Scenario 1: Tina and Brad - Applicability of Agency Law
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.
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.
The issue in the present case is to extend an advice to Tina about her contractual liabilities in the below mentioned scenarios:
- When Bred (the agent of Tina) has enacted a contract with Caltex.
- When Paul appointed on behalf of Tina has derived profits from her on account of the Holden Commodore Wagon.
According to the agency law, the person who has complete authority is known as principal and the person who has been authorized by the principal to perform some essential work is known as agent. The main work of agent is to complete the duties extended by the principal, and to enact the contract with the outsiders on behalf of the respective principal. Therefore, in such cases, it can be said that there are mainly three parties that would be taken into considered in order to enact a contract (Davenport & Parker, 2014).
- Principal is considered to be the first party who has full power and authority to enact any contract.
- Agent is considered to be the second parry who has received the authority from principal in regards to complete certain specific tasks when principal is not present.
- The party whom with the agent has enacted a contract on behalf of the principal is termed as innocent party.
In agency law, it is important that the act or commitments made on behalf of the agent must be informed to the principal. Because, the agent is mainly considered to be a representative of principal and hence, when the agent enters into a contractual relationship on behalf of the principal, then the principal will also be considered as legally bound with the contractual liabilities (Harvey, 2009). However, it is noteworthy that no contractual liability would be imposed on the agent because agent is working according to the authority extended by the principal only. Therefore, it is essential that if the principal has withdrawn the necessary authority from agent, then it is imperative on behalf of the agent that he/he must inform the third party regarding the withdrawal of the requisite authority (Latimer, 2016). Moreover, if the agent has enacted a contract with the third party irrespective of the fact that he had the requisite authorization or not to enact the contract, then in such cases the contractual liabilities would be extended to the principal. The leading case in this regards is the Freeman& Lockyer v Buckhurst Park Properties (Mangal) Ltd 2 QB 480 case (Lindgren, 2011). Further, if the third party does not have any awareness about the fact that agent does not have the requisite authority to perform the act, then the rights of the third party would be protected under the provision of “indoor management rule”. The judgement provided in the Royal British Bank v Turquand (1856) 6 E & B 327 case is the witness of this aspect. The principal cannot deny completing the contractual obligation which arise on account of contract enacted by the agent with the third party (Gibson & Fraser, 2014).
Scenario 2: Simon, George, Sara, and Mary - Applicability of Partnership Law
Moreover, if the agent does not follow the instruction extended by the principal and enacts a contract with the third party, then also the contract would be considered enforceable. The principal can recover the losses from agent on the account of not following the duties and instruction. There are essential fiduciary duties present on behalf of the agent that must be taken into consideration, while enacting any legal relation with the third party (Latimer, 2016).
If the agent has made any contract or performed any course of action in order to derive profit from principal then in such scenario, principal has the rights to recover the profit derived by the agent (Andrews, 2011). The leading case in this regards is Bentley v Craven (1853) 18 beav 75 case. Moreover, if the agent has found any discrepancy in the interest on the part of the principal at any stage, then it is the core responsibility of the agent to notify the principal about the same. The verdict of Christie v Harcourt (1973) 2 NZLR 139 case is the testimony of this (Carter, 2012).
Tina who operated a garage as a sole trader has appointed Bred as a checkout operator in her garage. She was suffering from glandular fever and hence, authorized Bred to order petrol from the respective oil companies till the time she came back to work. Bred enjoys the increased authority provided. When Tina returns back to work, she clearly stated to Bred that there was no need to order petrol anymore. However, even after explicit instructions from Tina, Bred ordered petrol from the seller Caltex. It is apparent from the case facts that Caltex was not aware the fact that Bred does not have the authority to enact contracts. Hence, as per agency law, the work performed by the agent would be creating liability for the principal provided the third party entered the contract in good faith and was unaware of the agent lacking the due authority. Hence, Tina is liable to perform the contractual obligation made by Bred with Caltex, However, she can claim for the shortfall from Bred for not following the instruction.
In the second case, Paul has been appointed as a sale manager on behalf of Tina in her garage. Tina has a Holden Commodore Wagon for sale with a estimated consideration amount of $19,000. Paul is very well aware about the fact that the worth of Wagon is very high and hence, he purchased the Wagon from her and then sold it to Fred with a consideration of $25,000. It is apparent that Paul has derived a profit of $6,000 from Tina. However it is the core duty of Paul to inform Tina regarding the low price of Wagon but he makes profit of his personal interest from her. Therefore, it can be said that Tina has the rights to recover the profit from Paul.
It apparent from the above discussion that Bred has enacted a contract with Caltex which would be enforceable on Tina and hence, she has to fulfil the contractual liabilities. Moreover, she has the rights to claim for the shortfall from Bred for not following the instruction.
In the second case, Paul has derived profit from Tina which was not appropriate as per common law and hence, Tina has the legal rights to recover the profit from him.
The issue in the present case is to determine the liability of the partnership firm on the account of the two transactions made on behalf of Simon without discussing with the other partners.
Partnership is a type of business structure in which two or more individuals form a partnership agreement with the intention of deriving profit. A partnership firm is not considered a legal entity which implies that the liability of the partnership firm is mainly the liability of the respective partners (Harvey, 2009). According to Partnership Act 1892, the partnership agreement can be in any mode i.e. written or oral. The respective partners not only decide the distribution of the profit but also define the respective authorization and their limitations. This is because any partner has the right to enact any contract with the third party on behalf of the other respective partners. Moreover, any action of the partner is taken with the intention of firm’s benefit, then the contractual liabilities arising from the same would be extended to the firm and to the other partners of the partnership firm (Lindgren, 2011).
Section 5 of Partnership Act provides that a partner is the representative of the partnership firm and has to work as an agent of the firm. In this scenario, the partnership agreement enacted among the partners is considered to be an imperative element to discuss the necessary express terms and authority of the partners and the respective liabilities incurred on the account of the contract formed by any one partner (Gibson & Fraser, 2014). However, in this regards, the assumption regarding the implied terms is quite difficult and hence, the intention of the partner, the purpose for the good faith of the firm to form the contract would be the vital elements to decide the liabilities (Latimer, 2016).
If any partner of the partnership firm has enacted an agreement for the betterment of the business, then the liabilities would be imposed on the other partners irrespective whether the partner had the requisite authorization or not. Also, if the act of partner does not have any relation with the business, then there would no liability of the firm and of the other partners to complete the contractual obligations (Davenport & Parker, 2014). However, it is imperative the third party does not have any idea that the concerned partner does not have sufficient authority to enact the contract because only then the rights of the third party would be protected by the common law (Andrews, 2011). Therefore in such cases, the contractual obligation would be extended to the other partners also on account of their mutual fiduciary responsibilities and hence they will have to discharge the requisite contractual obligations. It is because the partner was acting as a representative of the firm and the outside party acting in good faith has formed the contract by assuming that the partner has necessary authority (Carter, 2012).
Simon. George, Mary and Sara are the partners of the partnership firm (Computer Solution). It has been decided by the partners at the time of enacting the partnership agreement that any partner can enact a deal within the amount of $10,000 and if the transaction amount is higher than $10,000, then it is essential that the decision would be made after consulting with all the partners. Simon working as the agent on behalf of the partnership firm and enacted a contract with Sunstar Computer Hardware Ltd with a transaction amount of $12,000. It is apparent that this amount is higher than the amount highlighted in the partnership agreement. Further, the act of Simon is with the intention of good will of the firm and moreover, the third party is not aware about the fact that Simon does not have the requisite authority to enact a contract with the consideration of $12,000. Therefore, the rights of the third party would be protected and hence, the contractual liabilities would be extended to the other partners also. They have to fulfil the obligation made in the contract or else the third party has the legal right to sue the partners for not fulfilling the obligation.
In the second case, Simon has enacted contract with You Beaut Ute Ltd in regards to purchase a second hand Ute. The consideration amount was selected as $9,000. It is apparent from the above facts that Simon has enacted a contract within the limits of implied authority i.e. $10,000. However, the other partners would not be liable to complete the contractual liabilities because there is no association is present between the business of the partnership firm and with the Ute. Therefore, the partners are not accountable to fulfil the obligation of the contract. Further, it is imperative to note that the authority of the partners are limited only to the actions related to the business and if there is no association is present between the act of the partner and the business, then the partnership firm has no liability towards the contractual obligation.
It can be concluded that in the first case there would be a legal liabilities present on behalf of the other partners of the firm on the account of the contract enacted by Simon with Sunstar Computer Hardware Ltd. Moreover, if the partners deny completing the obligations, then the Sunstar Company has the rights to sue the partners or claim for the damages.
In the second case, there is no association between the decision and the business that is run by the firm. Hence the transaction made on behalf of Simon would not be liable on the other partners. Moreover, the You Beaut Ute Ltd cannot claim for the damages from the firm but only hold Simon responsible personally for any breach.
Andrews, Neil, (2011). Contract Law (3rd ed.). Cambridge: Cambridge University Press.
Carter, J. (2012). Contract Act in Australia (3rd ed.). Sydney: LexisNexis Publications
Davenport, S. & Parker, D. (2014). Business and Law in Australia (2nd ed.). Sydney:LexisNexis Publications.
Gibson, A. & Fraser, D. (2014). Business Law (8th ed.). Sydney: Pearson Publications.
Harvey, C. (2009). Foundations of Australian law (2nd ed.). Prahran, Vic.: Tilde University Press.
Latimer, P. (2016). Australian Business Law CC (5th ed.). Sydney: LexisNexis Study Guide.
Lindgren, KE. (2011).Vermeesch and Lindgren's Business Law of Australia (12th ed.). Sydney: LexisNexis Publications.
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