Understanding Agency Law And Elements Of A Good Business Contract Is Crucial For A Comprehensive Essay.

By referring to relevant case law, critically discuss the following types of agents’ authority:
•    Express actual authority
•    Express implied authority
•    Usual authority
By referring to case law and examples, critically discuss what elements should be taken into account to draft a good business contract.
You should focus, in particular, on the following aspects:
•    The definition and incorporation of terms
•    Confidentiality
•    Penalty clauses
•    Termination of contract
•    Applicable law

Under the English law, the relationship between the principal and the agent is governed by the agency law, which is a part of the common law. Agency law is an important area under the commercial law, which makes the principal liable for the acts done by their agent, to the third party. The principal is made liable because the agent represents the principal when they enter into transactions for the principal (Benett, 2014). This is the reason why any transaction undertaken by the agent with the third party is deemed as a transaction which took place between the principal and the third party. The principal is held liable for such acts as they give the agent the authority of conducting deals on their behalf. Also, the third party is not aware of the level of authority which is given to the agent or even on the lack of it in certain cases, or about the kind of relation which is present between the agent and his principal (Hynes, 2014).

The authority given to the agent also has its subtype. There are two broad classifications of actual authority and apparent authority. And the actual authority is further subdivided into express actual authority and express implied authority (Murdoch, 2014). The actual authority denotes that the agent has been given the authority in an actual manner to undertake the tasks on behalf of the principal. The express actual authority denotes the authority given to the agent, where the principal tells the agent to do certain things in an express and in clear words (Cohen, 2017). For example, a principal tells the agent that they have to go to a certain place and sell the land of principal to person X between the ranges of $5,000 to $6,000. This is quite simple authority and seldom results in disputes due to the express manner in which the agent is told to undertake certain actions.

Where the principal gives the authority to the agent through deed, then where the extent of the express actual authority of the agent has to be determined, the courts adopt a strict approach and limit the powers of agent within the four corners of such instrument (Allen and Kraakman, 2016). This can further be explained through the case of Jacobs v Morris [1902] 1 Ch 816 (CA). In this case, Louis was the principal who had executed a power of attorney which gave Leslie, the agent, the power of purchasing and creating contract for buying goods. Further, regarding the business of principal, the agent could sign, make, indorse, draw or accept the promissory notes or bills of exchange. Leslie borrowed certain sum from Morris under the power of attorney. Eventually, Morris sought to recover the sum from principal, who stated that the agent had no authority for borrowing money. It was held in this case that the power of authority gave no express power of borrowing to the agent, which meant that the agent lacked the authority of borrow the sum. Apart from this, Morris did have a constructive notice that the agent lacked authority for borrowing the money, which led to Morris being estopped from recovering the sum from the principal (Baskind, Osborne and Roach, 2013).

Types of Authority

The express implied authority refers to such cases where the authority given to the agent for carrying out any such acts which are necessary or are incidental to the express authority being effectively executed in the usual manner. Any agent who has been expressly authorized to get in a transaction on the principal’s behalf needs to do a lot of ancillary acts for fulfilling that transaction (Busch, Macgregor and Watts, 2016). For instance, in Norwich Union Life & Pensions Ltd v Strand Street Properties Ltd [2009] EWHC  1109 (Ch), the agent acted as project manager for development of a land part had incidental authority for appointing and agreeing on the remuneration for the purpose planning consultant and for property managers (Baskind, Osborne and Roach, 2013).

The implied actual authority has three categories, which includes incidental, usual and customary. Usual authority is the authority which is given to the agent, owing to the virtue of it being required for carrying out the express authority. This authority basically can be inferred from the virtue of position which the agent holds. An example of this can be seen in the partners having authority of binding the other partners under the partnership firm, where they are severally and jointly liable, and in case of companies, the senior employees and the executives making the decisions, owing to the virtue of position which they have, have the authority of binding the company (Munday, 2010). Under usual authority, an individual is appointed for a specific occupation or role; however, their authority is not given in detail. When such happens, the concept of usual authority gains significance as it provides an agent the authority of doing such things which an individual in the position of the agent usually holds (Baskind, Osborne and Roach, 2013).

Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 (CA) is a landmark case in context of usual authority coming in practice. In this case, the agent Richards was the principal’s chairman which was Brayhead Ltd. Even though he had not been appointed in a formal manner as the company’s managing director, he had acted in such position and this was with acquiescence of the board.  The agent purported to act on basis of the principal for indemnifying Hely-Hutchinson for any of the losses related to the company called Perdio Electronics Ltd. When this company went in liquidation, Hely-Hutchinson attempted to enforce the indemnity against the principal; however, they refused to honour this indemnity stating that the agent had no authority of getting in the indemnity agreement with Hely-Hutchinson. This led to a case being raised against the principal by Hely-Hutchinson. The court in this case stated that Richard lacked the express authority for getting in the contracts on company’s behalf and also lacked the same based on the nature of his office. He was appointed as a chairman but this office did not have the authority of getting in contracts with the permission of board. Though, in view of Lord Denning MR, he had the usual authority owing to the conduct of parties and based on the situation which was present in this case (McLaughlin, 2013). This was because the board knew that the agent had been acting in that position since months. This led to the claim of Hely-Hutchinson being successful and the indemnity being held as valid (Macintyre, 2016).

Elements of a Good Business Contract

The law surrounding agency law is at times very confusing. This is particularly when there is confusion on the matter of the agent having the authority to undertake certain transaction. The case laws quoted above can be classified based on usual authority or express authority. However, in real life, this becomes difficult to make differentiation between. The third party is particularly at the risk of bearing losses where it is concluded that the agent lacked the requisite authority. This requires the courts to interfere and analyse the entire case and look into each and every aspect of the case, to decide on the presence or absence of relevant authority. Even with all this confusion, one can take inference from the leading/ landmark cases, in order to decide if the agent does hold the relevant authority of undertaking certain act, and whether the principal would be bound by such acts. This requires efforts to be put into each and every transaction. Thus, it can be stated that the operation of agency law complicates the matters a bit.

Whenever a business is to be conducted, there is a need to draw up a business contract. This contract needs to be clear and unambiguous, as any kind of vagueness could render the purpose of such business contract nil. In order to draw up any good business contract, certain aspects have to be present in it, which includes the definition and the incorporation of terms, confidentiality, and termination of contract, penalty clauses, applicable laws, and many others. This discussion sheds light on these very elements, and also discusses the same in context of a real life contract.

The first requirement which has to be present in a good business contract is the general details of the parties. For instance, in an employment contract, the contract begins with the name of the employee, followed by their address, and them signing an oath. This has to be followed by defining the terms of the contract. These are particularly required when a term has any specific meaning. There is a need for the business contract to have a confidentiality clause. When any party gets in a contract, they are usually provided with sensitive or confidential information regarding the business. Where the party does not want this information to be shared or even used by the third party, it is recommended to include a confidentiality provision in the contract. This would create a restriction on the parties from sharing such information (Willans LLP, 2016).

General Details of the Parties

A very important clause, which is often taken lightly, is the penalty clause. It is crucial that a clause is drafted carefully in the business contract particularly which provides that a sum of money would have to be paid in case the contract is breached. This is because such clauses can be deemed as penalty clauses and are unenforceable. These clauses can be enforceable based on the test regarding the sum of all proportion to the legitimate interest of the innocent party in terms of enforcing of the contract based on the case of Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67 (Kuhnel-Fitchen and Hough, 2017). The business contracts also need to clearly state the laws which would become applicable on the agreement. It is crucial that the contract specifies that the English law would be applied when it comes to interpreting the agreement and its effects, where a dispute is raised between the parties. Such a clause becomes all the more important when it comes to the contract being undertaken with parties which are out of England and Wales jurisdiction (Boundy, 2016).

The next clause which has to include in the business contract is the termination of the contract. There is a need for the parties to clearly specify the events which would allow for the contract to be terminated. In common parlance, these include the failure of one of the parties in fulfilling their obligations. For instance, a contract would be deemed to be terminated when the parties fail to make timely payment or delays in the completing the work (Kim, 2016). The consideration amount is also required to be clearly stated under the contract. This is the sum which is to be paid for the party to undertake the particular promise or task under the contract. This also needs to detail the manner in which the payment would be made, in terms of it being lump sum payment or payment in instalments (Stim, 2016).

There is a need for the parties to get the contract signed after thoroughly reading the terms of the contract. In one of the recent cases of Globe Motors Inc., et al. v TRW Lucas Varity Electric Steering Ltd., et al. [2016] EWCA Civ 396, an exclusive supply agreement was present where a clause provided that the agreement could only be modified by a document in writing, which was then signed by both of the parties. It was decided by the court that such clauses could not restrict the parties from modifying through conduct or through an oral agreement.  It was provided that based on the English laws, the parties could agree to whatever terms they wished, subjected to the public policy limitations, be it through conduct, document or in an oral manner (Underhill, 2016). As a result of this, such clauses do not stop or restrict the parties from making a new contract later one, which is different from the original one, through conduct or through oral agreement (Gordon, 2016).

Confidentiality Clause

Where the business contract covers restrictive covenants or the non-competing clauses, these have to be drafted in a careful manner. This is particularly important as a wrongly drafted clause would make the contract uncertain, so much so that the clause could become unenforceable. Again, where these terms are drafted in an onerous manner or in too wide manner, they would not be enforced by the courts. There is also a need for the relevant dates, qualities, quantities and the other details to be properly included (Find Law, 2018). Owing to the chances of disputes, the business contracts often come with arbitration clause. This clause provides that where a dispute is raised between the parties, in such case, they have to resort to arbitration for solving the dispute. Only after this medium is exhausted by the parties, can they opt for litigation (Friedland, 2007).  

In order to better shed light on these clauses, the terms to be included in a standard employment contract have been covered here. After giving in the details of the parties and the summary terms, the job title and duties were defined. This is due to the fact that in an employment contract, it is crucial that the employee knows which job title they work on and the duties which have to be fulfilled by them. This is followed by having a clause of working hours, where the details of an individual’s working hours on normal days, and on weekends and public holidays are detailed. This would include the details of procedure which has to be followed when the shift has to be changed and the related terms. There is also a need to state clearly the place where the individual would be working. As it is an employment contract, there is a for the details on probation period, holidays, salary and expenses, sick pay, sickness absence, medical examination, definitions, termination of employment, confidentiality, data protection and information security, healthy and safety, and bribery and anti-corruption to be clearly covered under the contract. All this would help the employee in knowing their entire working conditions and also the duties of the employer would be provided through this agreement. It is also important that these terms are carefully drafted, as any ambiguity could result in unfavourable results for the contracting parties (Lagesse and Norrbom, 2006).

Thus, from the discussion undertaken in the previous segments, it can be concluded that business contracts are very complex and it is important that care is undertaken in drafting of such business contracts. Even though there are certain standard terms which have to be included in every business contract, based on the purpose of the business contract, certain terms are added for the contract to have a proper meaning. The example of employment contract particularly shed light on this, where the terms like holiday, sick pay, and health and safety were added in the contract. Thus, it is crucial that the aforementioned clauses are carefully inserted in the business contracts.

Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67

Globe Motors Inc., et al. v TRW Lucas Varity Electric Steering Ltd., et al. [2016] EWCA Civ 396

Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 (CA)

Jacobs v Morris [1902] 1 Ch 816 (CA)

Norwich Union Life & Pensions Ltd v Strand Street Properties Ltd [2009] EWHC  1109 (Ch)

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