Law Of Agency: Authority Of Agents In Business Transactions

Case Study 1: Supermarket Manager's Authority to Order Stock

Question 1

Linda is the manager of a supermarket named John’s Supermarket, which is located in a large country town on the north coast of NSW. The store was named after the owner, John Miley, who lived in Sydney. On his frequent visits to the store, John would discuss the purchase of replacement stock and sign the necessary orders for Linda to dispatch to the suppliers.

As a rule, sufficient stock was ordered during John visits so that Linda had no need to order further stock. Shortly after John’s visit in December, Cathy, the sales manager of AFS Grocery Wholesalers Co Pty Ltd, called at the store and showed Linda the orders she had taken from a nearby supermarket with which John’s Supermarket was in direct competition.

Linda was in a dilemma. John was overseas for the next two weeks and had left no contact details. Faced with the absence of John and very worried about losing customers to his competitor, Linda placed an order for $45,000 worth of goods for the lucrative Easter trade.

Three days later Linda received the goods and immediately placed them on sale. Unfortunately, the next day John had a large consignment of similar goods delivered to the store. In a note he apologised for not informing Linda of this consignment but said he had been busy with other retail business matters.

On his return to Sydney, John received an invoice for $45,000 for the goods supplied by AFS Grocery Wholesalers Co Pty Ltd to his north coast store. He immediately informed the company that he would not pay. In a letter to the company he said:” I will not pay because Linda the manager of my store had no authority to order those goods.”

You are required to:

Advise AFS Grocery Wholesalers Co Pty Ltd:

1. Of any legal rights they may have in order to obtain payment of $45,000 for the goods they delivered to John’s Supermarket

2. Would your advice differ if John informed you that Linda was expressly prohibited from ordering any goods without his authority?

Question 2

Bruno was a peasant farmer in Italy and had very little education. In 2010, he and his wife migrated to Australia. Soon after his arrival in Australia, he purchased a small farm on the south coast of NSW for $220,000.

In early 2012, Bruno’s wife who had never wanted to migrate to Australia left him to return to Italy. Bruno was devastated as a result of his wife’s departure and entered into a prolonged depression. This was compounded by an excessive consumption of alcohol.

In mid-2012, Brno was approached by Slybo, the managing director of Moreslybo Pty Ltd, a company that was involved in property development. Slybo told Bruno that the company was keen to purchase his property. Bruno in several conversations with Slybo told him of what had happened since his wife had left him. Slybo suggested that Bruno should return to Italy and try to patch things up with his wife. Slybo then said that, in order to help Bruno, Moreslybo Pty Ltd would purchase Bruno’s property for $160,000. Bruno was so happy that he could go back to Italy and be with his wife again and so he agreed to sell his property. Next day a contract between Moreslybo Pty Ltd and Bruno was prepared by the company’s solicitor and signed in the solicitor’s office.

A few weeks later, and before the sale of his property was concluded, Bruno was pleasantly surprised when his wife returned to Australia. She told Bruno that she could not live being separated from him. She said “I want to live with you and work the farm so that we have a future together. If things go well we can eventually make regular trips to Italy “.

Bruno was delighted with his wife’s plans for their future. Bruno told her of the contract he signed for the sale of the property. She became very upset at the news and pleaded with him to keep the farm. Bruno now wants to keep the farm. He wants to get out of the contract with Moreslybo Pty Ltd.

The certain issues arising out of the problem given in the assignment are as follows:

Whether John supermarket is liable to pay AFS Grocery Wholesalers Co. Pty. Ltd. $45,000 for the goods supplied by AFS Grocery Wholesalers Co. Pty. Ltd.?

Whether John supermarket is liable to pay AFS Grocery Wholesalers Co. Pty. Ltd. $45,000 for the goods supplied by AFS Grocery Wholesalers Co. Pty. Ltd. even if  AFS Grocery Wholesalers Co. Pty. Ltd. knew that Linda was not authorized to order goods on be half of John supermarket?

The present problem given in the assignment deals with the law of agency.

In any business activity that is being carried by any individual there are certain needs which are to be complied with to carry on the business smoothly. As a single individual cannot carry on all the activities of a business so he has to engage other persons with him in order to carry out all the functions of a business. In a sole proprietor form of business a proprietor engages employees for his business and the business is carried on by him with the help of the employees he hires. Likewise in company and partnership form of business two or more persons join together to carry on the business effectively. (Nolan 1996)

As in case of business when employee carries on the acts on behalf of his employer, then, the acts done by the employee binds the employer as the employee is considered as an agent of his employer. Likewise in case of principal and agent relationship in which the principal is bound by the acts of his agents.

An agent or an employee acts as per the wish of their respective superiors. Their duty is to act as per the instructions of their superiors and the acts committed by them are deemed to be the acts done by their respective superiors. In an agency relation the acts committed by one on behalf of the other are construed to be the acts of that other only. As in case the employee acts on behalf of his employer the act done by the employee is construed to be the acts of his employer only and any liability arising out of the act is fastened on the employer only. The idea behind the concept is that when the acts are performed by the employee on behalf of his employer within the authority granted to an employee, then, in such case the employer should be liable, as it is the employer who earns and gains due to effort of his employee so he would only be liable to pay for their acts if any loss is caused by their acts and is held in Maynegrain Pty Ltd v Compafina Bank, [1982]. (Greig 1988)

Case Study 2: Peasant Farmer's Sale of Property to a Property Development Company

An agent must act responsibly and as per the authotrity assigned to him. There are certain types of authorities which can be classified as: (Tarr 2001).

Express Authorityis one of that kind of authority in which the agent is provided the authority by expressive words of the principal for whom agent is to act. Express authority is also of two kinds which is as under:

Actual Express Authority is that authority which is given to an agent by the principal by express consent in favor of the agent. The express authority is conveyed by a principal to an agent by written or verbal contract with an agent. The authority and power of an agent is generally expressively stated in the written document and communicated to an agent in the case of oral contract also. The agent has the duty to act as per the powers assigned to him. The case law of Bell v Australian Eagle Insurance Co. Ltd (1990) is relateds to the above concept as explained above. (Gillies 2004)

Implied Express Authority is that authority in which the agent is not expressively given the authority by the principal but the agent himself assumes that he has certain powers and act accordingly. The power is generally assumed by the agent by the behavior of the principal. The deeds, behavior or the gestures of the principal lead to assumption by an agent that he has certain extent of authority.

The acts committed by an agent as per the express and the implied authority bind the principal. (Greig 1988).

Apparent Authorityimplies that when any third party is made to believe by the principal by way of his words of gestures that his agent has authority to a certain extent, then, in such a case said authority comes under the preview of apparent authority. The agent and the third person are made to believe by the principal about the authority that the agent is having. The acts done by an agent with any party on basis of apparent authority binds the principal. The third party who believing upon the words or gestures of the principal deals with the agent of such principal can claim from the principal in case of loss as they have every reason to believe as per the acts of the principal that the agent was having certain extent of authority as represented to third person by the principal.  The case law of Ogden & Co Pty Ltd v Reliance Fire Sprinkler Co Pty Ltd (1973) is based on the said principal as stated above herein.

The above authorities are the authorities as per which a agent should act and if the d the principal thinks that his agent can act beyond the authority assigned to him then the principal must communicate the level of authority which his agent is having to the third party.

Linda is manager at a supermarket owned by John Miley called as John’s Supermarket situated at north coast of NSW. John frequently visited the Supermarket for purchase of stock and in turn sign necessary orders which Linda dispatched to suppliers.

Generally sufficient stock was ordered to keep stock till John next visit. Cathy who was a sales manager of AFS Grocery Wholesalers Co Pty Ltd and told Linda that he had taken orders from nearby stores and John supermarket was in competition with these stores who gave orders to Linda. As John was outstation for two weeks so Linda in respect of lucrative Easter trade ordered goods worth $45,000. By third day Linda received the goods and placed them in store for selling them. John also sent a large consignment of similar goods just a day later without informing Linda who being told after the goods ordered by John arrived. After that when john received invoice for the goods ordered by Linda from AFS Grocery Wholesalers Co Pty Ltd, John refused to pay.

As per the facts of the case John will be liable to pay the amount for the goods purchased by Linda as Linda was having actual apparent authority in this case and she was dealing with AFS Grocery Wholesalers Co Pty Ltd on behalf of John and AFS Grocery Wholesalers Co Pty Ltd had no reason to believe that Linda was not having authority to order goods on behalf of John rather she had taken a sound decision by ordering goods as when she came to know that her competitors were ordering goods then as a prudent and reasonable person she placed the order as John was out and she could not seek instructions from him so she did what was best for her business. Hence AFS Grocery Wholesalers Co Pty Ltd will be able to claim from John as John was dealing with suppliers through Linda and the trend waqs just followed by AFS Grocery Wholesalers Co Pty Ltd and there was nothing wrong on part of AFS Grocery Wholesalers Co Pty Ltd.  Wholesalers Co Pty Ltd will not be able to claim from John in that case as they inspite of knowledge supplied goods without assent of John.

In this case AFS Grocery Wholesalers Co Pty Ltd will not be able to claim from John.

As per contract law, a contract is said to be concluded when an offer made by a person known as an offeror and same is accepted by the other person known as an offeree. The parties to a contract must be major and of sound mind. Apart from this there must be some consideration which should exist in a contract and the parties who are part of the contract must be having intention to be in legal relation with each other then only a contract is said to be complete in all respects, otherwise it will be termed as an agreement. (Turner 1999)

A contract concludes when the said purpose for which it is made is achieved. Apart from that a contract can also be terminated by the patty when the same is made under:

1. Mistake – when both or any one of the parties are established a contract under mistake then the contract can be avoided and is held in  Taylorv Johnson (1983); 
2. Est factum – it was held that when the parties fndametally can establish that the contract must be rescinded because this is not what they meant and is held in Petelin v Cullen(1975); 

• An Unconscionable Conductimplies that in case one of the party’s in the contract has a dominating influence or the superior bargaining power over the other, then, in order to take undue advantage of the other party such influential party uses its power or influence over the other party in order to gain from such other party, then, in such case the party at the suffering end can back out from the said transaction and thus the party who used its superior power cannot force the weaker party to forcibly go with the transaction as the transaction was developed due to the unconscionable conduct of the influential party. The influential party in case unconscionable conducts acts against the principals in order to gain from the transaction with such other party. In case law of Attorney-General (NSW) v World Best Holdings Ltd (2005) the said principal of unconscionable conduct is explained and elaborated. In such case when the transaction is entered on the basis unconscionable conduct then the party who is at the losing end can avoid such a contract. In case of Commercial Bank of Australia Ltd v Amadio (1983) the above principal is explained. Various instances which lead to unconscionable conduct of one party over the other are:

In case one party has influential bargaining power over the other.

In case the party is not mentally fit;

In case one of party is minor;

In case one of the party is having Specialized knowledge in a particular transaction and tries to misuse same for his own gain.

It also depends on the education of the parties in a transaction.

In case of Kakavas v Crown Melbourne Ltd [2013] it was thus retreated that in case unconscionable conduct of one party is found in the transaction then the other party can avoid such a transaction.

1. Section 20 – 22 of the Act submits that no party to the contract must enter in trade and commerce which are unconscionable and such contracts can be avoided by the aggrieved party.
2. An Undue Influenceis said to be there when in transaction one of the party is in a beneficial situation when compared to other party in the said transaction. In such case the party with the beneficial position as misuses his position so law allows the suffering party to withdraw from such a transaction Royal Bank of Scotland Plc v Etridge (No 2) (2001) and Lloyds Bank Ltd v Bundy [1974]. The concept of overpowering of one party by the other is called an undue influence such influence is of  following kinds which is stated below: (Vout 2006)
3. An Actual Undue Influencemeans that when the party who is in a dominating situation takes benefit of same and in turn he uses the said situation or his position for his gain and loss to the other party, then such a transaction can be avoided by the party who is suffering in such transaction as same had been established due to the undue influence of the influential party ( R" v Attorney General for England and Wales [2003]. In case of Farmers Co-operative Executors & Trustees Ltd v Perks (1989) the concept had been elaborately explained.
4. An Assumed Undue Influencemeans that when due to certain relationships one party who is at advantageous level takes the unnecessary benefit of the other party then such influence is known as assumed undue influence. It implies that when there is a relationship between the parties and in such relation one party is in a advantageous position, then such advantageous party makes undue influence on the other party. Examples of relations in which the undue influence follows are father and son, mother and son, doctor and client, lawyer and client, etc. (Enonchong 2006)

If the contract is established by one party by applying undue influence over the other party then the other party can avoid such contract as per the case of Johnson v Buttress (1936).

Bruno was a farmer in Italy and was having very little education. In year 2010 Bruno along with his wife migrated to Australia. After migrating he purchased a farm in NSW for $220,000. In beginning of year 2012 his wife left him and returned to Italy. Bruno due to this was devastated and went into depression and taking excess alcohol. In middle of year 2012, Slybo who was the managing director of Moreslybo Pty Ltd being into property development business approached Bruno for purchasing his farm and Bruno in conversations with Slybo told him about his wife who left him. Slybo told Bruno that his company named Moreslybo Pty Ltd can purchase his farm and Bruno can leave for Italy. Bruno agreed to sell his Farm and entered into a contract with Slybo for a lesser price. A few weeks later Bruno’s wife returned to Australia and Bruno now wants to cancel the contract with Slybo.

As per the law stated above here Bruno was under undue influence of Slybo and on the other had Slybo had unconscionable conduct in this transaction as he was trying to gain in this transaction by influencing Bruno. He knew that Bruno was less educated and thus was under excessive liquor consumption and suffering from severe depression and Bruno also told him the fact that his wife left him and went to Italy so Slybo was having complete knowledge of facts and he took advantage of his education and dominating position and thus misguided Bruno and offered him lower price for the farm as he knew that Bruno is not in right state of mind and can be easily influenced by him. There is presence of actual undue influence on part of Slybo and Bruno because of his mental condition did not even got his property evaluated and thus Slybo knowing about Bruno’s wife and his mental state tried to take advantage of Bruno.

Here Slybo’s conduct was unconscionable as he inspite of knowledge of all the facts tried to take undue advantage of the situation of Bruno and rather the education of Bruno also puts him under the preview that he can be affected by Slybo’s unconscionable conduct and hence Slybo beibg educated used his dominating power over Bruno and influenced him to enter into transaction with him at a low price in order make gain to him. As Bruno’s wife came back and wanted to settle down with him in this case as the Slybo’s unconscionable conduct and undue influence had been proved so Bruno will be able to cancel the contract entered into by him with Slybo.The said transaction fits with the parameters of the concept of unconscionable conduct as the elements of unconscionable conduct are present in this transaction and moreover Slybo’s being managing director of a estate company known as Moreslybo Pty Ltd being had right state of mind and tried to gain from Bruno knowing that he is not fine mentally and thus convinced him to sell his farm at a low price and shift to place where his wife was living.

Conclusion

As in the said case law the elements of unconscionable conduct and undue influence had been made out hence Bruno can avoid the transaction entered by him. As Slybo  inspite of knowledge of fact that Bruno was not in right mental state then also he entered into a transaction with him in order to gain from him, so Bruno has every right to get away from the transaction of selling his farm. There is clear actual undue influence on the party of Slybo in instant case.

Reference List

Collins, C 2003, The Law of Contract, Cambridge University Press.

Enonchong, N 2006, Duress, undue influence and unconscionable dealing, Sweet & Maxwell, Limited.

Gillies, P 2004, Business Law. Federation Press.

Greig, D. W 1988, Commercial law. Butterworths.

Nolan, J 1996, Australia Business: The Portable Encyclopedia for Doing Business with Australia, World Trade Press.

Tarr, J. A 2001, Information Disclosure: Consumers, Insurers and the Insurance Contracting Process. iUniverse.

Turner C 1999, Australian Commercial Law, LBC Information Services.

Vout, P 2006, Unconscionable Conduct: The Laws of Australia, Lawbook Company.

Caffrey, B 1991, Guidebook to Contract Law in Australia, CCH Australia.

Eggers, P 2016, Vitiation of Contractual Consent, CRC Press.

Gibson, A  and Fraser, D 2013,  Business Law 2014, Pearson Higher Education AU.

Attorney-General (NSW) v World Best Holdings Ltd (2005).

Australia v Amadio (1983).

Bell v Australian Eagle Insurance Co. Ltd (1990).

Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447.

Farmers Co-operative Executors & Trustees Ltd v Perks [1989]

Johnson V Buttress (1936) 56 CLR.

Kakavas v Crown Melbourne Ltd [2013].

Lloyds Bank Ltd v Bundy [1974] EWCA 8

Maynegrain Pty Ltd v Compafina Bank, [1982].

R" v Attorney General for England and Wales [2003].

Taylor v Johnson (1983) 151 CLR 422

Ogden & Co Pty Ltd v Reliance Fire Sprinkler Co Pty Ltd (1973).

Petelin v Cullen (1975) 132 CLR 355

Royal Bank of Scotland plc v Etridge (No. 2) [2001] UKHL 44