Contracts in Commercial Law

COMMERCIAL LAW “where a person contracts as agent, the contract is that of the principal, and not that of the agent and prima facie the only person who may sue is the principal and the only person who may be sued is the principal….to that rule, there are of course many exceptions” Per Wright J in MONTGOMERIE V UNITED KINGDOM MUTUAL STEAMSHIP discuss the situations in which an agent may be liable to a third party.

A relationship of agency arises where one person, an agent, acts on behalf of another person, a principal, in making legal arrangements with third parties that confer rights and impose obligations on the Principal.

It is the Principal that can sue and be sued on the contracts made between itself and the Third Party (Richards, p.449)[1]. However, in some cases, the Agent may be personally or jointly liable to the Third Party. Where there is joint liability, the Third Party must decide whether to sue the Agent, the Principal or both.

An agent will be liable when he intends to enter into an agreement as joint principal. This may be apparent from the express terms of the agreement, or from the way in which he signs it. An example of such arrangement can be found in a solicitor’s partnership, where each partner is an agent of the firm and any agreement entered into by them is as agent and joint principal (Denny, p.33)[2].

The case of Shack v Anthony (1813)[3] demonstrates that where an agent executes a deed on behalf of the principal in his own name, he will be held personally liable. For the Principal to take the benefit of the deed, he must be named on it and it is not enough that the Principal is simply disclosed.

In some cases, it is trade usage and custom that give agents liability under a contract. For example, insurance brokers take liability for non payment of premiums, and ship brokers accept liability for payment of charter parties (Fleet v Murton 1871)[4]. In both examples, liability is joint with the Principal. A further commercial example is found with Del Credere agents, who take personal liability as surety for their Principal.

Several outcomes can follow from contracts made with a non existent principal. If the contract is made prior to the incorporation of a company as in Kelner v Baxter (1886)[5], the Agent will be held personally liable. If the contract is entered into where the Principal is in fact fictitious, again the Agent will incur personal liability, and the same applies where the agent uses someone else’s name. If however the identity of the other person is material to why the third party entered into the contract, the agent will be liable for misrepresentation (The Remco 1984)[6].

An agent will incur liability to a third party if by his conduct he indicates that he intends to be liable to that party. He may, for example, enter into an agreement where there is no reference made to an agency, and which is signed in his own name or profession. In this scenario, he is jointly liable with the Principal. A further example of such liability that might arise can be found in Sika Contracts Ltd v B L Gill and Closeglen Properties Ltd (1978)[7], where an agent acting on behalf of a disclosed but unnamed principal signed contracts in his own name and profession, and was held to be personally liable. This situation could have been avoided had the agent added “as agent” after his signature, although the mere use of the word “agent” may indicate either a description or qualification and is not therefore conclusive (Gadd v Houghton (1876)[8], Halsburys s.184)[9].

The agent will always be jointly liable to the third party when acting for an undisclosed Principal because, for all intents and purposes, he appears to the third party to be the Principal (Halsbury’s s.183[10], Saxon v Blake (1861)[11]. Although it is the contract that the Agent has entered into that the Principal is entitled to enforce, the Third Party retains the right to elect to sue either the Agent or the Principal if he subsequently becomes disclosed (Bradgate, p.169[12], Richards p.456). The agent is not however liable where the contract is entered into with an unnamed (but disclosed) Principal, unless there is evidence of intention to be personally liable (Benton v Campbell, Parker & Co Ltd 1925[13]).

The above examples consider where the agent has found himself either jointly liable under the original contract, or personally liable and in fact, he becomes the principal and takes on all rights and liabilities of that contract, which is binding.

However, the case of Collen v Wright (1857)[14] establishes that where an agent enters into a transaction as if he were acting for a Principal and by implication, he warrants that he has the Principal’s authority to act in the matter, if the third party acts in reliance on his representation and it transpires that he has no such authority he may be liable to the third party for breach of warranty. This principle is based on an implied unilateral contract which is formed when the agent, by implication, promises that he will warrant he has authority if the third party enters into a contract with the principal. By entering into the contract with the principal, the third party accepts the offer of the agent and provides consideration for the agent’s promise. This brings about a collateral contract between the third party and the agent. Where the Principal remains liable under the main contract, the agent is not liable as the third party has suffered no loss despite the agent’s lack of authority (Richards, p.457).

Liability under this principal can be extended to warranting the authority of a fellow agent, as was the case in Chapleo v Brunswick (1881)[15]. The agent may also find themselves liable to any third party in the transaction – for example, the mortgage company in a property transaction (Penn v Bristol and West 1997)[16].

The third party may claim damages under the usual principals of contract law, being all damages that flow naturally and directly from the breach (Hadley v Baxendale (1854)[17], the aim being to put the third party back in the position he was in had the breach not occurred (Suleman v Shahsavari 1989[18], Nimmo v Habton Farms 2003[19]). Liability is strict and there is no defence in saying that the agent acted innocently in the matter (Yonge v Toynbee 1910[20]). However, the amount that can be recovered is limited by the amount the third party would have been able to recover from the Principal so if, for example, the Principal becomes insolvent, the amount is limited to how much the third party could have claimed from the Principal’s insolvency.

In addition to liability for breach of warrant of authority, if an agent deliberately or recklessless misstates his authority he will be liable to the third party in the tort of deceit (Derry v Peek 1889[21], Richards p.200). However, fraud is very difficult to prove and rarely gives right to recovery against an agent. He can also be liable for negligent misstatement under the principle in Hedley Byrne & Co v Heller & Partners (1963)[22] if it can be shown that there is an assumption of responsibility by the Agent to create a special relationship between the Agent and the Third Party, giving rise to a duty of care. The Agent, in failing to exercise due and reasonable care in representing the extent of their agency or the fact of its existence, breaches that duty. The Third Party would also need to show that they had suffered loss as a result of breach of that duty (Bradgate, p.175).

In conclusion, although an agent is not generally liable to the third party where both the existence and name of the Principal have been disclosed, there are many exceptions to the statement of Wright J in Montgomerie v United Kingdom Mutual Steamship (1891)[23] that only a principal can sue and be sued where an agency exists. The law of agency protects third parties who must be able to rely on an agent’s assertion of authority as a matter of commercial convenience, and where that assertion is incorrect, the agent may find himself jointly or personally liable to the Third Party. As can be seen, it is preferable to explore contractual remedies including breach of warrant of authority rather than negligence or deceit, as these carry with them the strict liability inherent to the law of contract.

Bibliography:

  1. Richards, P (2006) Law of Contract, Pearson, Essex
  2. Denny, R (2002) Commercial Law, ITC, Bedford
  3. Halsbury’s Laws of England : Agency
  4. Bradgate, R (2000) Commercial Law, Butterworths, United Kingdom
  5. Sealy, L.S, Hooley, R, Berwin S.J (2003) Commercial Law: Text, Cases and Materials Lexisnexis UK, England

Footnotes

[1] Richards, P (2006) Law of Contract, Pearson, Essex

[2] Denny, R (2002) Commercial Law, ITC, Bedford

[3] Shack v Anthony (1813) 1 M & S 573

[4] Fleet v Murton (1871) LR 7 QB 545

[5] Kelner v Baxter (1866) LR 2 CP 174

[6] The Remco (1984)2 Lloyds Rep 205

[7] Sika Contracts Ltd v B L Gill and Closeglen Properties Ltd (1978) 9 Build LR 11

[8] Gadd v Houghton (1876) 1 ExD 357, CA

[9] Halsbury’s Laws of England : Agency 7(1)(i)(184) Liabilities of Agent on Contracts – Identity of Principal Not Disclosed

[10] Halsbury’s Laws of England : Agency 7(1)(i)(183) Liabilities of Agent on Contracts – Fact of Agency not disclosed

[11] Saxon v Blake (1861) 29 Beav 438

[12] Bradgate, R (2000) Commercial Law, Butterworths, United Kingdom

[13] Benton v Campbell, Parker & Co Ltd [1925] 2 KB 410

[14] Collen v Wright (1857) 8 E & E 647

[15] Chapleo v Brunswick Permanent Benefit Building Society (1881) 6 QBD 696, CA

[16] Penn v Bristol and West Building Society [1997] 3 All ER 470, [1997] 1 WLR 1356, CA

[17] Hadley v Baxendale 1854 9 exch 341

[18] Suleman v Shahsavari [1989] 2 All ER 460, [1988] 1 WLR 1181

[19] Nimmo v Habton Farms 2003 1 ALL ER 1136 CA

[20] Yonge v Toynbee). 1910 1 KB 215

[21] Derry v Peek (1889) 14 App Cas 337, 58 LJ Ch 864, HL

[22] Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, [1963] 2 All ER 575, HL;

[23]Montgomerie v United Kingdom Mutual Steamship Association Ltd [1891] 1 QB 370;

Bill Carlson

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