BSL165 Foundations of Business Law

Ricardo is the senior curator and ground manager at Noora Norra Golf Club Resort, a luxury facility in WA owned by Gabba Pty Ltd. Noora Noora has been under financial pressure since the Global Financial Crisis affected the flow of Japanese tourists. The CEO cut budgets and informed Ricardo that he could not enter into any contracts valued at over $10,000. Despite this instruction he proceeded to negotiate a landscaping contract with Willow Landscaping that was valued at $13,000. An associated water feature cost an extra $4000. When work commenced the CEO asked Ricardo what was happening. Ricardo informed him of the landscaping project but did not mention the water feature. After considering the circumstances, the CEO tells Willow to proceed. However, the CEO is surprised to receive the bill for $17,000 when the work is completed. Advise the CEO whether the company is required to pay the bill. (You can assume that the CEO has actual authority to enter into contracts of this nature on behalf of the company)(15 marks)

Jeremy is an estate agent in the Perth inner city area. He is selling high-rise units “off the plan” for Aspirational Developments Pty Ltd. He has friends who work for other developers and becomes aware that a competing high-rise that is also selling “off the plan” has run into difficulties and is unlikely to go ahead. The result is that the units he is selling are likely to be more valuable than previously thought. Being an opportunist, Jeremy assists a friend to arrange finance so she can buy three of the units with a view to selling later at a profit that they will split 50–50. Furthermore, in return for a small payment, he informs several people who have expressed an interest in purchasing a unit of the news. Aspirational Developments learns of Jeremy's conduct and seeks your advice on whether Jeremy has breached any duty owed to it.

Issue 

Is the company Gabba Pty Ltd liable to pay the bill?

Rule

An agency relationship is formed either by law or by a contract where one party (principal) authorizes another party (agent) to act under or on behalf of the principal. The agent is authorized to deal with the third parties on behalf of the principal and the principal becomes legally bound by the actions or words of the agent (McKendrick 2014).

The principal shall authorize the agent to carry out several activities or may restrict the agent from performing certain tasks. However, based on the scope of authority given to the agent, he represents the principal and is entitled to act only on behalf of his principal. Similarly, if the conduct of the agent with respect to the third parties falls within the authority conferred upon him, the principal shall be bound by such conduct to such third parties (Andrews 2015). Due to the separate legal status accorded to corporations, it can exercise its legal capacity through an agent by authorizing it to act on the behalf of the company and the company shall be bound by actions of the agent.

The principal may grant either actual authority or an ostensible/apparent authority to the agent. Actual authority refers to the authority that is granted expressly or impliedly by the company to the agent for acting on behalf of the company. An express actual authority refers to the authority that is expressly granted to the agent by the principal either verbally or in writing as was established in Freeman & Lockyer v Buckhurst [1964]. In Hely-Hutchinson v Brayhead [1967], implied authority is defined as the authority where owing t the position of the agent at the company, the agent is expected to enter into contract on behalf of the company or the principal. In case an agent is not granted an actual authority, the agent shall be entitled to enforce the agency contract if they can establish they have ostensible authority. A contract shall not be considered as void if the third party had no knowledge that the agent was not authorized to act o behalf of the principal (Mann, Richard and Roberts 2015).

As per the rule of agency law if an agent acts outside the authority such agreement shall be considered as void and shall not bind the principal, however, the only exception to this rule is the if the conduct of the agent is ratified later then the conduct shall be considered to be done on behalf of the principal.

Application

On the facts here, Ricardo has been authorized by the CEO of the Gabba Pty Ltd to enter into contract that does not exceed $10000 owing to the financial crisis of the company. Here, the CEO has granted Ricardo with an express actual authority. However, Ricardo had entered into a contract valued at $13000 with Willow Landscaping, including an additional cost $4000.

As discussed above, if any agent acts beyond its authority, the principal shall not be responsible for the acts of the agent unless the principal has ratified the act of the agent. Thereafter, the principal shall become legally bound by the act of the agent, as it shall be considered as an act done behalf of the principal.

In the given case, although Ricardo did not disclose about the additional cost of $4000 but he did mention that the contract entered into with willow landscaping was valued at $13,000. CEO expressly authorized Ricardo not to enter into contract exceeding $10000 but he later ratified and authorized Ricardo to proceed with the contract, which makes him bound by the contract entered into by Ricardo.

Conclusion 

Since the company is legally bound by the acts of the agent as long as they are authorized to act on behalf of the company, the company is liable to pay the bill of $17,000.

Issue 

Can Jeremy be held liable for committing a breach of duty?

Rule

Agency refers to the relationship where the principal authorizes the agent to deal with the third parties on behalf of the principal. The principal shall be bound by the acts of the agents provided the agent is authorized to act on behalf of the principal (Willmott et al. 2013).

The agent and the principal owe certain rights and obligations towards each other and are required to comply with such rights and duties. The agent is obligated make complete disclosure of any personal interest to the principal and the agent is not permitted to make any profit outside the relationship. The agent is not allowed to take any advantage of the agency relationship. If the agent has any personal interest it must not place his own interest over the interest of the principal as was observed in the Dargusch v Sherley Investments [1970] Qld 338.

The agent must not make profits from its position as the cost of the principal and must ensure that where there arises a possibility of conflict of interests, the agent must give more priority to the interests of the principal than his personal interests as is required by the agent under the ‘no profit rule’. An agent must act on behalf of the principal in good faith under the agency relationship (Poole 2016).

Application

In the given scenario, Jeremy being the estate agent for Aspirational Developments Pty Ltd is under the agency relationship where he is required to act on behalf of the principal (Aspirational Developments Pty Ltd). Jeremy is obligated to perform his fiduciary duties that he owes to the principal being an agent.

On hearing about competing high-rise units, which was facing difficulties in selling off the plan, he assisted his friend to arrange finance buy the high-rise units he was selling on behalf of Aspirational Development Pty Ltd with a view that he could sell off the units and split the profits with his friend. The fiduciary duties that Jeremy owes towards his principal is that he must not profit from its position at the cost of the principal and in case he earns any profit within the course of agency, then the agent must disclose such profits to the principal (McKendrick 2014).

Further, Jeremy being an agent is not entitled to give more priority to his personal interest than the interest of the principal. The agent is required to follow the ‘no conflict rule’ which requires the agent to ensure that whenever there is a possibility that there arises a conflict with respect to the interest of the principal and interest of the principal, the interest of the principal shall prevail.

On the facts here, Jeremy was selling the high-rise units for its principal Aspirational Development Pty ltd and any profits that arise from selling of the high-rise units should be disclosed to the principal. An agent merely acts on behalf of the principal and must act in good faith and make full disclosure of the acts conducted by the agent within the agency relationship as was observed in Dargusch v Sherley Investments [1970].

Jeremy wanted to sell three of the high-rise units to his friend so that they could sell it off and can split profit between him and his friend. This establishes a clear breach of the fiduciary duty of an agent that he owed to his principal Aspirational Development Pty Ltd not to make profits from its position at the expense of the principal.

Conclusion

Jeremy has committed a breach of his fiduciary duty by making profits in his position at the expense of his principal Aspirational Development Pty Ltd.

Reference List

Andrews, Neil. Contract law. Cambridge University Press, 2015.

Dargusch v Sherley Investments [1970] Qd R 338

Freeman & Lockyer v Buckhurst [1964] 2 QB 480

Hanrahan, Pamela F., Ian Ramsay, and Geofrey P. Stapledon. "Commercial applications of company law." (2013).

Hely-Hutchinson v Brayhead Ltd  [1967] 1 QB 549

Mann, Richard A., and Barry S. Roberts. Business law and the regulation of business. Nelson Education, 2015.

McKendrick, Ewan. Contract law: text, cases, and materials. Oxford University Press (UK), 2014.

Poole, Jill. Textbook on contract law. Oxford University Press, 2016.

Willmott, Lindy, Sharon Christensen, Desmond Butler, and Bill Dixon. "Contract law." (2013).