Agency and Fiduciary Duties

Question 1

Who are the three persons that an agency transaction involves?

Answer 1

The principal
The agent
The third party

Question 2

What does agency refer to?

Answer 2

A specific type of relationship between two persons whereby one person appoints another to act on their behalf.

This can include binding that person contractually.

Question 3

What are the duties of an agent?

Answer 3

• Duty to act
• Duty to perform personally
• Duty to exercise care and skill
• Duty to provide information
• Fiduciary duties: conflict of interest, secret profits and bribes, duty to account, duty of confidentiality

Question 4

How does the case of Chaudry v Prabhakar (1989) relate to agency duties?

Answer 4

In failing to question the vendor regarding the repaired bonnet, the defendant had failed to fulfil the duty to exercise reasonable care and skill that he owed as a gratuitous agent

Question 5

How is an agency relationship created?

Answer 5

1) By agreement (express authority)
2) By ratification
3) By operation of law (agency of necessity)
4) Arising due to estoppel (apparent authority)

No requirement for a contractual agreement; commonly arise due to circumastance

Question 6

What types of authority can an agent have?

Answer 6

• Express actual authority
• Implied actual authority
• Usual (customary) authority
• Apparent/ostensible authority
• Agency of necessity

Question 7

What are the actual authorities?

Answer 7

Express - where an agent explicitly delineates the authority of an agent in written or verbal agreement

Implied - bestowed by the principle upon the agent as a result of their dealings, circumstances, relationship or conduct

Question 8

What is usual or customary authority?

Answer 8

These are the acts which are not express but are in the class of acts usually associated with agents of that character

A specific form of implied authority

Question 9

What is apparent/ostensible authority?

Answer 9

Exists where the principal is estopped from denying an agency relationship where his words or conduct previously indicated it did

• Representation
• Reliance on representation
• Alteration of position from such reliance

Question 10

What is agency of necessity?

Answer 10

• Where the agents actions are necessary
• Where it is not necessarily practical for the agent to communicate with the principal to seek instructions
• The agents actions should be performed in the principal interests
• The agents actions must be responsible and prudent

Less common today due to technology

Question 11

What is the case of Hely-Hutchinson v Brayhead Ltd.(1968) and what kind of authority does it relate to?

Answer 11

• Chairman of Brayhead Ltd acted as managing director with board’s acquiescence
• Agreed to indemnify the third party (claimant) by way of guarantor for another company
• When that other company went into liquidation, the third party called in its guarantee and Brayhead refused to pay - claimed lack of authority
• Held: The chairman had no express actual authority but as board had acquiesced to his acting as managing director, he had implied actual authority

Question 12

What is the case of Freeman and Lockyer v Buckhurst Park (Mangal) Properties Ltd (1964) and what type of authority does it relate to?

Answer 12

• Director for Buckhurst commissioned (agent) F + L as architects
• Buckhurst later refused to pay their invoices saying director was not authorised to enter transaction
• Held: company was bound to pay as director had represented the company (without actual authority), F+L did not know this broke the articles of association and relied on the representation
• Director had apparent authority and bound the company
• It is irrelevant whether the principal had actual authority

Question 13

What is the case of The Choko Star (1990) and what type of authority does it relate to?

Answer 13

• Ship was sinking in Argentinian river, master of the ship commissioned salvors from Europe to save the ship
• Held: it was not shown to have been impractical for the master to consult with the cargo owner before entering into the salvage agreement with the Greek salvors in preference to the local and presumably more economical, Argentine salvors
• Agency of necessity: wasn’t a true necessity

Question 14

What is the case of the Winson (1982) and what area of authority does it relate to?

Answer 14

• Ship carrying cargo stranded in South China Sea
• Savlors lightened the vessel by offloading part of the cargo and carrying it to safety and be stored under cover
• Cargo owners didn’t want to pay the costs of cover
• Held: the storage was both reasonable and necessary for the preservation of cargo to prevent deterioration

Question 15

What is ratification?

Answer 15

Grants retrospective agency. It can provide an exception to the doctrine of privity, - occurs when agency is granted after an agent has entered an unauthorised contract.

The original contract is treated as if it was authorised at the time it was entered into. Must be communicated to all parties in the transaction. Cannot change mind.

Question 16

What are the conditions needed for ratification to be available?

Answer 16

1) The agent must purport to act on behalf of the principal - principal must be disclosed - third party must know they are in the background and that agent is acting on their behalf
2) Principal must exist at time of contract - applies where agents are acting for future companies which are planned but not yet formed, this does not satisfy the condition
3) The principal must have capacity - to enter the transaction at the time of contract, and at time of ratification

Question 17

What are the other rules applicable to ratification?

Answer 17

• Only the principal can ratify the actions (this can be by conduct)
• The principal must have a choice whether or not to ratify
• The principal cannot ratify an act that is void in law or contrary to statute
• Ratification must take place within a reasonable time
• Ratification will not be permitted where it would defeat a vested property right of the third party or unfairly prejudice him in some way

Question 18

What is the case of Koenigsblatt v Sweet (1923) in terms of ratification?

Answer 18

• Copy of contract signed by a vendor was altered after his signature by his solicitor to correspond to the copy signed by the purchaser
• Held: the vendor’s subsequent ratification of the altered document related back, so that the position was as if the alterations had been in the document when he signed it

Question 19

What is a breach of warranty of authority?

Answer 19

• Where an individual represents to a third party that he has authority when in fact he has none and the third party in reliance of that representation suffers a loss
• An agent will be in breach even where he honestly but mistakenly believes he has authority

Question 20

What is the case of Yonge v Toynbee (1910) in terms of breach of warranty of authority?

Answer 20

Solicitors conducted interlocutory application sin the course of a defamation action in ignorance of the fact that their client was not in a unsound mind

Held - the principal’s certification of insanity had terminated their authority and they had breached their warranty of authority, irrelevant that they did not know that their authority was terminated

Question 21

What are the Commercial Agents (Council Directive) Regulations 1983?

Answer 21

A self employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person, or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principle e.g auction

Question 22

What are the two types of agency with statutory legitimacy according to the Commercial Agents (Council Directive) Regulations 1983?

Answer 22

Mercantile Agents (under the Factors Act 1889)
- Customary course of business 

Commercial agents who are afforded protection under EU law i.e regulation above

Question 23

What are fiduciary?

Answer 23

A fiduciary is a person who is bound to act for another’s benefit, in circumstance which give rise to a relationship of trust and confidence

Held to a standard of conduct above that of a stranger or casual business person

Most important duty is good faith

E.g partnerships

Question 24

What are the fiduciary duties?

Answer 24

1) To act in good faith to partnerships and partner
2) Not to profit from trust placed in them
3) Avoid conflict of interest with duty
4) Account to partnership of any benefit derived without consent on the other partners from transactions which involve the partnership
5) To account for and pay to the firm any profits made from business without consent of partnership
6) To render true and accurate accounts and full information to all matters relevant to the partnership
7) Avoid situation where their or another’s interest would conflict duties owed to partnership

Question 25

How doe the Companies Act (2006) Ss 170-181 incorporate fiduciary duties for directors?

Answer 25

• Directors owe common law fiduciary duty to companies they manage
• Good faith is stated in the CA 2006 (at s.170) reaffirming the duty to act in the best interest of the company at all times
• Sections 171-177 of the CA 2006 : outlines duties, consequences of breach

Question 26

What is the duty to act within the companies powers?

Answer 26

Exercising powers only for the purposes for which they are conferred

Intra vires - within the powers
Ultra vires - outside the powers

Question 27

What is the case of Howard Smith Ltd v Ampol Petroleum Ltd (1974) and how does it relate to duty to promote the success of the company?

Answer 27

• Howard Smith LTD controlled 55% of shares in company X and wanted to take it over
• Rival bid was made by Ampol Petroleum Ltd but rejected by X’s majority shareholder: Howard Smith
• Directors of X preferred Ampol as it was a higher bid but as Howard was majority shareholder it couldn’t succeed
• Directors of X issued $10m of new shares to Ampol to raise finance and make Howard a minority shareholder
  Held: deemed improper use - breach regardless of other subservient proper purposes

Question 28

What is duty to promote success of the company?

Answer 28

Must regard

• Likely consequences of decisions in the long run
• Interests of company’s employees
• Need to foster the company’s business relationships with suppliers, customers and others
• Impact of the company’s operations on the community and environment
• Desirability of the company maintaining a reputation for high standards and business conduct
• Need to act fairly between members of the company

Question 29

What is the case of Mutual Life Insurance Co of New York v Rank Organisation Ltd (1989)?

Answer 29

• 1975 Rank Org issued 20m shares to the public, with preference to existing shareholders
• Did not include shareholders based in the USA or Canada (incl Mutual Life) as seen not to be in the company’s interest to register there
• Ranks Articles of Association states that that directors could allot, deal with or dispose of company shares “on such terms as they think proper”
• ML claimed discrimination - breach of contract - equal treatment CA 1948 s.20
• Dismissed - treat shareholders fairly but not identically, in the best interests of the company

Question 30

What does not infringe the not infringed by a director acting duty to exercise independent judgement?

Answer 30

Not infringed by a director acting…

a) in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or
b) in a way authorised by the company’s constitution

Question 31

What is the case of Fulham Football Club Ltd v Cabra Estates Plc (1992) in terms of duty to exercise independent judgement?

Answer 31

• Cabra’s subsidiary owned the freehold of the football ground of Fulham’s team
• Subsidiary wanted to redevelop the ground requiring football club to move, planning permission not granted
• Cabra agreed with Fulham that they would pay Fulham to move; later Fulham changed mind; said it was invalid because it was based on its own directors fettering their own decision
• Held - Court of appeal refused it and held agreement valid; benefits for claimant as directors believed it to be in best interest of the company when they entered into it

Question 32

What is the duty to Exercise Reasonable Care, Skill and Diligence?

Answer 32

• Previously a subjective duty under the common law but CA 2006 has introduced an objective element
• Now states the minimum standard of care expected from a director is based on that of a reasonably diligent person with:
  > General knowledge, skill and experience that may be reasonably expected of a person carrying out the functions carried out by a director and
  > General knowledge, skill and experience that director has

Question 33

What is the case of Re Cardiff Savings Bank (1892) and how does it relate to duty to exercise reasonable care, skill and diligence?

Answer 33

• The Marquis of Bute was appointed a director of a bank at the age of 6 months
• Over the next 38 years, he attended one board meeting and took no part in the business of the bank
• Liquidation of bank, liquidator sought to held Marquis liable
• Held: the liquidators claim was dismissed. Whilst the Marquis had neglected to attend meetings, this was not the same as neglecting his duty. He was appointed at a time when he could take no part in the business and it was understood that this state of affairs would continue. The standard of care should reflect this .

A common law ‘Subjective Duty’ was applied

Question 34

How does the case of Re Barings Bank Plc (No5) [2000] differ to Re Cardiff Savings Bank (1892)?

Answer 34

• Barings Bank collapsed in 1995 following the unauthorised trading activities of a single trader, Nick Leeson
• Case concerned disqualification proceedings against 3 directors who had alleged to have made serious errors of judgement in relation to Leeson’s activities
• Held: Directors have a continuing duty to acquire, and maintain, a sufficient knowledge and understanding of the company’s business.
• Led to formation of minimum standard of care, skill and diligence and diligence together with any experience, knowledge and skill possessed by that particular director

Question 35

What is the duty to avoid conflicts of interest?

Answer 35

• Director has an interest or may conflict with interest of company
• Applies particularly to exploitation of any property, information or opportunity, immaterial of whether the company could take advantage of the same
• Director must not personally take advantage of an opportunity that rightly belongs to the company
• Director would be liable for any profit she made
• Duty not infringed if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest or if the matter is authorised by directors
• A person who ceases to be a director continues to be subject to this duty as regards things done or omitted by him before he ceased to be a director.

Question 36

What is the Duty not to Accept Benefits from Third Parties?

Answer 36

176(1) A director of a company must not accept a benefit from a third party conferred by reason of–

(a) his being a director, or
(b) his doing (or not doing) anything as director.

Question 37

What is Duty to Declare Interest in Proposed Transactions or Arrangements?

Answer 37

Any declaration of interest in proposed transactions or arrangements must be made before entering into the transaction or arrangement

Doesn’t need to be declared if it cannot reasonably be regarded as likely to give rise to a conflict of interest

Question 38

Who does a director not owe fiduciary duties to?

Answer 38

A director does not owe a fiduciary duty to members, creditors, employees or anyone else and only the company can sue for breach of such a duty.