reuters, 2014.

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