Copyright © 2008 Pearson Education Canada13-1 Chapter 13: Agency and Partnership

Copyright © 2008 Pearson Education Canada13-2 Agents  Represent and act for a principal in dealings with third parties  Agency is the service an agent provides  Agency relationship is created by the granting of authority by: an express or implied contract an express or implied contract estoppel estoppel ratification ratification gratuitously gratuitously

Copyright © 2008 Pearson Education Canada13-3 Formation by Contract  Agency contract  Principles of contract apply All the elements of a contract must be present All the elements of a contract must be present Should set out nature and extent of authority to act Should set out nature and extent of authority to act

Copyright © 2008 Pearson Education Canada13-4 Formation by Contract/2  Agency contracts longer than one year must be in writing in some jurisdictions  Power of attorney is an agency contract under seal

Copyright © 2008 Pearson Education Canada13-5 Authority of Agents  Actual authority - agency agreement sets out limits of agent’s authority express authority - when clearly stated express authority - when clearly stated implied authority - conveyed by actions of principal implied authority - conveyed by actions of principal  Agent who exceeds actual authority may be liable for injury their conduct causes principal.

Copyright © 2008 Pearson Education Canada13-6 Apparent Authority  A principal who acts in a way to make a third party believe that an agent has authority to act will be bound.

Copyright © 2008 Pearson Education Canada13-7 Apparent Authority/2  Estoppel - if a third party relies on the principal’s representation that the agent has the authority to act, the principal cannot then claim the agent had no authority.  Reasonable person test used to determine apparent authority.

Copyright © 2008 Pearson Education Canada13-8 Ratification  A principal can ratify a contract even if the agent acted beyond both actual and apparent authority.  Agent must have been acting for a specific principal for ratification

Copyright © 2008 Pearson Education Canada13-9 Ratification/2  Principal must have been capable of entering into the contract  Inadvertent ratification by accepting a benefit

Copyright © 2008 Pearson Education Canada13-10 Agent’s Duties  Agent must act within limits of contract may be sued for breach by principal may be sued for breach by principal may be liable for acting beyond authority may be liable for acting beyond authority must perform functions set out in agreement must perform functions set out in agreement owes duty of care of a reasonable person owes duty of care of a reasonable person

Copyright © 2008 Pearson Education Canada13-11 Agent’s Duties/2  must not go against specific instructions  cannot delegate responsibility unless stipulated in contract  must account for funds

Copyright © 2008 Pearson Education Canada13-12 Fiduciary Duty  Agent has duty to act only in the best interests of the principal: Cannot take personal advantage of opportunity because of position Cannot take personal advantage of opportunity because of position Duty to disclose information that would benefit principal Duty to disclose information that would benefit principal Must not compete with principal and must turn over all benefits Must not compete with principal and must turn over all benefits

Copyright © 2008 Pearson Education Canada13-13 Duties of Principal  Principal must honour terms of contract pay a reasonable amount for services pay a reasonable amount for services reimburse for reasonable work-related expenses reimburse for reasonable work-related expenses  Ambiguities re authority will be interpreted in favour of broader agent’s authority but not to borrow money but not to borrow money

Copyright © 2008 Pearson Education Canada13-14 Undisclosed Principals  Agent may be held liable to a third party when acting for an undisclosed principal  Third party is usually bound to contract even when principal is undisclosed except where the identity of principal is important  Only identified principals can ratify a contract.

Copyright © 2008 Pearson Education Canada13-15 Third Party  A third party can sue when agent goes beyond authority breach of warranty of authority breach of warranty of authority intentional deception on part of agent may lead to the award of damages intentional deception on part of agent may lead to the award of damages tort remedies may be available for fraud or negligence tort remedies may be available for fraud or negligence

Copyright © 2008 Pearson Education Canada13-16 Vicarious Liability  When agent is employee, principal may be vicariously liable for agent’s tortious conduct  Where fraud or negligent misstatement is involved, principal may be liable even where the agent is not an employee

Copyright © 2008 Pearson Education Canada13-17 Termination of Agency  As set out in contract or by agreement  If agent’s duties are changed, principle of frustration may terminate agent’s authority.  Death, insanity or bankruptcy of principal will terminate agency relationship.

Copyright © 2008 Pearson Education Canada13-18 Question for Discussion  Specialized agencies in such areas as real estate, travel, and insurance employ agents to promote and market their services. Customers of such services may be subject to abuse.  What principles of agency law protect consumers when they have been taken advantage of by agents?

Copyright © 2008 Pearson Education Canada13-19 Types of Business Organization  Sole Proprietorship - an individual carrying on business alone 1 person 1 person Unlimited personal liability Unlimited personal liability Few formalities to establish of Business licence, Trade name registration Few formalities to establish of Business licence, Trade name registration  Partnership - two or more people carrying on business together for the purpose of making a profit 2 or more persons carrying on business with a view to profit 2 or more persons carrying on business with a view to profit Contact law including agency Contact law including agency Fiduciary relationships apply Fiduciary relationships apply Partnership Act governs unless Q to contrary Partnership Act governs unless Q to contrary Can be created inadvertently Can be created inadvertently  Corporation – an incorporated company that is a legal entity separate from the people who make it up. An artificial state sanctioned legal entity (legal person) that has a separate Legal existence apart from its shareholders, directors, managers and Employees

Copyright © 2008 Pearson Education Canada13-20 Sole Proprietorship  An individual carrying on business alone  Must comply with government regulations avoid restricted/illegal activities avoid restricted/illegal activities meet zoning bylaws meet zoning bylaws comply with workers’ compensation, employment insurance and income tax regulations comply with workers’ compensation, employment insurance and income tax regulations

Copyright © 2008 Pearson Education Canada13-21 Sole Proprietorship/2  Unlimited liability for debts  Vicarious liability for torts of employees

Copyright © 2008 Pearson Education Canada13-22 Partnership  Group of people carrying on business together for the purpose of making a profit  Regulated by Partnership Act common to common law provinces.  Sets out circumstances that do not create a partnership such as owning property in common owning property in common sharing gross returns from business activity sharing gross returns from business activity

Copyright © 2008 Pearson Education Canada13-23 Creation of Partnership  By Inadvertence - implied from conduct the finding of a partnership has serious financial liability implications for partners the finding of a partnership has serious financial liability implications for partners  By Agreement - primarily a contractual relationship - oral or written must contain all the elements of a contract must contain all the elements of a contract  Estoppel applies to representations that a partnership exists

Copyright © 2008 Pearson Education Canada13-24 Partner as Agent  Partners are each agents of each other agency law applies to partners agency law applies to partners contracts made by a partner are binding on all the partners contracts made by a partner are binding on all the partners  Vicarious liability - all partners are liable for the tortious conduct of a partner or an employee

Copyright © 2008 Pearson Education Canada13-25 Unlimited Liability  Partners’ liability is not limited to the assets of the partnership personal assets may be used to satisfy claims against partnership personal assets may be used to satisfy claims against partnership third party can collect from any partner third party can collect from any partner  Registration - failure to register where required may increase liability

Copyright © 2008 Pearson Education Canada13-26 Rights and Obligations  Fiduciary Duty - a partner must act in best interest of other partners: account for all profits account for all profits not use partnership property for personal benefit not use partnership property for personal benefit cannot compete with partnership cannot compete with partnership disclose all information and not use it for personal gain disclose all information and not use it for personal gain

Copyright © 2008 Pearson Education Canada13-27 Rights and Obligations/2  Partnership Act governs partner relationship: partners share profits equally partners share profits equally expenses are reimbursed by partnership expenses are reimbursed by partnership all partners have right to participate in management all partners have right to participate in management

Copyright © 2008 Pearson Education Canada13-28 Rights and Obligations/3  no right to salary or wages  major changes must have unanimous agreement  no right to assign their partnership status without consent of all partners  can be modified by contract

Copyright © 2008 Pearson Education Canada13-29 Advantages  Disadvantages may be reduced by insurance  Requirements of unanimous consent protects partners  Less expensive to set up than incorporation  Some tax advantages available

Copyright © 2008 Pearson Education Canada13-30 Question for Discussion  Partners participate equally in the management of a partnership and therefore must reach consensus on any major change in the business.

Copyright © 2008 Pearson Education Canada13-31 Question for Discussion/2  Consider the advantages and disadvantages of such a requirement. Is the right to modify this arrangement by agreement inconsistent with the principles of partnership?

Copyright © 2008 Pearson Education Canada13-32 Dissolution  Notice of intention to dissolve can bring partnerships to an end, or The death of a partner The death of a partner Agreement Agreement Bankruptcy of one partner Bankruptcy of one partner The court of business is deemed illegal, etc. The court of business is deemed illegal, etc.

Copyright © 2008 Pearson Education Canada13-33 Dissolution/2  Public notice must be given of dissolution to escape further liability

Copyright © 2008 Pearson Education Canada13-34 Limited Partnerships  Limited partners are liable only to the extent of their investment must follow provisions set out in the Act must follow provisions set out in the Act to avoid risk of being considered a general partner to avoid risk of being considered a general partner should register as limited partnershould register as limited partner refrain from participating in decision- makingrefrain from participating in decision- making

Copyright © 2008 Pearson Education Canada13-35 LLP Partnerships  Several provinces not permit limited liability partnerships  Available for professions  A partner is not personally liable for conduct of other employees or partners  Must be registered and include LLP name

Copyright © 2008 Pearson Education Canada13-36 Question for Discussion  It is possible to create partnerships in which a partner has limited liability.  Is such an arrangement consistent with partnership law? Should the advantages of a limited partner be extended to all partners?  Fraud: Intention to cheat somebody