External Agency Relationship -- the contract between the principal and the third party Flashcards
What are the four main ways agents make contracts?
- Agent acts for a disclosed and named principal.
- Agent acts for a disclosed but unnamed principal.
- Agent acts for an undisclosed principal
- Agent acts on behalf of a non-existent principal
What happens when an agent acts for a disclosed and named principal?
This means that the agent is disclosing both that he is an agent and is also naming the principal.
Clear the agent is acting as a representative party. Where this is the case, a contract is created between the principal and the third party through the medium of the agent. The agent is not a party to this contract, and should not incur any liabilities to the third party.
However, this general principle must be considered in the light of the presumption that the party signing a written contract is bound by that contract (so if I sign a contract “John Smith” there is a presumption that the signor is bound by the contract). Thus where an agent signs a contract they must overcome this presumption.
This presumption can be difficult to overturn. See Stewart v Shannessy (1900)
Stewart v Shannessy (1900)
Shannessy looked to employ Stewart for two companies for which Shannessy was himself an agent.
Letter written on the headed paper of one of the companies Shannessy was an agent for - signed JJ Shannessy (his own name).
Stewart raises an action against S for payments due for work carried out as the representative. Shannessy said he is simply an agent and must look to the company (principal) to get paid. The Inner House argued that Shannessy was personally liable as the letter was signed by him in his own name without any qualification - no indication that S did not intend to bind himself personally in this letter. Presumption where if you sign a document you are bound by it.
⁃ Thus the agent must make it clear they are acting on behalf of the client. Methods of signature by the agent to rebut this presumption include writing e.g. “For and on behalf of Tesco PLC” or “per procuration”. It is thus possible to rebut this presumption by making clear that the agent is signing in a representative capacity. Methods of signature by the agent to rebut this presumption.
Digby Brown & Co v Lyall
A letter was signed by a firm of solicitors. The obligations set out in the letter were stated to be on behalf of our client. On that basis the court did not find that the firm were personally liable. The key with written documents is to be very clear that when signing as an agent you make it clear you are signing in a representative capacity (I.e. You are not binding yourself but the principal - use language such as “for” and “on behalf of”).
If an agent is acting on behalf of a disclosed and named principal - the agent does not generally form part of the contract and the principal and third party are contracting parties. Person signing must be careful not to personally bind themselves.
Brebner v Henderson 1925
**Use of descriptions such as ‘director’ or ‘secretary’ may not be sufficient to overcome the presumption.
An agent will likely want to rebut this presumption. This can be difficult to do. In this case, two parties signed document with their titles after their signatures. This was not enough. The inner house held that those who signed the deeds were reliable. In the courts view, adding the words director (e.g) were descriptive only. What is important is to make clear the basis on which you are signing for and on behalf of the principle.
Stone & Rolf Ltd v Kimber Coal Co 1926)
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What happens when an agent acts for a disclosed but unnamed principal?
This occurs when it is unclear who the agent is acting for - the principal has not been identified. There is little Scots authority on this issue.
The authority we do have points towards it being dependent upon whose credit (i.e. financial reputation) the third party relied upon when he entered into the contract: did the third party look to the credit of the agent, or to the credit of an unknown principal? Whose financial status was he looking at when entering into contract? This could be indicative of who the parties to the contract are.
In this case the agent discloses that they are an agent but doesn’t name the principal. In certain commercial situations this practice is quite common. There isn’t much Scottish case law on the point and there are two competing theories as to what is going on.
The main question is who is bound in this contract. Is it the principal and the third party, despite the fact the principal isn’t named or is it the principal and the agent? The following case gives one method of determining this question: Lamont, Nisbet v Hamilton 1907
Lamont, Nisbet v Hamilton 1907
⁃ Looks to the idea of credit or financial standing. The court in this case suggested that in order to determine who is bound one must ask who’s financial reputation did the third party rely on when they entered the contract. If the third party was relying on the agent’s financial reputation then it is probable that a contract is formed between the third party and the agent. But if the third party is relying on the financial reputation of the unknown principal then it is likely that the contract is formed between the third party and the unknown principal.
- The pursuers were insurance brokers. They had effective insurance over a ship that belongs to defenders on the instructions of the management agent of the ship. The managing agents became bankrupt and the broker looked to sue the owner for the insurance premiums he had laid out. Held: owner was not liable since even though it was clear to insurance brokers that managing agents was acting in a representative capacity for the owner - the insurers had not looked at the credit of the owners at all - only the agents, so they could only look to the agents to be paid. (??) [Look this case up].*
Ferrier v Dods (1865)
This is a conflicting earlier case.
⁃ A horse was sold at auction for an unnamed principal (the auctioneer was the agent, the owner of the horse was the principal). The horse was ‘defective’. The buyer who bought the horse chose to return the horse to the principal. …
- Who the third party elects to be the contracting party rather than looking to the credit of the party (?).
- Ferrier purchased a horse at an auction. It was clear that auctioner was acting as agent for owner BUT owners name was not disclosed. Ferrier said that the horse was essentially a duff (not sound) and he raised an action against the auctioneer and the principal (who had now been disclosed) - he sought for the price he paid for the horse.
- As well as raising the action,he physically returned the horse to the owner. The court said: purchaser was not entitled to sue the auctioneer (agent) and owner (principal). You cannot sue both (?). But by having taken the horse back to owner it appears he elected to sue the principal.
Ruddy v Monte Marco [2008]
Inner house case in 2008 which favoured the Lamont approach:
Looks to credit and financial standing. Here the IH found to escape personal liability under the contract the agent must show he expressly or impliedly negated that personal liability. It was evident that the pursuer did not trust to the credit of the agent but to the credit of the unidentified principal. It had to be very clear that the third party was looking to the credit of the principal.
Essentially two ways in which we might determine the effect of the agent acting as an agent for an unnamed principle:
- Whose credit did the third party look to
- The creditor is bound by this idea as an election
What happens when an agent acts for an undisclosed principal?
The agent may act on behalf of a principal, but this fact may be concealed from the third party. From the third party’s perspective, the ‘agent’ appears to be a principal. The agent is not disclosing that he is an agent and therefore not disclosing there is a principal. A contract is then formed between the agent and the third party., and the third party considers that his or her contracting party is the agent.
However, the principal can decide to disclose his or her existence at a later stage. So initially the third party is unaware that there is a principal. Following disclosure, the principal may choose to sue the third party under the contract formed by the agent. The third party may also (once aware of the principal's existence) choose to sue either the principal or the agent. Once disclosed the principal can sue the third party and the third party can choose who he sues. ⁃ But there is no assignation of the contract so it seems to go against the general rules of contract law. The only explanation is that it is a commercial concept that has arisen out of commercial convenience.
Why is this allowed? The courts tend to feel that in most commercial contracts it doesn’t actually matter who performs
Meier v Küchenmeister (1881) 8 R 642
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Bennett v Inveresk Paper Co (1891) 18 R 975
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Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 All ER 199
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Rolls Royce Power Engineering plc v Ricardo Consulting Engineers Ltd [2003] EWHC 2871, [2004] 2 All ER Comm 129 (especially paras 55-58)
Rolls Royce argued that a subsidiary … entered into a contract with Cargo and by entering into this contract Allan was not RR …
Court said: this contract was manifestly not one of a commercial contract
Evidence was led in this case to show that the nature of the services provided …
The contract was one in which is was inconceivable that the identities of the contracting parties was not significant to one another. So they cannot emerge at a later date since it is material to the contract?? The principal was excluded from intervening (Look this case up**).
