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Example Commercial Law Problem Question
Annette owned a shop selling antique goods. This required her to attend a number of auctions per year. When Annette went to these auctions her best friend Becky ran the shop. Annette instructed Becky, that she could sell any of the items displayed in the shop as long as Annette got at least seventy five percent of the price displayed on the item. Becky was warned that under no circumstances must she purchase any stock for the shop.
While Annette was away at an auction, Becky sold Chris an antique clock for seventy percent of the price displayed. Chris bought the clock believing that Becky owned the shop.
Becky also sold Diana, a regular customer and good friend of Annette's, a bedside cabinet for sixty five percent of the displayed price. Diana was aware that Annette would not sell for lower than seventy five percent of the marked price, even to a trader such as herself.
Becky also purchased a number of items of jewellery from a collection shown to her by Eddie, for £350. Becky believed this deal to be a bargain, one that she felt Annette would not want to let slip by.
On Annette's return, she discovered that the jewellery pieces were very rare and in fact worth £3000. Eddie, also having heard that the jewellery items were worth much more, returned to the shop and insisted that the items be returned because he was unaware that Becky did not own the shop, and thus had no right to buy them. However, Annette refused to give the items back, arguing that the contract was valid.
Advise Annette and Becky of their legal positions.
Becky may be Annette's Agent. An Agent is someone who acts on behalf of another person (the Principal) to negotiate contracts between the Principal and a third party1. Whether the various contracts Becky negotiates bind Annette depends on whether Becky had actual, apparent, or usual authority from Annette. Becky and Annette's liabilities are also affected by whether the agency relationship was disclosed to the third party or not. Finally, the Commercial Agents (Council Directive) Regulations 1993 also govern their relationship.
There are various definitions of an agency relationship2. These include whether the parties assent to the relationship or whether the Principal controls the Agent3. However, recent cases suggest that control is not the crucial factor, but whether the Agent is financially accountable to the Principal4. In Spearmint Rhino Ventures v Revenue and Customs Commissioners5 the defendant was found not to have had an agency relationship with lapdancers who performed in their nightclubs, as the dancers negotiated their own fee with customers and paid their own VAT. Here, Becky negotiates contracts herself. However, she is financially accountable to Annette for 75% of the price of any sales. Therefore, Becky is Annette's Agent.
An agency relationship can be created expressly or impliedly by agreement, under the doctrine of apparent authority or by operation of law6. No formalities are necessary7. Here, Annette and Becky agree that Becky will negotiate sales for Annette. This is an express agreement.
Becky may have actual authority to enter into the various contracts. Whether an Agent has actual authority is a question of fact depending upon the words used in the agreement between the Agent and Principal8. Annette tells Becky that she can sell any item so long as Annette receives 75% of the price displayed. She is also told not to buy stock. Therefore, when Becky sells the clock to Chris for only 70% of the price displayed and the cabinet to Diana for only 65% of the displayed price, and when she buys the jewellery from Eddie, she exceeds her actual authority.
However, actual authority may also be implied by the parties' conduct. For instance, the appointment of someone to the role of Managing Director of a company authorised him to do anything that was within the usual scope of that office9. Accordingly, courts will imply any authorisation necessary to allow the Agent to do anything ordinarily incidental to carrying out the role he has expressly been given10. As a shopkeeper ordinarily can buy stock and negotiate deals with customers, this could give Becky the implied authority to conduct these transactions. However, this will not apply if the Agent ignores the Principal's express instructions to the contrary11. As Annette expressly forbids Becky from doing this, Becky cannot have actual authority.
A Principal may still be bound if the Agent's act is something an Agent would usually have authority to do and the third party is unaware of any restriction on their actual authority12. Apparent authority can clothe an Agent with actual authority despite any restrictions on that authority13. Therefore, Annette will be bound by any contract Becky enters into with apparent authority regardless of placing limits Becky's authority.
In Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd14 it was held that there are three requirements for an Agent to have apparent authority: a representation that the Agent had authority to enter the contract on behalf of the Principal; the representation must be made by someone with actual authority to make it; and the third party was induced by the representation to enter the contract.
A 'representation' can be express or implied from previous dealings or conduct15. Annette makes no express representations. However, by placing someone in a position, a Principal impliedly represents to the whole world that the Agent has the usual authority of someone in that position16. A manager of a shop would usually have authority to enter contracts, negotiate prices and buy stock. Therefore, there is an implied representation that Becky has authority to do this.
The representation must be made by someone with authority17. Annette is the owner and, therefore, has authority to do this.
However, if the third party does not rely on the representation or they know of any restriction on the Agent's authority, this 'unclothes' the Agent of their apparent authority18. It will be difficult for a third party to say they relied upon a representation if the contract runs against the Principal's commercial interests19. Chris and Eddie do rely on the representation. Therefore, Becky has apparent authority to deal with them. However, Diana knows that Annette would not sell anything for less than 75% of the displayed price. Therefore, she is aware of a restriction on Becky's authority and cannot rely on any apparent authority.
In Watthau v Fenwick 20 it was held that if an Agent is appointed to a role he may impliedly have the authority that any Agent in his position usually has, even if this has been expressly restricted. Deciding what is usual for that kind of Agent is a question of fact21.
However, this will not apply if the third party is aware of a limit on the Agent's authority22. Chris and Eddie are unaware of any limits on Becky' authority. Therefore, Becky may also have usual authority in relation to them.
Conversely, Diana knows that Becky should not sell anything for less than 75%. Therefore, Becky does not have usual authority regarding Diana. Also, although Watthau v Fenwick is still good law this case has now fallen out of favour and has not been followed in Canada23. Therefore, it will be difficult to show that Becky will have 'usual authority' in relation to Chris and Eddie, although it is possible.
Liability for Undisclosed Agency
An undisclosed agency is where a third party is unaware that the Agent is acting for anyone else24. Chris and Eddie are unaware that Becky acts on behalf of Annette. The general rule is that the Principal is still bound by an undisclosed agency, provided the Agent had actual authority to act25. However, if the Agent has no actual authority, the Principal is not bound and the contract is between the Agent and the third party only26. Becky does not have actual authority. This suggests that Annette is not bound to honour the contracts with Chris and Eddie and only Becky is liable on them.
Even so, a Principal may sometimes intervene and enforce such a contract27. As the contract with Eddie is a lucrative one, Annette could intervene in that contract. The Principal must have had capacity to contract when the contact was made28. Annette was capable, being the shop owner at that time. The Agent must also have actual authority29. Becky will have this if she had 'usual authority' under Watteau v Fenwick. Also, the contract must not expressly prohibit the Principal's intervention30. This is satisfied here. Finally, the Principal cannot intervene if the third party had personal reasons for not contracting with them31. This does not apply here. Therefore, Annette may enforce the sale from Eddie provide that Becky had 'usual authority' to act.
Liability for Disclosed Agency
The agency is disclosed to Diana, who is aware that Annette owns the shop as she is a regular customer and Annette's close friend. With regards to Diana, Becky acts outside her actual authority and does not have apparent authority. In this situation, the Principal is not bound to honour the contract32. Therefore, Annette does not have to give Diana the cabinet.
However, as Diana is a regular customer and good friend, Annette may still wish to honour the contract. A Principal may sometimes ratify an Agent's actions, giving them authority to act even if they did not have authority at the time the contract was formed33.
There are several conditions before a Principal may do this. The agency must be disclosed34. This is satisfied with respect to Diana. The Principal must have had capacity to enter the contract at the time it was made35. Annette owned the shop when the items were sold. Therefore, this is satisfied. Ratification must also occur within a reasonable time36. Therefore, provided this happens, Annette could ratify the sale to Diana. If Annette does this, she can sue or be sued on the contract, and Becky would not be held liable for exceeding her authority37.
Breach of Warranty
If an Agent falsely informs a third party that they have authority to act for a Principal, and the third party relies on this to their detriment, the Agent will be liable for breach of warranty38.
Becky falsely claims to have authority to selling goods for less than 75% of their displayed price. However, the agency is undisclosed to Chris and Eddie. Therefore, they cannot rely on any representations by Becky. The agency is disclosed to Diana. Therefore, Diana could sue for this breach.
However, an Agent will not be liable for this if the Principal ratifies their actions or the third party ought to have known of the lack of authority or did not rely upon that authority39. Consequently, if Annette ratifies the contract with Diana, Becky will not be liable for this. Also, as Diana ought to have known of the limits of Becky's authority, she may not sue Becky for this.
Duties of an Agent
At common law an Agent must follow their Principal's lawful instructions40. If the agency is contractual the Agent is liable for breach of contract if they breach this duty41. As Becky is promised whatever amount she sells the goods for above 75% of their displayed price, the agency is contractual. Becky ignores Annette's instructions by selling goods below this limit and buying stock. This duty applies even if the Agent genuinely believed they were acting in the Principal's best interests42. Therefore, it does not matter that Becky thinks buying Eddie's jewellery is a good bargain. Consequently, Becky breaches her contract with Annette.
An Agent has a duty to exercise reasonable care and skill43. Becky also breaches this duty by ignoring Annette's instructions.
The Commercial Agents (Council Directive) Regulations 1993 apply to the activities of 'commercial Agents' in the UK44. A 'commercial Agent' is a self-employed intermediary with continuing authority to negotiate sales or purchases of goods on behalf of the Principal45. Becky has continuing authority as she runs the shop whenever Annette goes to auctions. She has authority to negotiate sales as she can ask for any price above 75% of the displayed price. Therefore, the regulations apply.
A 'commercial Agent' must act dutifully and in good faith by complying with any reasonable instructions of the Principal46. Becky breaches this duty when she ignores Annette's instructions not to sell goods for less than 75% of the displayed price and when she buys the jewellery from Eddie.
Under Regulation 6 the default position in the absence of any agreement is that the Agent is entitled to remuneration customarily allowed or, if there is no such custom, to a reasonable amount of remuneration. This becomes due as soon as the Principal or third party performs their contractual obligations47. Here, Annette and Becky agree that Becky can keep anything above 75% of the displayed price. Therefore, Becky is entitled to no remuneration under her agreement with Annette. An Agent also loses the right to remuneration if they breach the contract and the Principal terminates it48. Here, Becky breaches the agreement. Therefore, if Annette terminates the agreement, Becky is still entitled to nothing.
Becky is Annette's Agent. Becky has no actual authority to make the transactions with Chris, Diana and Eddie. However, she does have apparent authority with respect to Chris and Eddie. She may also have 'usual authority'. However, as the agency is undisclosed only Becky is liable for the sales to Chris and Eddie. Annette could intervene in the contract with Eddie, in which case he cannot ask for his jewellery back. The agency is disclosed to Diana. As Becky has no actual or apparent authority in this case, Annette is also not bound by that contract. However, as Diana is a friend and regular customer, Annette could choose to ratify this sale. Becky breaches her duties as an Agent under common law and under the Regulations. Therefore, she is not entitled to any remuneration.
1J Tilson, Consumer and Commercial Law (3rd edn Pearson, Harlow 2015) 170.
2L Sealy and R Hooley, Commercial Law: Text, Cases and Materials (4th edn, Oxford University Press, Oxford 2008) 95.
4Kieran Mullin Ltd v Customs and Excise Commissioners  STC 374 (Ch).
5 EWHC 613 (Ch).
6Sealy and Hooley (n2) 111.
7R Bradgate and F White, Commercial Law (Oxford University Press, Oxford 2012) 69.
8Sealy and Hooley (n2) 113.
9Hely-Hutchinson v Brayhead Ltd  1 QB 549 (CA).
10Tillson (n1) 172.
11Waugh v HB Clifford and Sons Ltd  Ch 374 (CA).
12Sealy and Hooley (n2) 116.
13Manchester Trust v Furness  2 QB 539 (CA).
14 2 QB 480 (CA).
15Bradgate and White (n7) 72.
16Freeman and Lockyer v Buckhurst Park Properties.  2 QB 480 (CA)
18Heinl v Jyske Bank (Gibraltar) Ltd  Lloyd’s Rep Bank 511 (CA) per Nourse LJ.
19Criterion Properties plc v Stratford UK properties LLC  UKHL 28 (HL).
20 1 QB 346 (QB).
21Bradgate and White (n7) 73.
22Tillson (n1) 176.
23Sealy and Hooley (n2) 132.
24Bradgate and White (n7) 80.
25Siu Yin Kwan v Eastern Insurance  2 AC 199 (PC).
26Bradgate and White (n7) 80.
27Siu Yin Kwan v Eastern Insurance  2 AC 199 (PC).
28Bradgate and White (n7) 81.
29Siu Yin Kwan v Eastern Insurance  2 AC 199 (PC).
30Fred Drughorn Ltd v Rederiaktiebolaget Trans-Atlantic  AC 203 (HL).
31Said v Butt  3 KB 407 (KB).
32Bradgate and White (n7) 80.
33Tillson (n1) 176.
34Keighley, Maxsted & Co v Durant  AC 240 (HL).
35Boston Deep Sea Fishing And Ice co v Farnham  1 WLR 1051 (Ch).
36Managers of the Metropolitan Asylums Board v Kingham & Sons (1890) 6 TLR 217 (QB).
37Bradgate and White (n7) 76.
38Tillson (n1) 179.
40Bradgate and White (n7) 89.
42The Hermione  P. 162 (HC).
43Chaudhry v Prabhakar  1 WLR 29 (CA).
44Commercial Agents (Council Directive) Regulations 1993, Reg 1.
45Ibid, Reg 2(1).
46Ibid, Reg 3.
47Ibid, Reg 10.
48Ibid, Reg 18.