Principal-Agent Relationship

Discuss about the Business Law Authority or Express Authority.

The issue in this case that whether there was an authority on the part of Sara and Peter to deal with Gabby and Mary respectively on the behalf of Terrence. And if so, is Terrence liable to pay Gordon the demanding amount.

According to the law of agency, there is an agreement between an individual who entrusts his rights or authority to another individual to act on his behalf or negotiate with the third parties. The individual conferring the authority is called principal and the right conferred on another person is his agent. It is worth noting that in case of law of agency, the agent is bound to act according to the instructions provided by his principal. However, in certain cases, whether the principal is held liable for the acts of their agents, it is important to recognize the fact that whether there was authority on the part of the agent. Authority under the law of agency can be summarized into-

• Actual authority or express authority.
• By implied appointment on the part of the principal.
• Authority arising due to necessity.
• Ostensible authority.

In general, an authority is entrusted to the agent by the principal however, if such agent acts outside the authority provided to him, then in such cases the principal shall not be bound for the acts of the agent. The agent, in this regard shall be held liable to the third party personally for breach of warranty in relation to the authority provided to him. In Watteau v Fenwick [1893] 1 QB 346, it was observed that the owner of the pub directed the manager by way of actual or express authority for not to buy cigarettes. In this case, the manager (agent) was not held liable in this case due to the reason that the purchase of cigars from the very beginning fell within the authority of the pub managers in England. In this case, it was observed that the pub manager did not breach his actual authority which was authorized to him.

Agency can be formed as a result of implied authority on the part of the principal. Implied authority is something which is not specifically mentioned in the contract. For instance, when the principal allows the agent to order specific goods on his behalf and thereby habitually pays him for the same, an implied authority is formed which was observed in Watteau v Fenwick [1893] 1 QB 346.

Apparent or ostensible authority can arise in situations where the principal in his own conduct makes the agent believe that he has the authority on the behalf of the principal to make contract with third parties. In cases, where a prior authority was vested on the agent to act on behalf of the principal however, the authority was terminated by the principal without informing the agent. In Freeman & Lockyer v Buckhurst Park Properties [1964] 1 All ER 630, it was observed that the company gave the authority to one of the directors to act as an M.D on various situations. The nature of the principal-agency relationship was such that it occurred to the third parties to believe that the actual authority is vested on the M.D.

Authority under Law of Agency

An agency by necessity is formed when the underlying conditions are fulfilled.

• When it is not possible on the part of the agent to act according to the instructions provided by the principal.
• When the act of the agent was necessary to prevent the loss of the principal.
• When the agent has acted in good faith.

In Great Northern Railway Co. v Swaffield (1874) LR 9 Ex 132, in this case the owner of the horse (principal) was held liable for the contract with the owner of the stable (agent) as there was an agency of necessity.

The subject-matter of undisclosed principle can be emphasized in this regard. When a contract is formulated between a third party and the principal as a result of action on the part of the agent, regarding the fact that he did not disclose that he is working under the authorization of his principal. In Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199, it was observed that a third party has entered into a contract with an agent as he was of the knowledge that he is the main person of concern. In this case, it was observed that the insurers were liable to the undisclosed principals that were based upon an indemnity policy. However, it was found that he was an agent acting on behalf of the principle. In this case, the third party has a contract with the agent and not with the principle.

It is worthwhile to refer the subject-matter of undisclosed principle and the case of Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199 can be applied in the case of Sara when she did not disclose the fact that she was working under Terrance to Gabby. Therefore, in this regard, as a result of undisclosed principle there is a contract between her and Gabby and not between Gabby and Terrance.

The case study of Watteau v Fenwick [1893] 1 QB 346 can be applied because there was a presence of actual authority as Terrence directed Peter not to buy gold. However, Peter acted outside the actual authority when he bought gold. Therefore, the subject-matter of apparent authority can be applied because there was a previous authority on Peter and that the authority was terminated thereafter. The case of Freeman & Lockyer v Buckhurst Park Properties [1964] 1 All ER 630 can be referred because the nature of the relationship between Peter and Terrence was such that Gordon believed that Peter had an authority. Therefore, in this case the subject-matter of ostensible authority applies.

In the conclusion, it can be stated that there was an express authority on the part of Sara to deal with Gabby and as she undisclosed her agency relationship, there is a contract between her and Gabby. Terrence is not liable to pay Gordon the amount demanded because the contract was made after termination of agency with Peter.

Forms of Authority

The issue in this case is that whether the Industrial Machines Ltd can sue Roger for $ 200,000. The issue is also regarding the fact that whether the Department of Industry has the authority to decline the application of Roger.

According to Section 119 of the Corporation Act 2001 (Cth), a company comes into effect after being registered under the principles of common law. In this regard, it is worthwhile to refer here that the shareholders do not have legal interest vested in the company which was held in Macaura v Northern Assurance Co Ltd [1925] AC 619. Therefore, it is worth mentioning that, the company has the capacity to sue and being sued on its own. According to the provisions of Section 124(1) of the Corporation Act 2001 (Cth), a company possesses the powers and capacity to that of a natural person and the powers of a body corporate as a separate legal entity. In Salomon v Salomon & Co Ltd [1897] AC 22, it was observed that the company was incorporated by Solomon and therefore for the purpose of the business, he transferred the assets of the business and as a result of it, he was paid with shares and debentures. In this case, the creditors sued Solomon on the ground that he is personally liable to the creditors equally as towards the debenture holders. However, the Court rejected the argument placed by the creditors and held that a company has a separate legal entity which is separate from its shareholders and there was no conduct of fraud in the formation of the company.

According to the provisions of Section 117(1) of the Corporations Act 2001(Cth), for the purpose of registering the registering a company, it is important to file an application with the ASIC. However according to the provisions of Section 117(2), the nature of the application must contain the type of the company, the proposed name of the company, the address and identity of the members of the company and the proposed registered office of the company.

The doctrine of corporate veil was first observed in the case of Lee v Lee’s Air Farming Ltd (1961) AC 12. In this case it was observed that Lee was the shareholder of the company and therefore he cannot stay behind the corporate veil. In Daimler Co v Continental Tyre and Rubber Co [1916] 2 AC 307, the Courts lifted the corporate veil when it came to the knowledge of the court that a UK registered company was having trade relations with the companies of Germany which was strictly prohibited.

Agency by Necessity

It is worthwhile to refer the provisions of Section 119 as the company formed by Roger has a separate legal entity. The case of Macaura v Northern Assurance Co Ltd [1925] AC 619 can be referred as Roger being the shareholder of the company cannot be sued personally by Industries Machines Ltd. The provisions of Section 124(1) can be applied in reference to the case study of Salomon v Salomon & Co Ltd [1897] AC 22, in which it has held that the company cannot be sued as there was no conduct of fraud in its incorporation. Therefore, the company formed by Roger was not fraudulently incorporated. Therefore, the shareholders of the company cannot be held liable as the shareholders do not have personal interest on the assets of the company. Roger cannot be held liable as the form of the company incorporated was not fraudulent in nature and from the case study of Macaura v Northern Assurance Co Ltd [1925] AC 619 it has been established that a company being a separate legal entity can be sued in its own name and therefore the shareholders cannot be sued personally.

The provisions of Section 117(1) of the Corporations Act 2001(Cth) can be applied because in the present scenario Roger has filed an application for the purpose of obtaining a licence for the registration of the company. The provisions of Section 117(2) can be referred because Roger has already filed an application on behalf of the Explosive Industries Pty Ltd with the Commonwealth Department of Industry.  The case of Lee v Lee’s Air Farming Ltd (1961) AC 12 and Daimler Co v Continental Tyre and Rubber Co [1916] 2 AC 307 can be applied because Roger being the shareholder of the company cannot stay behind the corporate veil however, the granting of license to individual having prior convictions has been prohibited therefore, Roger’s application got rejected.

Conclusion:

Therefore, it can be concluded that there is no authority on the part of Industrial Machines Ltd to sue Roger. The Department of Industry can decline the application if it finds it unsuitable by applying the provisions of Section 117 and can also lift the corporate veil accordingly.

References:

Freeman & Lockyer v Buckhurst Park Properties [1964] 1 All ER 630.

Great Northern Railway Co. v Swaffield (1874) LR 9 Ex 132.

Macaura v Northern Assurance Co Ltd [1925] AC 619.

Salomon v Salomon & Co Ltd [1897] AC 22.

Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199.

Watteau v Fenwick [1893] 1 QB 346.

The Corporations Act 2001(Cth).