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The Case of John's Supermarket

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 Groceryn 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
  1. 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 Case of John's Supermarket

The law of agency covers situations where one party delegates the duties of the formation of a contract to another party. Any case regarding agency relationship constitutes three parties; (i) the first one is the principal who gives permission for the contract to be made on his/her behalf; (ii) the second party is the agent who receives authority to form contracts in the principal’s interests, and (iii) the last party is the third party who execute transactions with the agent to create a connection with the principal (Baskind, Osborne and Roach, 2016, p.46).  Both the principal and its agent have a fiduciary relationship which is very much contractual. This rationale was once confirmed with a statement given by the judge in (South Sydney District Rugby League Football Club Ltd v. News Ltd, [2000]) that ‘finding whether there is a relationship between an agent and his principal requires an analysis of their contract, their conducts in the business or their express statement when dealing with each other.’

Contracts made between a third party and the agent are treated as though they were made between that third party and the principal(Chen-Wishart, Loke and Vogenauer, 2018, p.146). This is a principle that has been held by courts that where person ‘A’ leads person ‘B’ to believe that person ‘C’ is an authorized agent, and the person ‘B’ relies on this representation, the court will not allow person ‘A’ to deny the authority manifested on person ‘C.’ This concept was widely discussed in (Rama Corp Ltd v Proved Tin and General Investments Ltd, [1952]) under the apparent authority which would be covered below.

Every agency relationship operates with both parties consenting to each other thus creating a relationship based on trust and confidence mainly based on the agent’s authority. There are different types of these relationships. One of these authorities is an actual authority. This actual authority mostly arises from an agreement made by the principal with the agent in express terms either in words or in writing (Mann and Roberts, 2018, p.538). At other times, the actual authority may be implied which would not need express words which become implied actually. In most cases, it is assumed that principals have given implied authority to agents or employees appointed to a particular position in the principal’s place of business.  In general, any type of actual authority is born from the principal’s consent that the agent holds some authority. For instance, in (Hely-Hutchinson v. Brayhead Ltd, [1968]) the court stated that where the board of directors agreed to authorize the chairman to work as though he was a managing director, the court would assume that the board has given the chairman express actual authority, and thus the chairman’s would also have the implied actual authority in managing director’s duties.  

The Case of Bruno's Property Sale

People working in offices could also have usual authority. This type of authority was illustrated in the case of (Watteau v. Fenwick, [1893]). Watteau was a third party who sold cigars to the agent (public-house manager) of Fenwick. The agent, Humble was previously working as a pub manager. When the defendant principal denied the agency, the court held that the principal was bound since the house manager was exercising the general duties of a manager.  

Lastly, ostensible authority looks at the conduct of the principal and his agent as described above (Mann and Roberts, 2018, p.521). The authority follows the rationale that if the principal manifested to the third party that the agent has the authority to form contracts or execute transactions, and then the third party relies on this manifestation, the court will disapprove any claim by principal refuting the authority (Miller and Jentz, 2010, p.499). In (Rama Corp Ltd v Proved Tin and General Investments Ltd, [1952]) the court explained that ostensible authority is a type of estoppel which the court regards to as the agency created through estoppel and it requires three elements which are (i) principal’s representation, (ii) third party’s dependence on the representation, and (iii) the change of legal position on the side of the  third party following the reliance on the representations.

On application, the first step would be identifying whether there was an agency relationship between Linda and John. This first step would require an examination of the relationship between the parties, and the facts regarding this relationship can be found in the realm of their contract, trade practices, or their interaction as explained in (Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd, [1964]) that agency relationship results from the parties express words in the contract or trade practices. On analysis, the fundamental relationship between Linda and John was that of an employer and an employee. Linda was working as a supermarket manager at John’s supermarket.

Having found an agency relationship, the next step is conducting an analysis as to whether Linda had any authority for ordering the orders. An authority for this analysis can be derived from the rationale held by Lord Denning in (Hely-Hutchinson v. Brayhead Ltd, [1968]). The judge gave an example that where the board of directors allows two directors to certify cheques, the two acquire express actual authority to signing the cheques. Where the same board appoints one director as the managing director, they confer to him implied actual authority in the duties of managing directors. Applying the case to supermarket managers, it can be argued that if Linda was given a role of supermarket manager, she had an implied authority of managing even the orders, and this included getting new orders. Regarding actual authority, there was a rule that orders could only be made when John was present. In confirmation, a test for usual authority applied to the case of (Watteau v. Fenwick, [1893]) would confirm that managers have a usual authority or ordering purchases.

Agency Relationship and Authority

Apparent authority requires the application of the test developed in (Rama Corp Ltd v Proved Tin and General Investments Ltd, [1952]). The test requires three ingredients which are the principal’s manifestation, a reliance on the third party, and a change in the third party’s position due to the reliance. In this case, the principal would be John. The act of allowing Linda to interact with Cathy created the reliance. And this particular day, Cathy relied on that manifested reliance to think Linda had the right to purchase orders.

Question 1: Advice to AFC Grocery Ltd.

As we have found that John was bound to Cathy by Linda, it means that John was liable for the payment of $45,000.  This case is covered under section 53 of (Sale of Goods Act, 1954). Subsection 1 on this provision provides that:

(1) If the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may maintain an action against the buyer for damages for nonacceptance.

(2) The measure of damages is the estimated loss directly and naturally resulting in the ordinary course of events from the buyer's breach of contract.

(3)  If there is an available market for the goods, the measure of damages is prima facie to be ascertained by the difference between the contract price and the market or current price at the time or times when the goods ought to have been accepted, or, if no time was fixed for acceptance, at the time of the refusal to accept.”

In this regard, Cathy would calculate the value of the goods in the market, and charge the difference to John.

Question 2: Linda expressly prohibited from making orders.

Whether Linda was expressly prohibited from making order requires an analysis of the facts of the case. From the facts, we are told that as a rule, sufficient stock was ordered during John visits so that Linda had no need to order further stock. These facts demonstrate that Linda did not have express authority to order further stock, but that does not mean she did not have other authorities such as usual authority or apparent authority. For instance, in (Ireland v Livingstone, [1872]), the given the express authority to procure sugar, but he had not stated the limits of this authority and had not told the third parties that he had given such authority. Similarly, the express authority only applies where third parties are aware of such authority.

Actual Authority

The main issue, in this case, regards a transaction entered between two persons with the stronger party pressuring the weaker party thus raising a question of undue influence and disadvantageous transaction.

The doctrine of undue influence evolved from courts as a way of ensuring that equity prevails in the transactions (Mann and Roberts, 2018, p.198). The reason why equity required the principles of undue influence was that the principles of duress were too narrow and could not cover some cases where there was pressure in absence of threats(Chitty, 2012, p.675). Today, any contract concluded by two people with one party exercising undue influence on the other is stated to be voidable upon a claim by the disadvantaged party. However, the law does not prohibit inducement of the other party into forming the contract as this is the rationale of bargaining. The only instance that this doctrine prohibits is when inducement extends to a degree which denies the other party a chance to exercise its free will.

One of the earliest cases that defined undue influence includes (Allcard v. Skinner, [1887]). The case arose after the defendant joined a convent and transferred almost all her property to the lady superior Miss Skinner. After the convent, she then sought to recover the property. This case led to the definition of the doctrine of undue influence as one that protects victims from the unconscious conducts of the stronger parties where they are forced, misled or tricked into giving up their property.  

Traditionally, cases of undue influence were solved by classifying them as either having actual undue influence or presumed undue influence. The actual undue influence was found in cases where parties carried no special attachment. In such cases, the onus of proof was with the party that was alleging that it had been unduly influenced. The attempt to prove the cases involved the claimant demonstrate that the defendant used his/her dominant position to unduly influence the claimant. For instance, in (Williams v. Bayley, [1866]), the bank approached the father over his son’s debt to that bank. The bank told that father that if he was not going to finance the son’s debt, the then son would be prosecuted. The Court looked at the nature of the threats subjected to the father and ruled that there was an actual undue influence.

The second category of undue influence in traditional courts was the presumed undue influence. This one was found to be automatic in people with a special attachment unless the defendant proved otherwise. Therefore, it was upon the defendant to disapprove the alleged claim of presumed undue influence. Examples of special attachment included parent/son, doctor/patient, solicitor/client e.t.c. An example of cases of presumed undue influence is the case of (Allcard v. Skinner, [1887]) as discussed above that involved a superior lady and members of the convent.

Implied Authority


In addition to these rules, the case of (National Westminster Bank Plc v. Morgan, [1983]) added to the traditional rules especially in cases involving banks and their clients. Lord Scarman added that even though a case could involve parties who are in a special relationship, this relationship should not automatically lead to the presumption of undue influence. He added that the party claiming to have been unduly influenced must show that it lost something of value, i.e. a ‘manifest disadvantage’.

A refinement of the traditional classification has led to the classification of undue influence into three classes. The first class is an actual undue influence. This has retained the traditional principles where the party alleging actual undue influence has to prove it. In addition, the party has to show evidence of coercion, and the coercion happened due to the fact that the defendant was in a position that he/she could exercise a clear degree of dominance. A third element is that the undue influence led to a disadvantaged transaction, but this applies to situations where it is not clear that the defendant used undue influence. For instance, in (Bank of Credit and Commerce International SA v. Aboody, [1990]) the court rejected a claim of actual undue influence since the claimant did not show a proof of a disadvantageous transaction. In cases where actual undue influence is clear, such as the case of (CIBC v. Pitt, [1994]), the court held that there was no need for a manifested disadvantaged transaction.

The second class of undue influence has been known as class 2A. This is the category of presumed undue influence, and it requires the party claiming that there was the influence to demonstrate the existence of a special relationship or attachment. The special relationship should be one that involves trust and confidence. After proving the existence of a relationship, it would then be upon the defendant to show that there was no undue influence.  For example, in (Royal Bank of Scot. PLC v. Etridge (No. 2), [2002]), the husband provided wrong information regarding the amount of loan needed, and he convinced the wife to allow him to use their matrimonial home as loan security.  In this case, the stated that the bank should have taken steps of bringing notice and legal advice to the wife. Another example is the case of (Lancashire Loans Co v. Black, [1933]) where the mother lied to the daughter in convincing her to become a guarantor for her business loan.

Ostensible Authority

The third class of undue influence is called class 2B, and this involves presumed undue influence which is based on trust and confidence or fiduciary relationship. This category is an extension of category 2A where the court believes that there is presumed undue influence resulting automatically from the relationship. In class 2A, the court allows a party to show that there is a presumed undue influence based on the trust and confidence that existed in their relationship For instance, in (Lloyds Bank v. Bundy, [1975]), the business farmer had previously mortgaged the farm twice for his son ’s business. On both times, it was the assistant manager who went and negotiated with the father on behalf of the bank. For a third time, the bank assistant manager told the father that if he mortgaged the farm a third time, the son’s business would stabilize. However, the business did not stabilize and the bank sought to recover the loan. A claim of undue influence succeeded based on the fact that the father had trusted the assistant manager.   In the case of (Union Fidelity Trustee Co of Australia Ltd v. Gibson, [1971]), the court advised that as far as the defendant can demonstrate that the claimant well-understood the repercussions of the transaction in a reasonable man’s position, and the claimant used his free judgment, the transaction will stand.


On application, this case would require looking for the evidence of undue influence by analyzing the facts, and finding whether they fit either class 1, class 2A or class 2B. Starting with class 1, this would require Bruno to prove his case by providing evidence of coercion, a proof that the coercion happened because Bruno was exercising a dominant position, and the coercion led him to accept the agreement. However, this test would fail since there is was no evidence of coercion.

The class 2A would require a test whether Sylbo and Bruno had a special relationship, the relationship caused Sylbo to exercise some dominance, and a presence of a disadvantageous transaction. Again, even though there is evidence of a disadvantageous transaction, the fact that Sylbo and Bruno had only met for one day disapproves this assumption.

The third test involves looking for the elements of class 2B undue influence. Here we would need to find whether there could be instances of trust and confidence, and a disadvantageous transaction. One class case that defined a test for finding a fiduciary relationship was settled in (Frame v. Smith, [1987]). In this case, the judge said that fiduciary relationship involves one party that has discretionary powers, a second party which is weak and vulnerable on the expense of the other, and the discretionary powers of the stronger party change the legal position of the weaker party.  Again in (Daly v Sydney Stock Exchange Ltd, [1986]), the judges said that there is always trust and confidence when one party relies on the advice of the other. Also in (Aequitas v AEFC, [2001]), he affirmed that there is always trust and confidence when one party expects the other to take care of its interests. Therefore, when Bruno was bringing the issue of separation, it could be said that he was seeking advice from Sylbo. The advice given by Sylbo that Bruno should go to Italy is another evidence of Sylbo using the trust he was accorded by Bruno for the advice. Lastly, a disadvantageous transaction proves that there was class 2A presumed undue influence.

Conclusion

Bruno was vulnerable to the fact that he had separated from his wife to an extent of suffering depression and being compounded by an excessive consumption of alcohol. Bruno took advantage of his vulnerability to induce him to sell his land. Therefore, the court should cancel the transaction.

References

Aequitas v AEFC [2001] NSWSC 14.

Allcard v. Skinner [1887] Ch D 36.

Bank of Credit and Commerce International SA v. Aboody [1990] QB 1 1990.

Baskind, E., Osborne, G. and Roach, L., 2016. Commercial Law. 2nd ed. UK: Oxford University Press.

Chen-Wishart, M., Loke, A. and Vogenauer, S., 2018. Formation and Third Party Beneficiaries. 1st ed. UK: Oxford University Press.

Chitty, J., 2012. Chitty on Contracts: General principles. Sweet & Maxwell.

CIBC v. Pitt [1994] AC 1 1994.

Daly v Sydney Stock Exchange Ltd [1986] 160 CLR 371.

Frame v. Smith [1987] SCR 2 1987.

Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd [1964] QB 2 1964.

Hely-Hutchinson v. Brayhead Ltd [1968] QB 1 1968.

Ireland v Livingstone [1872] LR 5 HL 395.

Lancashire Loans Co v. Black [1933] KB 1 1933.

Lloyds Bank v. Bundy [1975] All ER 3 1975.

Mann, R.A. and Roberts, B.S., 2018. Essentials of Business Law and the Legal Environment. 12th ed. Mason, OH: Cengage Learning.

Miller, R.L. and Jentz, G.A., 2010. Cengage Advantage Books: Business Law Today: The Essentials. 9th ed. Mason, OH: Cengage Learning.

National Westminster Bank Plc v. Morgan [1983] All ER 3 1983.

Rama Corp Ltd v Proved Tin and General Investments Ltd [1952] 2 QB 147.

Royal Bank of Scot. PLC v. Etridge (No. 2) [2002] UKHL 2002.

Sale of Goods Act, 1954.

South Sydney District Rugby League Football Club Ltd v. News Ltd [2000] ALR 177.

Union Fidelity Trustee Co of Australia Ltd v. Gibson [1971] VR 1971.

Watteau v. Fenwick [1893] QB 1 1893.

Williams v. Bayley [1866] LR 1 HL 200.

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