Chapter 10: Agency and Partnership Flashcards
LO 10.1 Describe the agency relationship
LO 10.1 Describe the agency relationship
Agent
a person authorized to represent or act on behalf of a principal in dealings with third parties
Prinicpal
the person who authorizes an agent to represent him or her
Agency
the service an agent performs on behalf of a principal
This service may be performed as an employee, as an independent agent, or gratuitously
Key element is the granting of authority
LO 10.2 Explain how an agency relationship can be created
LO 10.2 Explain how an agency relationship can be created
The agency relationship can be created by an
- express or implied contract,
- by estoppel,
- by ratification,
- or by necessity,
The key element being the granting of authority , the right or power to act on the principal’s behalf.
Authority
the right or power to act or to make a decision
How is an agency relationship created?
Usually, an agency relationship is created through a contract (an agency
agreement ) between the agent and the principal.
Agency agreement
an agreement creating an agency relationship between principal and agent
an cover such things as the authority of the agent,
the duties to be performed, and the nature of payment to be received
Power of attorney
an agency agreement in writing and under seal
*although the seal is no longer required
in most provincial powers of attorney acts.
Do the elements of a contract need to be present for the agreement to be binding?
All the elements of a contract, such as consensus, consideration, legality, intention to be bound, and capacity on the part of both parties, must be
present for an agency agreement to be binding.
What happens if any of the contract components are missing?
The lack of any one of these elements may void the agency agreement, but that will not affect
the binding nature of any contract the agent enters into on behalf of the principal
An agent who is a minor
An agent who is a minor may not be bound by his agreement with the principal, but any contracts he enters into with authority on the principal’s behalf will still be binding on that principal, unless of course
the agent is so young or insane that he doesn’t understand what he is doing.
However, a contract entered into by an agent for a principal who is a minor will be voidable as if the minor had entered into the contract directly.
Actual authority
authority given to an agent expressly or by implication
May be express (ie. verbal or written in agency agreement)
Express authority
a contract in which the parties have expressly stated their agreement, either verbally or in writing
Implicit authority
when the authority of the agent is implied from surrounding circumstances, such as the position or title given (by the principal) to the agent
Apparent authority
authority as suggested to a third party by the conduct of a principal; may exist even when there is no actual authority
Estoppel
an equitable remedy that stops a party from trying to establish a position or deny something that, if allowed, would create an injustice
Promissory estoppel
the principle that when a gratuitous promise to do something in the future causes a person who relies on that promise to incur an expense, the promisor will not be allowed to enforce other contractual rights that
are inconstant with that promise; the promise can only be used as a defence by the promisee; also known as equitable estoppel
Reasonable person test
in a negligence action, the judicial standard of socially acceptable behaviour; the standard used to determine the existence of apparent authority of an agent
To determine whether a principal is bound in contract with a third party
by the actions of an agent, a person must first ask,
“Was the agent acting
within the actual authority given by the principal?”
If the answer is yes, then there is a contract, provided all the other elements are present.
If the answer is no, then the question to ask is “Did the principal do anything to lead the third party to believe that the agent had the authority to act?”
In other words, was the agent acting with apparent authority? If the answer is yes, and the third party relied on that apparent authority, then there is
a contract between the principal and the third party.
It is only when the answer to both these questions is no that there is no contract and the
third party can only look to the agent for redress.
Ratification definition
when the majority agrees with the terms of a collective bargain; when a
principal confirms a contract entered into by his agent
See slide 24 for the 5 qualifications of ratification
What can you ratify a contract
A principal can ratify a contract even if the agent has acted beyond both actual and apparent authority
In fact, the power of the principal to ratify must meet the following qualifications:
1) The third party has the right to set a reasonable time limit within
which the ratification must take place.
2) The agent can’t make the deal and then search for a principal to ratify it.
3) The principal has to be fully capable of entering into the contract at the time the agent was claiming to act on her behalf
4) The parties must still be able to perform the object of the contract at the time of the ratification
Agency by Necessity definition
consent to act as an agent that is implied when there is an urgent reason
For example, an agent might have to sell deteriorating goods to preserve some value for the principal
Extremely rare today due to easy communication through cellphones
LO 10.3 Review the duties of the parties in an agency
relationship
LO 10.3 Review the duties of the parties in an agency
relationship
What happens if an agent abuses their authority
An agent violating the contract but exercising apparent authority can be
sued for breach and will have to compensate the principal for any losses
suffered.
Does the agent owe a duty of care to the principal?
Oh Yes, absolutely!
An agent owes a duty of care to the principal.
Can an agent go against the instructions provided to them?
However, an agent cannot go against the specific instructions received,
even if it might be in the principal’s best interests to do so.
Delegation
Entrusting someone else to act in one’s place; an agent normally cannot
delegate his responsibilities to someone else
This either needs to be express or implied by the customers and traditions of the industry
When is the work delegated?
The authority of an agent is commonly delegated to subagents when that agent is a corporation or large business
organization, such as a law firm, bank, real estate agency, or trust
company
Fiduciary Duty
a duty to act in the best interests of another; such duty may arise between directors and officers and the corporation they serve, between business
associates including senior employees and their employer, between agents and their principals, and between partners, also called utmost good
faith
Utmost good faith
a duty to act in the best interests of another; such duty may arise between directors and officers and the corporation they serve, between business associates including senior employees and their employer, between agents and their principals, and between partners; also called fiduciary
duty
The relationship between the principal and the agent are often referred to as an ___________________, requiring the
agent to put the interests of the principal ahead of her own
utmost good faith relationship
Full disclosure
the obligation to reveal all relevant details of a transaction
Can you conduct two sided deals? Aka represent both the principal and the third party?
Duel-agency
Double-ending deals
An agent cannot act for both a principal and a third party at the same time
Why? It would be very difficult for an agent to extract the best possible
price from a third party on behalf of a principal when the third party is
also paying the agent.
Can the agents collect any profits or commission without the principal knowing?
Also, the agent must not collect any profits or
commissions that are hidden from the principal, but must pay over all the benefit resulting from the performance of the agency agreement
Other examples of fiduciary duty require an agent to do the following:
-Keep in strict confidence any communications that come through the
agency function and communicate that information to the principal
-Act in the best interests of the principal, even if the agent may lose
some personal benefit
-Not take advantage of any personal opportunity that may come to her
knowledge through the agency relationship
Fiduciary Duty Owed to Indigenous
Peoples
Fiduciary Duty Owed to Indigenous
Peoples
The Royal Proclamation of 1763
recognized Indigenous title to
Indigenous lands but reserved to the Crown the exclusive right to
negotiate the giving up of Indigenous title. This was reflected in the
Constitution Act, 1867, which granted the federal Parliament legislative
authority over “Indians and Lands Reserved for the Indians.”
The Indian Act
requires reserve lands to be surrendered to the federal government
before they can be sold or leased
There have been many cases in which Indigenous peoples have claimed
that they were owed a fiduciary duty.
The Courts have held that:
1) Federal boards and tribunals, even though they are appointed by
and are agents of the Crown, do not have a fiduciary duty to Aboriginal peoples
2) When an Aboriginal group sues the Crown, the Crown does not have a fiduciary duty to act in the Aboriginals’ interest during the
litigation
3) It remains unclear whether the Crown has fiduciary duties to fund social services such as health care and education in Aboriginal
communities because lower courts have made conflicting
decisions.
The Principal’s Duties
The Principal’s Duties
The principal’s primary obligation to the agent is to
honour the terms of the contract by which the agent was hired
Payment upon completion
Thus, if an agent is to receive a commission upon the sale of a house,
even if the agent puts considerable effort into promoting a sale, there is
generally no entitlement to commission if no sale occurs.
LO 10.4 Discuss the liabilities that may be incurred by the parties in an agency relationship
LO 10.4 Discuss the liabilities that may be incurred by the parties in an agency relationship
The Agent’s Liabilities
The Agent’s Liabilities
When an agent does not have the authority claimed, either actual or
apparent, she may be sued by the third party for ___________________________
breach of “warranty of
authority.”
What other tort can agents be sued for
1) ^^^^
2) an agent who intentionally misleads the third party into believing that he has authority, when he does not, may be sued by the
third party for the tort of deceit
3) Agents who inadvertently exceed their
authority can be sued for the tort of negligence.
The Principal’s Liabilities
The Principal’s Liabilities
Vicarious liability
When an agent is also an employee of the principal, the principal is
vicariously liable for any tortious acts committed by the agent in the
course of that employment.
There are some situations in which vicarious liability will apply even if
the agent is acting independently.
The courts appear willing to hold the
principal responsible for theft or fraudulent misrepresentation by an agent, even when no employment exists
As is the case with employment law, vicarious liability makes the
principal responsible, but it does not relieve the agent of liability for her
own tortious conduct.
Both can be sued, but the principal can then seek
compensation from the agent.
Undisclosed Principals
a principal whose identity is concealed from the third parties with whom
the agent is dealing; the rights and obligations of the parties depend on whether the agent makes it clear that she is representing an undisclosed
principal rather than operating on her own behalf
Note that there are some types of contracts that cannot be enforced by an
undisclosed principal
One example is when the identity of the parties is
important.
For the same reason, you cannot go to a job
interview and be hired and then claim you were acting as an agent for someone else
To avoid the problem of an
undisclosed principal, individuals acting as agents should be extremely
careful to make it clear that they are acting in an agency capacity
This is
normally done by writing “per” immediately before the signature of the
agent
LO 10.5 Examine how an agency relationship can be terminated
LO 10.5 Examine how an agency relationship can be terminated
When does an agents authority end?
An agent’s authority ends when the agent is notified
How can the principal end the agents authority
When the principal wants to end the agent’s authority to act, simple
notification is usually sufficient, for there is no requirement that the notice be reasonable, only that it be communicated to the agent
Similarly, an
agent’s authority to act on behalf of a principal is terminated when
the actions the agent is engaged to perform become illegal.
An agent’s authority to act on behalf of a principal will also end upon the
death, bankruptcy or insanity of the principal
Enduring Powers of Attorney
Enduring Powers of Attorney
Loss of sanity on the part of the principal will terminate an agency;
consequently, authority to act under a power of
attorney terminates when the principal loses capacity
Enduring Power of attorney
the power to act as the donor’s trustee or representative following the donor’s lack of capacity
The attorney generally can make
all financial decisions on behalf of the donor
Through use of an enduring power of attorney, a person can decide, in advance, whom to entrust with
the future handling of her financial affairs.
It is now also possible for individuals to exercise some control over who will make health-care
decisions and similar personal decisions for them
LO 10.6 Introduce the three major types of business
organization
LO 10.6 Introduce the three major types of business
organization
3 types of major types of business organizations
1) Sole proprietorship
2) Partnership
3) Corporation
Sole proprietorship
an individual carrying on business alone
Employees may be hired and business may be carried on through the services of an employee or agent, but the business is the sole responsibility of one person, the owner
Partnership
when the ownership and responsibilities of a business are shared by two or more people with a view toward profit
Also, each partner acts as an agent for the other partners and has a fiduciary duty to them
Corporation
a business organization that is a separate legal entity from its owners, the shareholders
By statute, it has been given an identity separate from its owners. Thus, contracts with a corporation are dealings with the corporation itself as if it were a person in its own right.
Other ways to run a business
1) Non-profit society
2) Holding corporation
3) Joint venture
1) Non-profit society
a separate legal entity with different procedures of incorporation and liabilities of its members than corporations
This also creates a separate legal entity, but the procedure of incorporation and the obligations of those involved are quite different from those of a corporation.
2) Holding corporation
a corporation that owns shares in other corporations
3) Joint venture
the collaboration of several businesses, usually to complete a major project
LO 10.7 Discuss Sole Proprietorship
LO 10.7 Discuss Sole Proprietorship
A sole proprietor also bears full responsibility for all the
costs, losses, and obligations incurred in the business activity
Goody to know
As a general rule, sole proprietors are subject to less government regulation than partnerships and corporations
Unlimited liability
the liability of the sole proprietor or the partners for all debts incurred by
the business to the extent of their personal resources
Firm
a partnership
Creation of a Partnership
LO 10.9 Explain how a partnership can be created
LO 10.9 Explain how a partnership can be created
Creation by Inadvertence
Creation by Inadvertence
The Partnerships Act
provides that a partnership is created when
two or more people carry on business in common with a view toward profits
A partnership can therefore be created inadvertently, even when two or more people don’t have an express contract, if they meet this criterion.
Evidence of the following will usually give rise to a
presumption of a partnership:
- Joint contribution of capital to establish a business
- Intention to share profits or losses
- Joint participation in the management of a business.
Creation by Contract
Creation by Contract
A partnership agreement should deal with all of the matters important to the partnership, such as
the duties of each partner
what type of work or talent each is expected to contribute the amount of time to be committed to the business
how the profits are to be shared and how the capital is to be distributed
any limitations on the powers or authority of each partner
methods of resolving any disputes between the partners and how the business is to be managed
the circumstances in which the partnership will be dissolved
Registration
Most provinces require that a partnership be registered. Some provinces,
such as British Columbia and New Brunswick, require registration only when the partnerships involve trading, manufacturing, and mining
Rights and Duties of Partners
LO 10.10 Review the rights and duties of partners
LO 10.10 Review the rights and duties of partners
The rights and duties of partners
1) The partners will share profits equally between them.
2) The partners are entitled to reimbursement for any expenses they
incur in the process of the partnership business
3) All partners have the right to take part in management.
4) A partner is not an employee and is not entitled to wages or other remuneration for work done, only to a share of the profits
5) No major changes can be made to the partnership business
without the unanimous agreement of all the partners
6) Partners do not have the right to assign their partnership status to
some other party without the consent of the other partners
7) The business records of the partnership must be kept at the
partnership office, and all the partners have the right to inspect
them.
Some provisions that would likely be found in a partnership agreement include the following:
Names of the partners and the name of the partnership
What each partner brings to the partnership, including specific duties and responsibilities and the capital contribution of each partner
Nature of the partnership business and limitations on the authority of the partners
How profits and losses are to be shared and any right to take a draw against profits
The decision-making structure and a provision for dispute resolution
How (and when) changes are to be made to the agreement, such as retirement, adding a new partner, or changing the nature of the business, and under what circumstances the partnership is to be dissolved
Reference to specific sections of the Partnership Act where appropriate
Fiduciary Duty
Each partner has a fiduciary duty to act in the best interests of his/her
partners.
This duty imposes an obligation to account for any profits that
have been made or for any partnership funds or property used.
Liabilities of Partners
LO 10.11 Discuss the liabilities that may be incurred by partners
Liabilities of Partners
LO 10.11 Discuss the liabilities that may be incurred by partners
Vicarious Liability
All partners are also vicariously liable in tort for both careless and
intentional conduct of their partners in all business-related activities.
Unlimited Liability
Like that of a sole proprietor, a partner’s liability is unlimited, and his personal fortune is at risk to satisfy the claims of an injured party
With partners, however, they are liable not only for their own wrongful acts and those of their employees but also for the conduct of their partners.
Jointly Liable
under joint liability, all parties must be sued together; partners may face
joint liability for debts of the firm
Severally liable
under several liability, each partner can be sued separately
Explain how a partnership can be dissolved
LO 10.12 Explain how a partnership can be dissolved
Explain how a partnership can be dissolved
LO 10.12 Explain how a partnership can be dissolved
Is it hard or easy
Usually a partnership is easy to dissolve, requiring only notice to that effect by one of the partners
Death or insolvency
Subject to the partnership agreement, a partnership is dissolved by the
death or insolvency of any partner
British Columbia’s partnership legislation
is unique because it establishes
that, when more than two partners are involved, the partnership will be
dissolved only in relation to the partner who has died or become
bankrupt.
In addition, a partner can apply to the court to dissolve the partnership if any of the following factors are present:
- One of the partners has become mentally incompetent or
otherwise incapable of performing partnership responsibilities. - The conduct of one partner is prejudicial to the partnership
relationship, or the partner is otherwise in breach of the
partnership agreement. - It is clear that the partnership business can be carried on only at a loss.
- It is just and equitable that the partnership be dissolved
Distribution of Assets and Liabilities
Subject to the partnership agreement, when dissolving a partnership, the
debts must be paid first out of profits and, if they are insufficient, out of
the capital the partners originally invested
If there is still not enough
money to pay the debts, the creditors can then turn to the partners
themselves, who are liable in the proportion in which they were entitled
to share profits
Advantages of Partnership
LO 10.13 List the advantages of partnership
Advantages of Partnership
LO 10.13 List the advantages of partnership
Advantages
It may be less expensive to set up a partnership than a corporation and
less costly to operate a partnership because there are few formal
requirements once the business has been established.
It should not automatically be assumed that, because of the unlimited
liability and unwieldy management structure of partnerships,
incorporation is a better way of carrying on business.
For a small business
operating in a “low-risk” industry, for example, it may be advantageous to
start up and then carry on business as a partnership until the business
becomes profitable.
Other Types of Business
Organizations
LO 10.14 Describe other types of business organizations
Other Types of Business
Organizations
LO 10.14 Describe other types of business organizations
Limited partnerships
a partnership with general and limited partners
Limited partners
a partner in a limited partnership whose liability is limited to the amount
of her investment
General partner
a partner in a limited partnership whose liability is unlimited
Limited Liability Partnerships (LLP)
a form of partnership in which only the partner responsible for the loss
faces unlimited liability
The main advantage to professionals carrying on business in an LLP
is
that potential liability is limited.
The main advantage of LLPs is that a nonnegligent
partner will not face personal liability when the insurance
coverage is not sufficient to cover the loss.
Keep in mind the distinction between a limited partnership and a limited
liability partnership
A limited partner is in effect an investor who does not participate in the partnership business—his liability is limited to
losing what he has invested. However, a limited liability partner is an active professional who practises her profession with other partners and who is liable for her own negligent acts and for those committed by
others under her supervision
Joint Ventures
Often two or more individuals or corporations wish to cooperate in
completing a project together.
