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Obligations in agency

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All agency agreements confer obligations upon both their principal and agent.

Agents’ obligations

Agents usually owe three types of obligations to their principals: performance obligations, fiduciary obligations and, if the agent is a commercial agent, commercial agent obligations.

Performance obligations

The common law has little to say about what an agent must and must not do; an agent’s performance obligation, sometimes called his positive obligation is simply to perform his mandate under the agency agreement. The common law only appears to intervene if the agreement does not provide for a standard of care which the agent must meet: if none is specified, the agent must act with reasonable care for skills which they profess to have, according to The Moonacre [1992].

Fiduciary obligations

Equity has much more to say about agents’ obligations, imposing fiduciary, or negative, obligations. Two obligations are imposed: avoid conflicts of interest and don’t take advantage of a privileged position. In Bristol & West Building Society v Mothew [1998], Lord Millet explained that fiduciary obligations arise because a principal exposes himself to his agent, creating a relationship of trust and confidence. An agent who is incompetent does not breach these obligations, only an agent who is unfaithful. Regal Hastings v Gulliver [1967] shows that even when acting with a good motive, utilising a privileged position for personal gain will usually be classed as a breach of fiduciary obligations.

Consent

If there is consent to a breach of fiduciary obligation, the breach will not be actionable by the principal. In Boardman v Phipps [1967], consent was not obtained from every principal trustee, therefore there was still a breach of fiduciary obligation. According to Dunne v English (1874), consent must be informed by the disclosure of all material circumstances. In Hustanger v Wilson [2007], this test failed. The burden is on the agent to show that there was consent, according to Allwood v Clifford [2002], where the defendant could not prove that an oral agreement consenting to his profit had occurred.

Conflict unavoidable

It is no defence for an agent to say that a conflict was unavoidable due to his failure to obtain the consent of both parties, according to Hilton v Baker Booth and Eastwood [2005].

Consequences of breach

Internally, the breach of a fiduciary obligation entitles the principal to elect to terminate the agency agreement, according to Rhodes v Macalister (1923). In any event, remuneration for all performance tainted by the breach will be forfeited.

Externally, any contract concluded in breach of an agent’s fiduciary obligations will be voidable, but subject to equity’s bars to rescission, according to Kimber v Barber (1872). In Hurstanger v Wilson [2007] (above), it was confirmed that rescission was discretionary as it would be unfair and disproportionate to allow such rescission of a loan agreement.

Financially, according to Boardman v Phipps [1964], an agent will be liable for all unauthorised profits made, subject to an equitable allowance, which in the Court of Appeal, Lord Denning had emphasised the importance of in his judgement. In O’Sullivan v Management Agency and Music [1985], the presence of an equitable allowance was also advocated. The House of Lords also refused to overrule the express provisions with regard to breaches of fiduciary obligations in Guinness Plc v Saunders [1990]. A principal is only entitled to recompense for damages lost as a result of the defendant’s act. In Target Holdings v Redferns [1995], the House of Lords found no causal link between the agent’s breach of fiduciary duty and the loss sustained by the principal. According to Mahesan v Malaysian Government Officers’ Cooperative Housing Association [1979], where a bribe is involved, a principal must elect between the recovery of the bribe or equitable compensation of the money lost as a result of the bribe at the time of the judgment. There may be no double recovery.

Sale by agent to principal

An agent must not act as a merchant with his principal as the final consumer. If an object which the principal orders is acquired and sold to the agent during the agency period, the principal is entitled to the profit made by the agent, according to Bentley v Craven (1853). If the agent already had such an item, a reasonable market price may be imposed upon the principal, according to Re Cape Breton (1885). If the item is unique and was acquired by the agent prior to the agency period, it does not have a market value and there can be no breach of fiduciary duty when it is sold.

Proprietary remedies

Historically, there was significant debate about whether a remedy for breach of fiduciary duty was proprietary in nature or not. A proprietary nature would allow illicit profit to be traced through changing forms and would be recoverable with priority if the agent were to become insolvent. In FHR European Ventures v Cedar Capital Partners [2014], the Supreme Court ended this discussion, finding that remedies for breaches of fiduciary duties are always proprietary in nature. Therefore, if an agent takes a £2 bribe from a third party to procure a contract, a principal is not only entitled to the £2, but the house that the agent purchased with the lottery winnings that resulted from the ticket purchased with that £2. The Supreme court took a strict approach to the seriousness of fiduciary duties. According to Daraydan Holidays v Solland International [2005], both an agent and a third party are jointly and severally liable to account for any bribes transferred between themselves. Third parties may also be liable to a principal in tort for inducing a breach of contract, dishonest assistance or being in knowing receipt of a bribe.

Commercial agent obligations

If an agent is a commercial agent, regulation 3 of the Commercial Agents (Council Directive) Regulations 1993 requires that an agent acts dutifully and in good faith. According to Vick v Vogle-Gapes [2006], this means not acting in a way calculated and likely to destroy or damage the relationship of trust and confidence between agent and principal.

Principals’ obligations

A principal owes an agent very little by way of obligations at common law, but the Commercial Agents (Council Directive) Regulations 1993 were designed to provide greater protection for commercial agents, therefore a commercial agent is owed more by way of obligations than a non-commercial (common law only) agent.

Common law remuneration

At common law, obligations once again stem from the interpretation of the agency agreement. A principal’s main obligation is to remunerate his agent for work carried out. Whether an agent is entitled to remuneration for the conclusion of a specific contract is a question of fact, and often raised in the context of estate agency. Usually, to be remunerated for the conclusion of a contract, an agent must be the effective cause of the conclusion, although this will be dependant on the agency agreement. Court were happy to uphold unconditional remuneration on exchange following the interpretation of a contract in Foxtons v Thesleff [2005], and saw no reason why two agents could not be remunerated as a result of one contract in Lordsgate Properties v Balcombe [1985]. Conversely, where there was no causal link to the conclusion of a contract in Foxtons v Bicknell [2008], the agent was not entitled to remuneration as a question of fact and interpretation. The agent must usually be the effective cause of the contract in order to be entitled to remuneration, according to McNeil v Law Union and Rock Insurance Company [1925].

To circumvent the issue of a right to remuneration, an agent may with to specify the type of agency he is entering into. Normally, a principal may have multiple agents. A sole agency ensures that a principal may only have one agent working for him, meaning that only if a principal procures a contract himself will the agent forfeit his right to remuneration. A sole and exclusive agency prevents even the principal from acting, meaning that an agent is usually entitled to remuneration for all contracts concluded on behalf of the agent within the terms specified in the agency agreement. Courts will rarely find an implied exclusivity term in an agency agreement, as illustrated by Luxor v Cooper (1941), as counsel are required to specify what exactly this term would say; an almost impossible task.

Contractual interpretation is at the heart of an agent’s right to remuneration, therefore in French & Co v Leeston Shipping (1922), an agent was not entitled to further periodic commission payments following the cancellation of a time charterparty, and in Adler v Ananhall Advisory and Consultancy Services [2009], no term could be implied to suggest that a principal was obliged not to breach a contract from which the agent earned commission.

Commercial agency remuneration

If an agent falls within the definition of a commercial agent, and is not exempted from the regulations (such as if the agent is a gratuitous agent), regulation 6(1) provides that a commercial agent is entitled to an agreed commission. If no commission is agreed, a customary commission will be imposed, and failing the finding of a custom, a reasonable sum will be imposed. Mercantile International Group [2001] confirms that the defining factor as to whether an agent is a commercial agent or not is ‘continuing authority’; a mark-up agent may still be a commercial agent. However, if the ‘agent’ acts on his own behalf, as in AMB Plastici v Pacflex [1999], where there was no continuing authority, the regulations and their remuneration obligations will not apply.

Regulations 7 and 8 provide the basis of a commercial agent’s right to remuneration. Regulation 7(1) provides the right to commission if a contract is concluded during the an agency either as a result of the agent’s action or from a customer as a result of a previous transaction procured by the agent of a similar kind. Regulation 7(2) provides the right to commission from contracts within an agent’s exclusive geographic or client-group jurisdiction. Chevassus-Marche v Groupe Danone [2008, ECJ] qualified this latter right slightly in requiring there to have been some direct or indirection action of the principal or agent. Regulation 8(a) provides the right to commission for a contract concluded after an agency period has expires if (a) a contract concluded within a reasonable time after the agency expired was mainly attributable to the efforts of the agent, or (b) an order was placed before the expiry of the agency period, but only accepted after the expiry date, in accordance with regulation 7. The latter option prevents principals from collection orders then only accepting them once the agency agreement has expired and commission would not at common law be payable.

Tigana v Decoro [2003] interpreted regulation 8(a) as a question of fact where ‘reasonable time’ and ‘mainly attributable’ were linked. An agent was entitled to commission for subsequent orders within the current ‘sofa season’ of 9 months. Ingmar v Eaton Leonard [2001, ECJ] found a reasonable time in the context of selling pipe bending machines to extend to 21 months. Vick v Vogle-Gapes [2006] said that an agency agreement may specify what constitutes a reasonable time period for the purposes of regulation 8.

Two final regulations to note in this section are regulations 9 and 11. Regulation 9 prevents a new agent obtaining commission under regulation 7 if an old agent is owed commission under regulation 8 (unless sharing the commission would be equitable), and regulation 11 removes an agent’s right to commission if as a question of fact, it can be established that the contract which would give rise to commission will not be executed and the principal is not the cause of this non-execution.

Other obligations

A principal owes two other obligations to his agent. Firstly, a principal must indemnify his agent against expenses incurred whilst carrying out acts within the scope of actual authority. For example, in Anglo Overseas Transport v Titan Industrial Group [1959], compensation was payable to an agent for the cost of booking space on a ship which the principal failed to fill. Secondly, a principal is obliged to grant his agent a lien in lieu of compensation not being paid. A lien is a security interest, allowing an agent to retain any previously acquired property belonging to his principal to encourage payment of remuneration. In Ismail v Richards Butler [1996], it was said that such a right of an agent in the context of solicitors has long been established. For a lien to be operative, the property retained by the agent must have been obtained in the course of the agency agreement, according to Dixon v Stansfield (1850). An authorised sub-agent also have the right to lien against his principal, although his claim for remuneration will be directed at the principal’s agent, according to Solly v Rathbone (1814). Finally, sub-agents are not entitled to a lien if the principal is undisclosed and has not been discovered, according to Mann v Forrester (1814).

Next: Disclosed and undisclosed agency

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