10.1The Agency
Relationship
LO 10.1 Describe the agency relationship
The function of an agent is to represent and act on behalf of a principal in
dealings with third parties. The term agency refers to the service an agent
performs on behalf of the principal. This service may be performed as an
employee, as an independent agent, or gratuitously. When an agent is acting
independently, the business performing the service is often called an agency,
such as a travel agency, employment agency, or real estate agency.
Most of these specialized agencies are fulfilling a service function and many
are governed by special statutes and professional organizations. This includes
real estate agencies, law firms, and accounting firms. The boards and
commissions governing these businesses and professions provide licences,
training, insurance, and other services to their members. They also hear
complaints and provide discipline when misconduct occurs.
Although by far the most common example of agents representing principals is
in the creation of contracts, agents also find themselves involved in other types
of legal relationships. Real estate agents, lawyers, accountants, financial
advisers, and insurance representatives often represent clients when their
actions have legal ramifications but they don’t enter into contracts on their
behalf. They may negotiate and act on their clients’ behalf in other ways. Real
estate agents, for example, usually represent the vendor of a property; their
job is to bring the vendor and the purchaser together so that they can enter
into a contract directly.
What follows focuses on the law of agency generally, and in most cases no
distinction will be made between people functioning as agents as part of an
employment contract and those acting independently. Note that when
employees also act as agents of the employer, their duties and obligations as
agents go far beyond the employment relationship and must be understood as
a separate function or set of obligations. It is important, however, to
remember that not all employees are agents.
Case Summary
10.1
Liability of Principal for Agent’s
Fraud: Mignault v. Palmer666
Palmer acted for Great-West Life Assurance Company (GWL) in selling life
insurance products to customers. In the contract between Palmer and GWL,
Palmer was clearly identified as an independent contractor, and later this
relationship was changed to a broker. As part of his agency function, he acted
for the Mignaults, assisting them to transfer several investment vehicles into
GWL products. Later he persuaded the Mignaults and several other clients to
cash out their GWL investments and transfer the money to his company (J. D.
Raleigh & Company Ltd.) for further investment at a more attractive interest
rate. In fact, he used these funds for personal living expenses and to further
his own business activities. He led the Mignaults and the other clients to
believe these new investments were also GWL investments.
Palmer was convicted of fraud and imprisoned. In this action, the Mignaults
are suing GWL, claiming that it is vicariously liable for the fraud of its agent,
Palmer. The Court agreed. Palmer may have been an independent contractor,
but he worked out of the GWL offices and all of the documentation involved
referred to Palmer as its agent. GWL had held out Palmer as its agent and
was therefore liable for the fraud committed by him on the basis of vicarious
liability.
Discussion Question
Great-West Life tried to have it both ways. It tried to separate itself from its
representatives to avoid this kind of liability, but then it did all it could to create
the impression that the representatives were working for GWL in their dealings
with clients. As a result, it found itself liable for the actions of its
representative, on the basis of apparent authority. Do you think imposing
liability in these circumstances places too great a burden on corporations like
GWL?
10.2The Duties
of the Parties in
an Agency
Relationship
LO 10.3 Review the duties of the parties in an agency
relationship
The Agent’s Duties
When an agency agreement has been created by contract, the agent has an
obligation to act within the actual authority given in that agreement. An agent
violating the contract but exercising apparent authority can be sued for breach
and will have to compensate the principal for any losses suffered. Failure on
the part of the agent to fulfill any other obligation set out in the agreement will
also constitute an actionable breach of contract unless the specified act is
illegal or against public policy.
An agent owes a duty of care to the principal. The agent must not only have the
skills and expertise claimed but also must exercise that skill in a reasonable
manner. For example, if Khan hires Gamboa to purchase property on which to
build an apartment building, and Gamboa fails to discover that the property
he finds is not zoned for that use, he would likely be liable to compensate Khan
for any loss caused by his mistake. Gamboa’s conduct fell below the standard
of reasonable performance you would expect from someone in this type of
business.
Agents often have considerable discretion in carrying out agency
responsibilities as long as they act to the benefit of the principal. However, an
agent cannot go against the specific instructions received, even if it might be in
the principal’s best interests to do so. If a stockbroker is instructed to sell
shares when they reach a specific price, the broker must do so even though
waiting would bring the principal a better price.
Generally, the agent has an obligation to perform the agency agreement
personally. An agent is not permitted to delegate responsibility to another
party unless there is consent to such delegation, either express or implied by
the customs and traditions of the industry. Even then the primary agent has
the responsibility to see that the terms of the agency agreement are fulfilled.
The authority of an agent is commonly delegated to subagents when that agent
is a corporation or large business organization, such as a law firm, bank, real
estate agency, or trust company.
Case Summary
10.4
Agent Liable for Breach of his
Duties: Forbes v. Morrison674
The plaintiffs purchased a cabin from John and Evelyn Morrison. Their son,
Leo, acted as a real estate agent for both the plaintiffs and his parents with
respect to the purchase and sale. After the transaction closed, the plaintiffs
discovered that the property’s boundaries were not as described by Leo and
that the cabin encroached onto public land. Four years later, the cabin shifted,
resulting in extensive cracking. The plaintiffs claimed that Leo misrepresented
that the foundation of the cabin was poured concrete.
The Court held that Leo misrepresented the property’s boundaries, but not the
type of foundation. The misrepresentation was negligent, as Leo used
“average” in describing the property’s dimensions and relied on his memory in
doing so. The Court stated (at paragraph 73) that Leo’s duty of care included:
. . . a duty to be fair to both parties, to avoid conflicts, to be
scrupulously honest and to disclose all relevant information he
possessed or might reasonably be expected to possess about the
property or the transaction in general which might reasonably affect its
sale.
The Court also held that Leo’s misrepresentation was fraudulent, that he
breached his fiduciary duty to the plaintiffs, and that he breached his agency
contract with them, as he did not disclose everything that might impact their
decision to purchase the property or affect the sale price. Leo’s parents, as
vendors, were vicariously liable for the fraudulent misrepresentations of Leo,
their real estate agent. They were also liable for breach of contract because of
the encroachments.
Discussion Questions
Why were the parents not liable for Leo’s negligent misrepresentations? Why
were the plaintiffs not liable for contributory negligence, as they did not
request a survey of the property?
10.3The
Liabilities of the
Parties in an
Agency
Relationship
LO 10.4 Discuss the liabilities that may be incurred by the
parties in an agency relationship
The Agent’s Liabilities
When an agent does not have the authority claimed, either actual or apparent,
she may be sued by the third party for breach of “warranty of authority.” This
action is founded in contract law and is the most common example of an agent
being sued directly by the third party. Otherwise, only the principal can
enforce the agreement or be sued under it. However, an agent who
intentionally misleads the third party into believing that he has authority,
when he does not, may be sued by the third party for the tort of deceit. Agents
who inadvertently exceed their authority can be sued for the tort of negligence.
Case Summary
10.6
Breach of Warranty of Authority:
Wolfedale Electric Ltd. v. RPM’s
Systems Automation & Design
Quality in Motion Inc.692
Hammond claimed to be an agent acting for RPM’s Systems Inc. when he
arranged for Wolfedale Electric Ltd. to do electrical work for the third party,
Meridian. Meridian paid in full, but there was a shortfall to Wolfedale of
$18 367. This action was brought against Hammond personally for that
amount. Hammond was a director, shareholder, and officer of 1485777
Ontario Limited and of RPM’s Systems Automation & Design Quality in Motion
Inc. He took the position that if the money was owed, it was owed by those
corporations for which he was acting as agent and not by himself personally.
The evidence showed that in all of Wolfedale’s dealings, and in all of the
documentation supplied to Wolfedale, the corporation it was dealing with was
represented as RPM’s Systems Inc. In fact, there was no such corporation in
existence, so Hammond, who purported to act for that non-existent
corporation, was personally liable to Wolfedale for the claimed amount on the
basis of breach of warranty of authority.
It is likely that the long corporate name RPM’s Systems Automation & Design
Quality in Motion Inc. was shortened by Hammond, for convenience, to RPM’s
Systems Inc., which was used in all his business dealings. But that provided
misleading information to all those whom Hammond dealt with, and hence he
became personally liable for any dealings done in that name. Businesspeople
have to be extremely careful not to fall into the same trap and, when acting as
agent, accurately specify the name of the principal being represented.
Small Business Perspective
When officers and other employees of corporations negotiate contracts on
behalf of the corporation, they have to ensure that they have authority to do
what they are doing and that they properly indicate whom they are
representing.
10.4Types of
Business
Organization
LO 10.6 Introduce the three major types of business
organization
There are three major types of business organization (see Figure 10.2).
The first, the sole proprietorship, involves an individual carrying on
business alone. Employees may be hired and business may be carried on
through the services of an employee or agent, but the business is the sole
responsibility of one person, the owner. A second method of carrying on
business is the partnership, when two or more partners share
ownership and responsibilities, along with both profits and losses. As
was the case with the sole proprietorship, the partnership may also
employ others and act through agents. Also, each partner acts as an
agent for the other partners and has a fiduciary duty to them. The third
type of business organization is the incorporated company. Any type of
business organization involving more than one person can be called a
company; a corporation, however, is a legal entity. By statute, it has
been given an identity separate from its owners. Thus, contracts with a
corporation are dealings with the corporation itself as if it were a person
in its own right. And, because the corporation is a fiction, it must
conduct all of its affairs through employees and agents.
Figure 10.2
Types of Business Organization
The three types of organization are as follows. Sole proprietorship. Individual carries
on business alone. No separate legal entity. Unlimited personal liability. Partnership.
Individual carries on business with partner or partners. No separate legal entity.
Unlimited personal liability. Corporation. Separate legal entity. Or more individuals.
Can be owned by one individual or by two or more individuals.
There are other ways for people to work together to carry on a
commercial activity. For example, a non-profit society can be set up
under legislation such as the Nova Scotia Societies Act.704 This also
creates a separate legal entity, but the procedure of incorporation and
the obligations of those involved are quite different from those of a
corporation. There are also several ways in which these various types of
business organizations can be combined. A holding corporation holds
shares in other corporations. A joint venture involves several
businesses that band together, usually to complete a major project. They
may form a corporation or a partnership.
It must be emphasized at the outset that this is an area where a
sophisticated businessperson will obtain expert advice from
professionals such as lawyers, accountants, and bankers. It is a simple
matter to start a business as a sole proprietor and not much more
complicated to do so as a partnership. While the process of incorporation
is more involved, there are self-help books and websites available to
assist in the incorporation process without the necessity of using a
lawyer. It is even possible to purchase an already incorporated
off-the-shelf corporation, much like you would purchase a lawnmower or
other consumer item. But decisions made at this stage of owning a
business to save a few dollars can come back to haunt the owners and be
very costly later on, especially if the business is successful. The
discussion in this chapter will be limited to an examination of sole
proprietorship and partnership, while Chapter 11 will deal with
corporations.
10.5Rights and
Duties of
Partners
LO 10.10 Review the rights and duties of partners
Provisions of the Partnerships
Act
The rights and duties of partners are set out in the Partnerships Act, and
these provisions apply except when modified by the partnership
agreement.723 Some of the rights and duties covered by the Act are as
follows724:
1. The partners will share profits equally between them.
Similarly, any losses incurred are shared equally between the
partners. This provision is often modified by a partnership
agreement, but outside third parties will not be affected by any
agreement, as they can recover losses from any partner who
has assets. That partner may then look to the other partners for
reimbursement.
2. The partners are entitled to reimbursement for any expenses
they incur in the process of the partnership business. They are
entitled to be reimbursed for any money other than capital they
have advanced to the partnership before the other partners can
claim a share of the profits. In addition, the partner advancing
such funds is entitled to the payment of interest on any money
loaned to the partnership over and above the capital
contribution.
3. All partners have the right to take part in management. This
provision is often modified by partnership agreements, which
create different classes of partners such as senior and junior
partners, particularly in large firms.
4. A partner is not an employee and is not entitled to wages or
other remuneration for work done, only to a share of the
profits. To provide partners with a steady stream of cash flow,
the firm may pay partners a monthly draw against the
yet-to-be-calculated profits of the partnership. In a BC case, a
partner was also found to be an employee of the partnership by
the Human Rights Tribunal, which also determined that he had
been the victim of age discrimination. The BC Supreme Court
agreed, but this decision was overturned by the Court of
Appeal,725 which found that a partner in a partnership could
not be an employee of that partnership. The case was further
appealed to the Supreme Court of Canada, which upheld the
Court of Appeal decision but noted that it was not saying that a
partner could never be an employee for the purposes of the
Human Rights Code. In this case the equity partner had such a
degree of control and input into management decisions that
finding him to be an employee would be inconsistent with him
being a partner. In most cases, a partner will not be an
employee, but the Supreme Court left the door open to find
otherwise when the arrangement created a relationship of
control and dependency.
5. No major changes can be made to the partnership business
without the unanimous agreement of all the partners. No new
partner can be brought into the partnership, nor can a partner
be excluded from the firm, without the unanimous consent of
all the partners.726 However, for the ordinary matters of the
firm a simple majority vote is sufficient, unless the partnership
agreement states otherwise.
6. Partners do not have the right to assign their partnership
status to some other party without the consent of the other
partners. The benefits can be assigned, but the assignee will
not be a partner and will not have the right to interfere in the
management or administration of the partnership business.727
7. The business records of the partnership must be kept at the
partnership office, and all the partners have the right to inspect
them.
As can be seen from this summary, the general principle governing a
partnership relationship is that the partners function as a unit and have
a considerable responsibility to look after each other’s interests. When
changes are proposed in the partnership agreement, all partners should
take great care to consider all of the possible consequences before
making such changes. Some provisions that would likely be found in a
partnership agreement include the following:
● Names of the partners and the name of the partnership
● What each partner brings to the partnership, including specific
duties and responsibilities and the capital contribution of each
partner
● Nature of the partnership business and limitations on the authority
of the partners
● How profits and losses are to be shared and any right to take a
draw against profits
● The decision-making structure and a provision for dispute
resolution
● How (and when) changes are to be made to the agreement, such as
retirement, adding a new partner, or changing the nature of the
business, and under what circumstances the partnership is to be
dissolved
● Reference to specific sections of the Partnership Act where
appropriate
10.6Other Types
of Business
Organizations
LO 10.14 Describe other types of business organizations
Limited Partnerships
Additions to the legislation governing partnership in every province provide
for the creation of limited partnerships.755 This approach provides some
of the advantages of incorporation to partnerships. The main advantage of a
limited partnership is that it allows the limited partners to invest money in
a partnership but to avoid the unlimited liability that goes with being a
general partner. The only loss a limited partner can incur is the original
investment.756 For example, if Gingras and Gitter were general partners with
Leopold, a limited partner, and Gingras negligently injured a customer to the
extent of $300 000 damages, Leopold would lose only his investment in the
firm. Both Gingras and Gitter would be liable for the entire $300 000, but
Leopold’s liability would be limited to the amount he invested, even if the
combined assets of Gingras and Gitter were not enough to cover the loss.
Partners can, however, lose their status as limited partners if they fail to
carefully adhere to all the requirements of the governing legislation, with the
result that they are then deemed to be general partners with all the
consequences inherent in that designation. In the preceding example, if
Leopold had allowed his surname to be used in the name of the business,757
contributed services to the partnership,758 taken part in the control of the
business,759 allowed himself to be represented as a partner in the business, or
otherwise failed to followed the statutory requirements, he would have become
a general partner and would have been required to pay along with Gingras and
Gitter, with no limitation on his liability. A limited partner is not prohibited
from giving the other partners advice as to the management of the business
but, since it is often difficult to determine where advice stops and control of
the business starts, there is a considerable risk in doing so. When a business
starts to fail, there is a great temptation for the limited partner to jump in to
preserve the investment, but doing so raises the risk of becoming a general
partner and should be avoided.
To form a limited partnership, it is necessary to file a declaration at the
appropriate government registry. This declaration will set out information
such as the term of the agreement, the amount of cash and other property
contributed, and the way profits are to be shared.760 The name used by the
limited partnership can contain the name of the general partners, but the
surname of a limited partner cannot be included in the firm name unless it is
also the surname of one of the general partners. It is not possible to form a
partnership with only limited partners—there must be at least one general
partner in the firm—but it is possible for that general partner to be a
corporation, even one without assets (a shell corporation).
Reducing Risk
10.7
Limited partnerships may be attractive to people because of favourable tax
implications. The risk is that a limited partner could inadvertently lose her
status and become a general partner. A sophisticated client will take great
care before entering into investment vehicles structured as limited
partnerships to ensure that she understands exactly what she is getting into
and then ensure that she does not accidently assume the unlimited liability of
a general partner.
Summary
Agency Relationship
Agent acts for a principal in dealings with third parties
Agent can be an employee, or act independently
Agents provide many services, including the creation of
contracts
How to Create an Agency
Relationship
Agency relationship usually created by contract
Law of contract applies to agency agreements
Actual authority usually expressly stated in agency agreement
Authority can be implied from the circumstances
Agency relationship can be created by estoppel because of
apparent authority
Principal bound if they held out agent to have authority
Reasonable person test used to determine if apparent
authority exists
Agency relationship can be created by ratification of
unauthorized contract by principal
Agency relationship not often formed today by necessity
The Duties of the Parties
The agent must act within the actual authority and comply
with the other obligations in the agency agreement
The agent owes the principal a duty of reasonable care
The agent also has a fiduciary duty; the interests of the
principal must take priority
The federal government owes a fiduciary duty to Indigenous
peoples with respect to specific issues
The courts are developing the common law relating to when a
fiduciary duty is owed to Indigenous peoples
The principal must honour the terms of the agency agreement
The Liabilities of the Parties
The third party can sue the agent for unauthorized acts, deceit
or negligence
The principal is vicariously liable for torts committed by an
agent who is an employee
The principal is not vicariously liable for torts committed by
an agent who is an independent contractor, but courts can
expand definition of employment
The principal is liable for the torts he commits
The agent has no liability if she lets the third party know she
is acting for an undisclosed principal
If there is ambiguity, the third party can sue the agent or the
undisclosed principal
Termination of the Agency
Relationship
The principal can end the agent’s authority by notifying them,
but there may still be apparent authority
The death, bankruptcy, or insanity of the principal terminates
the agency
Enduring powers of attorney continue in effect even if
principal loses mental capacity
Sole Proprietorship
An individual carrying on business independently; can act
through employees or agents
Must deal with some government regulation
Business is not a separate legal entity
Owner has unlimited liability for the debts and obligations of
the business
Partnership
Involves two or more partners carrying on business together
with a view to profits
Controlled by partnership legislation and by specific
agreement of the partners
Creation of a Partnership
Can be created by agreement, but often comes into existence
by inadvertence when people work together in a business
activity
Legislation sets out presumptions regarding existence of
partnership
A partnership agreement should deal with all important
matters
Partnership can be created by estoppel
Partnerships usually have to be registered
Rights and Duties of Partners
Rights and duties set out in partnership legislation but can be
modified by partnership agreement
Partners owe each other a fiduciary duty
Liabilities of Partners
Partners can be liable through agency or vicarious liability
Liability is unlimited unless limited by partnership agreement
Third parties can collect from any partner regardless of
partnership agreement
Dissolution of a Partnership
Partnership can usually be dissolved by notice of a partner
Partnership dissolved by death or insolvency of a partner,
subject to the partnership agreement
Dissolution ends the partnership relationship; partners
should give notice to third parties
Debts are paid first; partners receive any surplus funds
Advantages of Partnership
Insurance can reduce potential liability of partners
Advantages of partnership mean that it should be considered
when starting a business
Other Types of Business
Organizations
In a limited partnership, limited partners can lose only their
original investment
Limited partners must be careful to ensure they don’t become
general partners with unlimited liability
Professionals can work in limited liability partnerships
Partners in limited liability partnerships are liable for their
own negligent acts and for those committed by others under
their supervision
1. Joint ventures are used to complete a project; they are created
using corporations or partnerships
Cases and
Discussion
Questions
1. Bateman v. Steed, 2014
SKPC 81 (CanLII)
Bateman purchased the Steeds’ home, but abandoned it six months after
taking possession. She asked for return of the deposit she had paid
because of misrepresentations made by the Steeds and their realtor,
Swartz. Bateman claimed that there were windows that didn’t open,
sagging floors, a leaking roof, and mould. The Property Condition
Disclosure Statement indicated that the Steeds were unaware of any roof
leaks or moisture or water problems. This was not true and the Court
held that it was negligent misrepresentation of material facts. Swartz
represented both the Steeds and Bateman. The Limited Dual Agency
Acknowledgement Form required Swartz to “disclose to the Buyer all
material defects about the physical condition of the property known to
her.” She advised Bateman to have a home inspection, but told her that
the roof did not leak and did not mention the presence of water stains.
If Swartz was aware of the leaking roof and moisture problems, should
she be held liable for some or all of the damages suffered by Bateman?
Should Bateman bear some of her losses because of contributory
negligence, since she did not view the house or have it inspected prior to
taking possession?
2. Moores v. Fish, Food and
Allied Workers Union, 2017
NLCA 38 (CanLII)
The Union represented fishing licence holders in negotiations for
financial compensation for permanent loss of access to a fishing area.
The fishers signed consent forms with the Union, authorizing it to
conduct the negotiations and confirming that they would accept any
negotiated agreement. Union representatives were to consult with the
fishers during the negotiations. The Union did not consult with the
fishers and did not inform them of three settlement proposals that it
received. The fishers were notified a compensation agreement had been
negotiated in a Union press release. In fact, this agreement had been
negotiated prior to the signing of the consent forms. The fishers were not
satisfied with the agreement and sued the Union, claiming a breach of
fiduciary duty.
Did the Union owe a fiduciary duty to the fishers? If so, did it breach its
duty? Was the signing of the consent forms ratification of the agreement
negotiated by the Union?
3. Rivermist Holding Ltd. v.
McGregor Estate, 2012 BCSC
1645 (CanLII)
Rivermist hired McGregor Management to construct a storage facility.
McGregor Management then hired Rivermist as a subcontractor for
some excavation work. Allan McGregor negotiated both contracts on
behalf of McGregor Management. McGregor Management failed to pay
$75 780 of the balance owed to Rivermist. Allan then claimed that the
estate of his mother was liable for the second contract, as he and his
brother were agents for his mother’s business, McGregor Management.
Rivermist was unaware of the mother’s involvement in the McGregor
Management; all of its dealings were with the McGregor brothers.
Are the McGregor brothers personally liable for the debt? Explain your
answer.
4. Tremblett v. Tremblett, 2012
CanLII 67443 (NL SCTD)
(CanLII)
[Note: Your instructor may assign this case as a Shared Writing activity.]
Doug and Bill Tremblett were brothers and, at least in the early stages,
owned a fishing boat together. The brothers worked together in the
fishing operation from 1988 to 2004, using a crab licence that Bill had
acquired through a swap and that was held in his name. The crab fishing
licence was the primary asset of the business and the main subject
matter of the dispute. After the brothers stopped working together, Bill
continued on with the fishing enterprise, relying on the crab licence he
had obtained.
Explain any claim Doug might have against Bill in this situation. Would
it affect your answer if Bill did more work than Doug? If the value of the
licence was over $800 000 at the time they stopped fishing together,
what would Doug be entitled to if successful, given that the trial took
place in 2012?
5. Tim Ludwig Professional
Corporation v. BDO Canada LLP,
2017 ONCA 292 (CanLII)
Ludwig, a chartered accountant, was a partner of BDO for 22 years. The
partnership agreement provided that the policy board could force the
resignation of a partner if it determined that it was not in the best
interests of BDO for the partner to remain with the firm. In fact, the CEO
made the decision to force Ludwig’s retirement and the policy board did
not consider whether Ludwig’s retirement was in the best interests of the
partnership. The Court awarded Ludwig $1.3 million in damages,
including $100 000 in aggravated damages for the harm to Ludwig’s
reputation caused by his expulsion form the partnership. The
Partnership Act confirmed that the common law applicable to
partnerships continued in force after the passage of the legislation.
Which part of the common law of partnership did the Court rely upon in
reaching its decision?
Purchase answer to see full
attachment
Relationship
LO 10.1 Describe the agency relationship
The function of an agent is to represent and act on behalf of a principal in
dealings with third parties. The term agency refers to the service an agent
performs on behalf of the principal. This service may be performed as an
employee, as an independent agent, or gratuitously. When an agent is acting
independently, the business performing the service is often called an agency,
such as a travel agency, employment agency, or real estate agency.
Most of these specialized agencies are fulfilling a service function and many
are governed by special statutes and professional organizations. This includes
real estate agencies, law firms, and accounting firms. The boards and
commissions governing these businesses and professions provide licences,
training, insurance, and other services to their members. They also hear
complaints and provide discipline when misconduct occurs.
Although by far the most common example of agents representing principals is
in the creation of contracts, agents also find themselves involved in other types
of legal relationships. Real estate agents, lawyers, accountants, financial
advisers, and insurance representatives often represent clients when their
actions have legal ramifications but they don’t enter into contracts on their
behalf. They may negotiate and act on their clients’ behalf in other ways. Real
estate agents, for example, usually represent the vendor of a property; their
job is to bring the vendor and the purchaser together so that they can enter
into a contract directly.
What follows focuses on the law of agency generally, and in most cases no
distinction will be made between people functioning as agents as part of an
employment contract and those acting independently. Note that when
employees also act as agents of the employer, their duties and obligations as
agents go far beyond the employment relationship and must be understood as
a separate function or set of obligations. It is important, however, to
remember that not all employees are agents.
Case Summary
10.1
Liability of Principal for Agent’s
Fraud: Mignault v. Palmer666
Palmer acted for Great-West Life Assurance Company (GWL) in selling life
insurance products to customers. In the contract between Palmer and GWL,
Palmer was clearly identified as an independent contractor, and later this
relationship was changed to a broker. As part of his agency function, he acted
for the Mignaults, assisting them to transfer several investment vehicles into
GWL products. Later he persuaded the Mignaults and several other clients to
cash out their GWL investments and transfer the money to his company (J. D.
Raleigh & Company Ltd.) for further investment at a more attractive interest
rate. In fact, he used these funds for personal living expenses and to further
his own business activities. He led the Mignaults and the other clients to
believe these new investments were also GWL investments.
Palmer was convicted of fraud and imprisoned. In this action, the Mignaults
are suing GWL, claiming that it is vicariously liable for the fraud of its agent,
Palmer. The Court agreed. Palmer may have been an independent contractor,
but he worked out of the GWL offices and all of the documentation involved
referred to Palmer as its agent. GWL had held out Palmer as its agent and
was therefore liable for the fraud committed by him on the basis of vicarious
liability.
Discussion Question
Great-West Life tried to have it both ways. It tried to separate itself from its
representatives to avoid this kind of liability, but then it did all it could to create
the impression that the representatives were working for GWL in their dealings
with clients. As a result, it found itself liable for the actions of its
representative, on the basis of apparent authority. Do you think imposing
liability in these circumstances places too great a burden on corporations like
GWL?
10.2The Duties
of the Parties in
an Agency
Relationship
LO 10.3 Review the duties of the parties in an agency
relationship
The Agent’s Duties
When an agency agreement has been created by contract, the agent has an
obligation to act within the actual authority given in that agreement. An agent
violating the contract but exercising apparent authority can be sued for breach
and will have to compensate the principal for any losses suffered. Failure on
the part of the agent to fulfill any other obligation set out in the agreement will
also constitute an actionable breach of contract unless the specified act is
illegal or against public policy.
An agent owes a duty of care to the principal. The agent must not only have the
skills and expertise claimed but also must exercise that skill in a reasonable
manner. For example, if Khan hires Gamboa to purchase property on which to
build an apartment building, and Gamboa fails to discover that the property
he finds is not zoned for that use, he would likely be liable to compensate Khan
for any loss caused by his mistake. Gamboa’s conduct fell below the standard
of reasonable performance you would expect from someone in this type of
business.
Agents often have considerable discretion in carrying out agency
responsibilities as long as they act to the benefit of the principal. However, an
agent cannot go against the specific instructions received, even if it might be in
the principal’s best interests to do so. If a stockbroker is instructed to sell
shares when they reach a specific price, the broker must do so even though
waiting would bring the principal a better price.
Generally, the agent has an obligation to perform the agency agreement
personally. An agent is not permitted to delegate responsibility to another
party unless there is consent to such delegation, either express or implied by
the customs and traditions of the industry. Even then the primary agent has
the responsibility to see that the terms of the agency agreement are fulfilled.
The authority of an agent is commonly delegated to subagents when that agent
is a corporation or large business organization, such as a law firm, bank, real
estate agency, or trust company.
Case Summary
10.4
Agent Liable for Breach of his
Duties: Forbes v. Morrison674
The plaintiffs purchased a cabin from John and Evelyn Morrison. Their son,
Leo, acted as a real estate agent for both the plaintiffs and his parents with
respect to the purchase and sale. After the transaction closed, the plaintiffs
discovered that the property’s boundaries were not as described by Leo and
that the cabin encroached onto public land. Four years later, the cabin shifted,
resulting in extensive cracking. The plaintiffs claimed that Leo misrepresented
that the foundation of the cabin was poured concrete.
The Court held that Leo misrepresented the property’s boundaries, but not the
type of foundation. The misrepresentation was negligent, as Leo used
“average” in describing the property’s dimensions and relied on his memory in
doing so. The Court stated (at paragraph 73) that Leo’s duty of care included:
. . . a duty to be fair to both parties, to avoid conflicts, to be
scrupulously honest and to disclose all relevant information he
possessed or might reasonably be expected to possess about the
property or the transaction in general which might reasonably affect its
sale.
The Court also held that Leo’s misrepresentation was fraudulent, that he
breached his fiduciary duty to the plaintiffs, and that he breached his agency
contract with them, as he did not disclose everything that might impact their
decision to purchase the property or affect the sale price. Leo’s parents, as
vendors, were vicariously liable for the fraudulent misrepresentations of Leo,
their real estate agent. They were also liable for breach of contract because of
the encroachments.
Discussion Questions
Why were the parents not liable for Leo’s negligent misrepresentations? Why
were the plaintiffs not liable for contributory negligence, as they did not
request a survey of the property?
10.3The
Liabilities of the
Parties in an
Agency
Relationship
LO 10.4 Discuss the liabilities that may be incurred by the
parties in an agency relationship
The Agent’s Liabilities
When an agent does not have the authority claimed, either actual or apparent,
she may be sued by the third party for breach of “warranty of authority.” This
action is founded in contract law and is the most common example of an agent
being sued directly by the third party. Otherwise, only the principal can
enforce the agreement or be sued under it. However, an agent who
intentionally misleads the third party into believing that he has authority,
when he does not, may be sued by the third party for the tort of deceit. Agents
who inadvertently exceed their authority can be sued for the tort of negligence.
Case Summary
10.6
Breach of Warranty of Authority:
Wolfedale Electric Ltd. v. RPM’s
Systems Automation & Design
Quality in Motion Inc.692
Hammond claimed to be an agent acting for RPM’s Systems Inc. when he
arranged for Wolfedale Electric Ltd. to do electrical work for the third party,
Meridian. Meridian paid in full, but there was a shortfall to Wolfedale of
$18 367. This action was brought against Hammond personally for that
amount. Hammond was a director, shareholder, and officer of 1485777
Ontario Limited and of RPM’s Systems Automation & Design Quality in Motion
Inc. He took the position that if the money was owed, it was owed by those
corporations for which he was acting as agent and not by himself personally.
The evidence showed that in all of Wolfedale’s dealings, and in all of the
documentation supplied to Wolfedale, the corporation it was dealing with was
represented as RPM’s Systems Inc. In fact, there was no such corporation in
existence, so Hammond, who purported to act for that non-existent
corporation, was personally liable to Wolfedale for the claimed amount on the
basis of breach of warranty of authority.
It is likely that the long corporate name RPM’s Systems Automation & Design
Quality in Motion Inc. was shortened by Hammond, for convenience, to RPM’s
Systems Inc., which was used in all his business dealings. But that provided
misleading information to all those whom Hammond dealt with, and hence he
became personally liable for any dealings done in that name. Businesspeople
have to be extremely careful not to fall into the same trap and, when acting as
agent, accurately specify the name of the principal being represented.
Small Business Perspective
When officers and other employees of corporations negotiate contracts on
behalf of the corporation, they have to ensure that they have authority to do
what they are doing and that they properly indicate whom they are
representing.
10.4Types of
Business
Organization
LO 10.6 Introduce the three major types of business
organization
There are three major types of business organization (see Figure 10.2).
The first, the sole proprietorship, involves an individual carrying on
business alone. Employees may be hired and business may be carried on
through the services of an employee or agent, but the business is the sole
responsibility of one person, the owner. A second method of carrying on
business is the partnership, when two or more partners share
ownership and responsibilities, along with both profits and losses. As
was the case with the sole proprietorship, the partnership may also
employ others and act through agents. Also, each partner acts as an
agent for the other partners and has a fiduciary duty to them. The third
type of business organization is the incorporated company. Any type of
business organization involving more than one person can be called a
company; a corporation, however, is a legal entity. By statute, it has
been given an identity separate from its owners. Thus, contracts with a
corporation are dealings with the corporation itself as if it were a person
in its own right. And, because the corporation is a fiction, it must
conduct all of its affairs through employees and agents.
Figure 10.2
Types of Business Organization
The three types of organization are as follows. Sole proprietorship. Individual carries
on business alone. No separate legal entity. Unlimited personal liability. Partnership.
Individual carries on business with partner or partners. No separate legal entity.
Unlimited personal liability. Corporation. Separate legal entity. Or more individuals.
Can be owned by one individual or by two or more individuals.
There are other ways for people to work together to carry on a
commercial activity. For example, a non-profit society can be set up
under legislation such as the Nova Scotia Societies Act.704 This also
creates a separate legal entity, but the procedure of incorporation and
the obligations of those involved are quite different from those of a
corporation. There are also several ways in which these various types of
business organizations can be combined. A holding corporation holds
shares in other corporations. A joint venture involves several
businesses that band together, usually to complete a major project. They
may form a corporation or a partnership.
It must be emphasized at the outset that this is an area where a
sophisticated businessperson will obtain expert advice from
professionals such as lawyers, accountants, and bankers. It is a simple
matter to start a business as a sole proprietor and not much more
complicated to do so as a partnership. While the process of incorporation
is more involved, there are self-help books and websites available to
assist in the incorporation process without the necessity of using a
lawyer. It is even possible to purchase an already incorporated
off-the-shelf corporation, much like you would purchase a lawnmower or
other consumer item. But decisions made at this stage of owning a
business to save a few dollars can come back to haunt the owners and be
very costly later on, especially if the business is successful. The
discussion in this chapter will be limited to an examination of sole
proprietorship and partnership, while Chapter 11 will deal with
corporations.
10.5Rights and
Duties of
Partners
LO 10.10 Review the rights and duties of partners
Provisions of the Partnerships
Act
The rights and duties of partners are set out in the Partnerships Act, and
these provisions apply except when modified by the partnership
agreement.723 Some of the rights and duties covered by the Act are as
follows724:
1. The partners will share profits equally between them.
Similarly, any losses incurred are shared equally between the
partners. This provision is often modified by a partnership
agreement, but outside third parties will not be affected by any
agreement, as they can recover losses from any partner who
has assets. That partner may then look to the other partners for
reimbursement.
2. The partners are entitled to reimbursement for any expenses
they incur in the process of the partnership business. They are
entitled to be reimbursed for any money other than capital they
have advanced to the partnership before the other partners can
claim a share of the profits. In addition, the partner advancing
such funds is entitled to the payment of interest on any money
loaned to the partnership over and above the capital
contribution.
3. All partners have the right to take part in management. This
provision is often modified by partnership agreements, which
create different classes of partners such as senior and junior
partners, particularly in large firms.
4. A partner is not an employee and is not entitled to wages or
other remuneration for work done, only to a share of the
profits. To provide partners with a steady stream of cash flow,
the firm may pay partners a monthly draw against the
yet-to-be-calculated profits of the partnership. In a BC case, a
partner was also found to be an employee of the partnership by
the Human Rights Tribunal, which also determined that he had
been the victim of age discrimination. The BC Supreme Court
agreed, but this decision was overturned by the Court of
Appeal,725 which found that a partner in a partnership could
not be an employee of that partnership. The case was further
appealed to the Supreme Court of Canada, which upheld the
Court of Appeal decision but noted that it was not saying that a
partner could never be an employee for the purposes of the
Human Rights Code. In this case the equity partner had such a
degree of control and input into management decisions that
finding him to be an employee would be inconsistent with him
being a partner. In most cases, a partner will not be an
employee, but the Supreme Court left the door open to find
otherwise when the arrangement created a relationship of
control and dependency.
5. No major changes can be made to the partnership business
without the unanimous agreement of all the partners. No new
partner can be brought into the partnership, nor can a partner
be excluded from the firm, without the unanimous consent of
all the partners.726 However, for the ordinary matters of the
firm a simple majority vote is sufficient, unless the partnership
agreement states otherwise.
6. Partners do not have the right to assign their partnership
status to some other party without the consent of the other
partners. The benefits can be assigned, but the assignee will
not be a partner and will not have the right to interfere in the
management or administration of the partnership business.727
7. The business records of the partnership must be kept at the
partnership office, and all the partners have the right to inspect
them.
As can be seen from this summary, the general principle governing a
partnership relationship is that the partners function as a unit and have
a considerable responsibility to look after each other’s interests. When
changes are proposed in the partnership agreement, all partners should
take great care to consider all of the possible consequences before
making such changes. Some provisions that would likely be found in a
partnership agreement include the following:
● Names of the partners and the name of the partnership
● What each partner brings to the partnership, including specific
duties and responsibilities and the capital contribution of each
partner
● Nature of the partnership business and limitations on the authority
of the partners
● How profits and losses are to be shared and any right to take a
draw against profits
● The decision-making structure and a provision for dispute
resolution
● How (and when) changes are to be made to the agreement, such as
retirement, adding a new partner, or changing the nature of the
business, and under what circumstances the partnership is to be
dissolved
● Reference to specific sections of the Partnership Act where
appropriate
10.6Other Types
of Business
Organizations
LO 10.14 Describe other types of business organizations
Limited Partnerships
Additions to the legislation governing partnership in every province provide
for the creation of limited partnerships.755 This approach provides some
of the advantages of incorporation to partnerships. The main advantage of a
limited partnership is that it allows the limited partners to invest money in
a partnership but to avoid the unlimited liability that goes with being a
general partner. The only loss a limited partner can incur is the original
investment.756 For example, if Gingras and Gitter were general partners with
Leopold, a limited partner, and Gingras negligently injured a customer to the
extent of $300 000 damages, Leopold would lose only his investment in the
firm. Both Gingras and Gitter would be liable for the entire $300 000, but
Leopold’s liability would be limited to the amount he invested, even if the
combined assets of Gingras and Gitter were not enough to cover the loss.
Partners can, however, lose their status as limited partners if they fail to
carefully adhere to all the requirements of the governing legislation, with the
result that they are then deemed to be general partners with all the
consequences inherent in that designation. In the preceding example, if
Leopold had allowed his surname to be used in the name of the business,757
contributed services to the partnership,758 taken part in the control of the
business,759 allowed himself to be represented as a partner in the business, or
otherwise failed to followed the statutory requirements, he would have become
a general partner and would have been required to pay along with Gingras and
Gitter, with no limitation on his liability. A limited partner is not prohibited
from giving the other partners advice as to the management of the business
but, since it is often difficult to determine where advice stops and control of
the business starts, there is a considerable risk in doing so. When a business
starts to fail, there is a great temptation for the limited partner to jump in to
preserve the investment, but doing so raises the risk of becoming a general
partner and should be avoided.
To form a limited partnership, it is necessary to file a declaration at the
appropriate government registry. This declaration will set out information
such as the term of the agreement, the amount of cash and other property
contributed, and the way profits are to be shared.760 The name used by the
limited partnership can contain the name of the general partners, but the
surname of a limited partner cannot be included in the firm name unless it is
also the surname of one of the general partners. It is not possible to form a
partnership with only limited partners—there must be at least one general
partner in the firm—but it is possible for that general partner to be a
corporation, even one without assets (a shell corporation).
Reducing Risk
10.7
Limited partnerships may be attractive to people because of favourable tax
implications. The risk is that a limited partner could inadvertently lose her
status and become a general partner. A sophisticated client will take great
care before entering into investment vehicles structured as limited
partnerships to ensure that she understands exactly what she is getting into
and then ensure that she does not accidently assume the unlimited liability of
a general partner.
Summary
Agency Relationship
Agent acts for a principal in dealings with third parties
Agent can be an employee, or act independently
Agents provide many services, including the creation of
contracts
How to Create an Agency
Relationship
Agency relationship usually created by contract
Law of contract applies to agency agreements
Actual authority usually expressly stated in agency agreement
Authority can be implied from the circumstances
Agency relationship can be created by estoppel because of
apparent authority
Principal bound if they held out agent to have authority
Reasonable person test used to determine if apparent
authority exists
Agency relationship can be created by ratification of
unauthorized contract by principal
Agency relationship not often formed today by necessity
The Duties of the Parties
The agent must act within the actual authority and comply
with the other obligations in the agency agreement
The agent owes the principal a duty of reasonable care
The agent also has a fiduciary duty; the interests of the
principal must take priority
The federal government owes a fiduciary duty to Indigenous
peoples with respect to specific issues
The courts are developing the common law relating to when a
fiduciary duty is owed to Indigenous peoples
The principal must honour the terms of the agency agreement
The Liabilities of the Parties
The third party can sue the agent for unauthorized acts, deceit
or negligence
The principal is vicariously liable for torts committed by an
agent who is an employee
The principal is not vicariously liable for torts committed by
an agent who is an independent contractor, but courts can
expand definition of employment
The principal is liable for the torts he commits
The agent has no liability if she lets the third party know she
is acting for an undisclosed principal
If there is ambiguity, the third party can sue the agent or the
undisclosed principal
Termination of the Agency
Relationship
The principal can end the agent’s authority by notifying them,
but there may still be apparent authority
The death, bankruptcy, or insanity of the principal terminates
the agency
Enduring powers of attorney continue in effect even if
principal loses mental capacity
Sole Proprietorship
An individual carrying on business independently; can act
through employees or agents
Must deal with some government regulation
Business is not a separate legal entity
Owner has unlimited liability for the debts and obligations of
the business
Partnership
Involves two or more partners carrying on business together
with a view to profits
Controlled by partnership legislation and by specific
agreement of the partners
Creation of a Partnership
Can be created by agreement, but often comes into existence
by inadvertence when people work together in a business
activity
Legislation sets out presumptions regarding existence of
partnership
A partnership agreement should deal with all important
matters
Partnership can be created by estoppel
Partnerships usually have to be registered
Rights and Duties of Partners
Rights and duties set out in partnership legislation but can be
modified by partnership agreement
Partners owe each other a fiduciary duty
Liabilities of Partners
Partners can be liable through agency or vicarious liability
Liability is unlimited unless limited by partnership agreement
Third parties can collect from any partner regardless of
partnership agreement
Dissolution of a Partnership
Partnership can usually be dissolved by notice of a partner
Partnership dissolved by death or insolvency of a partner,
subject to the partnership agreement
Dissolution ends the partnership relationship; partners
should give notice to third parties
Debts are paid first; partners receive any surplus funds
Advantages of Partnership
Insurance can reduce potential liability of partners
Advantages of partnership mean that it should be considered
when starting a business
Other Types of Business
Organizations
In a limited partnership, limited partners can lose only their
original investment
Limited partners must be careful to ensure they don’t become
general partners with unlimited liability
Professionals can work in limited liability partnerships
Partners in limited liability partnerships are liable for their
own negligent acts and for those committed by others under
their supervision
1. Joint ventures are used to complete a project; they are created
using corporations or partnerships
Cases and
Discussion
Questions
1. Bateman v. Steed, 2014
SKPC 81 (CanLII)
Bateman purchased the Steeds’ home, but abandoned it six months after
taking possession. She asked for return of the deposit she had paid
because of misrepresentations made by the Steeds and their realtor,
Swartz. Bateman claimed that there were windows that didn’t open,
sagging floors, a leaking roof, and mould. The Property Condition
Disclosure Statement indicated that the Steeds were unaware of any roof
leaks or moisture or water problems. This was not true and the Court
held that it was negligent misrepresentation of material facts. Swartz
represented both the Steeds and Bateman. The Limited Dual Agency
Acknowledgement Form required Swartz to “disclose to the Buyer all
material defects about the physical condition of the property known to
her.” She advised Bateman to have a home inspection, but told her that
the roof did not leak and did not mention the presence of water stains.
If Swartz was aware of the leaking roof and moisture problems, should
she be held liable for some or all of the damages suffered by Bateman?
Should Bateman bear some of her losses because of contributory
negligence, since she did not view the house or have it inspected prior to
taking possession?
2. Moores v. Fish, Food and
Allied Workers Union, 2017
NLCA 38 (CanLII)
The Union represented fishing licence holders in negotiations for
financial compensation for permanent loss of access to a fishing area.
The fishers signed consent forms with the Union, authorizing it to
conduct the negotiations and confirming that they would accept any
negotiated agreement. Union representatives were to consult with the
fishers during the negotiations. The Union did not consult with the
fishers and did not inform them of three settlement proposals that it
received. The fishers were notified a compensation agreement had been
negotiated in a Union press release. In fact, this agreement had been
negotiated prior to the signing of the consent forms. The fishers were not
satisfied with the agreement and sued the Union, claiming a breach of
fiduciary duty.
Did the Union owe a fiduciary duty to the fishers? If so, did it breach its
duty? Was the signing of the consent forms ratification of the agreement
negotiated by the Union?
3. Rivermist Holding Ltd. v.
McGregor Estate, 2012 BCSC
1645 (CanLII)
Rivermist hired McGregor Management to construct a storage facility.
McGregor Management then hired Rivermist as a subcontractor for
some excavation work. Allan McGregor negotiated both contracts on
behalf of McGregor Management. McGregor Management failed to pay
$75 780 of the balance owed to Rivermist. Allan then claimed that the
estate of his mother was liable for the second contract, as he and his
brother were agents for his mother’s business, McGregor Management.
Rivermist was unaware of the mother’s involvement in the McGregor
Management; all of its dealings were with the McGregor brothers.
Are the McGregor brothers personally liable for the debt? Explain your
answer.
4. Tremblett v. Tremblett, 2012
CanLII 67443 (NL SCTD)
(CanLII)
[Note: Your instructor may assign this case as a Shared Writing activity.]
Doug and Bill Tremblett were brothers and, at least in the early stages,
owned a fishing boat together. The brothers worked together in the
fishing operation from 1988 to 2004, using a crab licence that Bill had
acquired through a swap and that was held in his name. The crab fishing
licence was the primary asset of the business and the main subject
matter of the dispute. After the brothers stopped working together, Bill
continued on with the fishing enterprise, relying on the crab licence he
had obtained.
Explain any claim Doug might have against Bill in this situation. Would
it affect your answer if Bill did more work than Doug? If the value of the
licence was over $800 000 at the time they stopped fishing together,
what would Doug be entitled to if successful, given that the trial took
place in 2012?
5. Tim Ludwig Professional
Corporation v. BDO Canada LLP,
2017 ONCA 292 (CanLII)
Ludwig, a chartered accountant, was a partner of BDO for 22 years. The
partnership agreement provided that the policy board could force the
resignation of a partner if it determined that it was not in the best
interests of BDO for the partner to remain with the firm. In fact, the CEO
made the decision to force Ludwig’s retirement and the policy board did
not consider whether Ludwig’s retirement was in the best interests of the
partnership. The Court awarded Ludwig $1.3 million in damages,
including $100 000 in aggravated damages for the harm to Ludwig’s
reputation caused by his expulsion form the partnership. The
Partnership Act confirmed that the common law applicable to
partnerships continued in force after the passage of the legislation.
Which part of the common law of partnership did the Court rely upon in
reaching its decision?
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