ACCESS PART II HERE
PARTNERSHIPS
DEED OF PARTNERSHIP
Although there is no need to have a formal
partnership agreement, the vast majority of partnerships do draw such an
agreement up. It is important to recall that a partnership can be created
informally and that people can be partners even without realising it.
Partnership is based on a contractual agreement and therefore a partnership is
only created if all the requirements of a contract are fulfilled.
There must be an offer, acceptance,
an intention to create legal relations
and consideration. The contract
must not be void for mistake or illegality and it might be rendered voidable by
misrepresentation, duress or undue influence. The contract might become
frustrated if it becomes impossible to perform, or illegal to perform, or if it
can be performed only in a manner which is radically different from what the
parties contemplated when they made it. Where the terms of the agreement are
not expressed by the partners they might either be implied by the Partnership
Act or implied as a matter of general construction of contracts {Law of
Contact}. Formal partnership agreements are often known as articles of partnership. Such
agreements are commonly set out as a deed
although there is no requirement that they should be.
There are 13 or so matters that should be dealt
with by almost any formal partnership agreement. We therefore make a brief
consideration of these 13 ‘universal’ articles.
1.
The parties to the agreement
The agreement should clearly set out who is
partner and who is not. However, as we saw in Saywell vs. Pope the
final decision as to whether or not a person is a partner can only be made in
the light of all the evidence.
2.
The nature of the business
There
are three fundamental reasons why it is important to clearly set out the nature
of the partnership business. First,
partners are agents of the firm and of their fellow partners for the purposes
of the firm’s business, but not for other purposes. Second, there is a fiduciary duty preventing partners from
carrying on a business which competes with the business of the firm or is of
the same nature as the business of the firm. Third, having been defined, the nature of the partnership
business can only be varied with by the consent of all the partners.
3.
The name of the firm
The name of the firm should be clearly
identified. Partners commonly choose to be known by their collective surnames,
although they can in general choose to be known by any other name.
There is no requirement to register the firm’s
name. In the process of choosing and registering a name the name should not be
similar to other business names {NB: the register of company and business names
is central}, should not use the name ‘limited’ {under the Companies Act} or
names which suggest connection with Government or with local authority.
The name should not be designed to deceive the
public by causing confusion with another business. If that happens an action
for the tort of passing off might be brought. If successful an action could
result in an injunction preventing further use of the name and/or payment of
damages.
2.
Dates of commencement and
dissolution
A formal partnership will almost always state
the date on which partnership is to commence. However, as we see in Saywell vs. Pope this is not conclusive evidence as to
whether or not the partnership did in fact commence on that date.
The date at which a partnership commenced is a
matter of fact, which will be determined by examining all the evidence.
However, the fact that a partnership agreement states a date of commencement is
likely to be very strong evidence of a partnership having existed from that
date.
A formal partnership agreement might or might
not give a date on which the partnership is to end. If such a date is specified
then the partnership can only be ended in advance of that date by one of the
matters specified in the Partnership Act or by a court order.
So
if a date for dissolution is fixed, no single partner will be able to dissolve
the firm by giving notice before that date. If no date for dissolution is
fixed, the partnership is known as a partnership at will and any of the
partners can dissolve the firm by giving notice.
3.
The capital of the firm and of
the individual partners
All the partners are entitled to share equally
in the capital and the profits of the business and must contribute equally
towards the losses, whether of capital or otherwise sustained by the firm.
This presumption that partners will contribute
capital equally and be entitled to equal repayment of capital on dissolution is
very commonly varied. In many partnerships one partner provides the capital
while the others provide business skills. For the sake of certainty, the
partnership agreement should spell out clearly the intentions of the parties.
As well as dealing with capital contributions
the agreement should make it plain whether property which is used by the firm
is partnership property or remains the property of individual partners.
4.
The salary and profit
entitlement of the partners
Very commonly the partners do not share equally
in the profits of the firm. We have already seen that profits and losses are to
be shared equally unless the partners agree otherwise.
The partnership agreement is the most
appropriate place for unequal share in profits to be spelled out. Sometimes the
partnership agreement provides for the payment of a notional salary to a
partner. This is really no more than a way of distributing the profits amongst
the partners and does not make the recipient an employee.
5.
The management of the business
Every partner is entitled to take part in the
management of the partnership business. This is applicable if no contrary
agreement is expressly or impliedly made. It is possible to have a dormant or
sleeping partner who has no right to manage the business.
The agreement should set out the duties of the
various partners, how majority decisions should be taken and whether or not
some partners are excluded from the right to do certain things. It is commonly
the case that partners do not have equal voting or management rights.
If a partner is excluded from the management of
the firm without having agreed to this, the courts will regard this as a reason
to dissolve the firm.
6.
Banking arrangements and the
right to draw cheques
The partnership agreement should name the
firm’s bank and specify whether or not individual partners have the right to
draw cheques on the partnership account.
It is commonly agreed that the signatures of
two partners are required on cheques to the value of more than a specified
amount. The bank will not be bound by the partnership agreement but has duty to
obey the mandate given by the customer.
Therefore if the provisions of the partnership
agreement are reproduced in the mandate given to the bank, the bank will not be
entitled to debit the firm’s account if the provisions of the partnership
agreement are not observed.
7.
The firm’s accounts
The
agreement will generally arrange for the accounts to be drawn up on certain
dates. By reference to these accounts the partners will know how they stand as
regards each other and the firm will know how it stands as regards outsiders.
8.
Admission and expulsion of
partners:
The agreement should set out the grounds on
which a partner can be expelled from the partnership. It is also sensible to
set out the circumstances in which new partners can be admitted.
If there is no express or implied agreement to
the contrary, a new partner can only be admitted by the consent of all the
existing partners. Very often the partnership agreement does provide otherwise,
so that a new partner can be admitted without the consent of all the existing
partners.
9.
Death or retirement of
partners:
The Act provides that the death of a partner
dissolves the firm unless the partners agree otherwise. It would be usual in a
commercial firm for the partnership agreement to provide that the firm should
be carried on after the death of a partner, and to provide a right for a
partner to retire from the firm after giving a stated period of notice.
In addition, it is important to set out the
financial arrangements to be applied when a partner dies or retires. The
partnership agreement might also contain a restraint of trade clause preventing
a partner from competing with the firm after retirement.
10.
Valuation of the goodwill
The agreement should set out how the goodwill
should be valued and the entitlement in respect of the goodwill of partners who
die or retire. See 15.9.5 of Ewan Macintyre Business Law text.
11.
Arbitration
One of the most important provisions of a
partnership agreement is that disputes should be referred to arbitration. If
there is no such provision then disputes between parties could become the subject
of litigation. The publicity which this might generate could be very damaging
to the firm, and perhaps to the future prospects of the partners as
individuals.
Other important matters that
should be considered are:
1.
Variation of partnership
agreement:
2.
Numbers of partners:
3.
Capacities of partners:
REGISTRATION
A partnership is normally easy to register as it is normally registered
as a business under The Registration of Business Names Act cap 499.The deed of
partnership itself is not registered as it merely regulates the relationship
between the partners.
The registration is carried out as follows:
1.
The first step is to identify the name with which the business is to be
registered.
2.
Then an application must be made to the registrar-general to have the
name reserved and if the name is available it is reserved for thirty days.
Once the name is reserved then the partners must file the statement
of particulars which is in the prescribed form no. BN/2 which
stipulates inter alia:
1.
Business name
2.
Nature of business
3.
Date of commencement
4.
Address of the principal place of business (Plot No., Section and Name
of Street or Road)
5.
Postal address
6.
Address of any other place of business
7.
Particulars of proprietor or partners
NB: if for some reason
all the partners are unable to sign the statement, it can still be filed but it
must be accompanied by a statutory declaration provided under it.
CHANGE OF PARTNERS
The proprietorship of a partnership may change. This would happen where
new partners are admitted or existing partners exit or both events occurring.
Where there is change of partners the proprietors are required to file a notice
of change under s.9 of The Registration of Business Names Act cap 499.
The notice of change should normally be in the prescribed form no. BN/4
and importantly the following must be observed:
1.
Where a business is transferred to a new partner taken in, full
particulars of the new proprietor have to be shown.
2.
The original Certificate of Registration should accompany this notice.
3.
This notice must be signed by the proprietor or by all partners, as the
case may be. A director or the secretary can sign for a corporation which is
the proprietor or a partner.
DISSOLUTION AND WINDING-UP
When a partnership is dissolved it comes to an
end. Often this can be little more than a technicality.
A firm is dissolved each time there is a change
in the membership, although in a commercial firm the remaining partners are
likely to carry on in very much the same way as before.
This will involve the firm’s assets being
realised, creditors being paid off and any remaining surplus being divided
amongst the partners.
DISSOLUTION
A partnership may be dissolved in any one of
the following ways:
1.
Dissolution by partners
A partnership arises on account of a contract
having been made by the partners. The general common law of contract might
allow one or more of the partners to terminate the contract. For instance, all
the partners might make a new contract, agreeing to end the partnership or a
formal partnership agreement might set out the circumstances on which the
partnership can be ended.
In addition, a partner can rescind the contract
if he made it in consequence of misrepresentation, and a partner may apply to
the court to terminate the contract if the other partners commit a repudiatory
breach of contract.
Further, if a partner is expelled then the firm
is dissolved. Although this might be little more than a technicality in a large
firm, if there are only two partners the expulsion would lead to winding up of
the firm.
2.
Dissolution under a provision
of the Act
The Partnership Act proclaims that a
partnership is dissolved in the following circumstances:
1.
Subject to any agreement to
the contrary between the partners, a partnership is dissolved if: entered for a
fixed term, by the expiration of that term; if entered into for a single
adventure, it dissolves upon accomplishment of that adventure and if entered
for an undefined time, any partner may give notice to the other partners of his
intention to dissolve the partnership (see s.36).
2.
Subject to any agreement
between the partners every partnership is dissolved by the death or bankruptcy
of any partner (see s.37 (1)).
3.
At the option of the other
partners, a partnership may be dissolved if any of the partners suffers his
share of partnership property or assets to be charged for his personal debts
(see s.37 (2)).
4.
If an event happens which
makes it unlawful for the business of the firm to be carried on or for the
members of the firm to carry it on in partnership (see s.38).
1.
Dissolution by court order
Under s.39 on the application by a partner, the
court may order dissolution of the partnership in any of the following cases:
1.
Partner is adjudged lunatic or
shown to be permanently of unsound mind.
2.
Partner other than one making
the application becomes permanently incapable of performing his part of
partnership agreement.
3.
Partner other than one making
the application is guilty of such conduct in the opinion of the court which is
calculated to prejudice carrying on business of the firm.
4.
Partner other than one suing
wilfully and persistently commits breach of partnership agreement or partner
conducts himself in such a manner as to make it not practicable to continue
carrying on business with him.
5.
When it is proved that the
business of that partnership may only be carried out at a loss.
6.
When circumstances have arisen
which in the opinion of the court, render it just and equitable that the
partnership be dissolved.
NB: the court can dissolve a partnership under
Mental Health Act. This is where the court is satisfied that that a partner is,
by reason of mental disorder, incapable of managing his property affairs.
WINDING
UP
After the dissolution of a partnership the
authority of each partner to bind the firm and the other rights and obligations
of the partners may continue. However, this authority continues only to the
extent that it may be necessary in order to wind up the affairs of the
partnership and to complete the transactions that begun but are unfinished at
the time of dissolution (see s.42).
Realisation of the firm’s
assets
Under
s.43 upon dissolution of a partnership, the assets of the partnership must be
applied in this order:
1.
To discharge debts and
liabilities of the firm.
2.
The surplus assets should then
be shared between the partners.
3.
Before sharing of surplus,
what is due to a partner must be charged with what that partner owes to the
firm e.g. contribution to the deficiency of the capital.
Options available where a
partner has died
Where before dissolution a partner has died,
the partnership has got two options:
1.
The partnership may settle the
accounts at that stage by calculating what is due to the estate of the deceased
and paying it out.
2.
If the accounts are not
settled that way, until the partnership dissolves, the estate of the deceased
or personal representative will be entitled to share the profits of the
partnership or surplus that remains after settlement of debts and liabilities
Sometimes partners may enter into an agreement
that in the event of death, the surviving partners will have the option of
purchasing interests of deceased partner.
In that case the estate of the deceased will not be entitled to further
claim upon dissolution of the partnership.
Rules for final settlement of
accounts
Under s.48, in settling accounts after
dissolution of partnership the following rules shall subject to any agreement
be complied with;
The losses including losses out of capital must
be paid first out of profit. If the profits don’t satisfy losses, they may be
paid out of capital.
If losses are still unsettled every partner
will be liable to contribute in proportion in which a partner was entitled to
share profits.
The assets of the firm including any
contributions made by partners for settling losses as above shall be applied in
the following manner and order.
1. To
pay debts and liabilities owed by the firm to 3rd parties.
2. If
any partner may have made advancements to the firm, he will be paid at an
interest of 6% p.a.
3. Paying
each partner whatever is due to him from the firm in respect of capital.
4. If
after the above payment there is any surplus, the same shall be shared out
between partners in proportion in which they were entitled to share profits.
CHAPTER THREE
INTRODUCTION TO COMMERCIAL LAW
SALE OF GOODS AND AGENCY
3.1 INTRODUCTION TO
COMMERCIAL LAW
Commercial law is the branch of law
that is concerned with rights and duties arising from the supply of goods and
services in the way of trade. Its scope is not clearly defined and no two text
books adopt the same approach as to the spheres of commercial activity that ought
to be properly included in a work on the subject. There is in fact doubt by
some as to whether commercial law is a subject at all, but rather an
amalgamation of distinct subjects such as sale, negotiable instruments, etc.
PRINCIPLE SOURCES OF
COMMERCIAL LAW
CONTRACT
The foundation on which commercial law rests is the law of contract.
Commercial transactions are specific forms of contract. While each type of
commercial contract is governed by rules peculiar to that type, all are subject
to the general principles of contract law except to the extent to which these
have been displaced by statute or mercantile usage.
The general principle relate to the well-established rules relating to
offer, acceptance, consideration, capacity to contract, intention to create
legally binding obligations, formalities, vitiating factors, breach and remedies etc.
EXPRESS AND IMPLIED TERMS
GENERALLY
When considering the law making capacity of parties themselves one must
avoid the assumption that they have necessarily negotiated each individual
term. Certain basic terms will of course be bargained in almost every
transaction such as the subject matter of the transaction and the price to be
paid for it. Many commercial contracts are indeed hammered out by the parties
term by term, and can be truly said to represent their own creation, to which
they may be assumed to have addressed their minds. But a large number of
commercial agreements are standard term contracts and are not individually
negotiated.
It would be impossible for business to cope with the enormous volume of
bargains conducted daily if every term in every agreement, no matter how
consistent the pattern of business had to be negotiated step by step. The
standard term contract is thus an
essential feature in business life, and depending on the scale of business the
standard term contract may be made by
the businessman, his lawyer or trade associations etc
This however does not alter the fact that the parties to the contract
in adopting the standard terms, are making their own law, and such model
contracts perform an increasingly valuable function as traders become familiar
with them. Frequently parties do not set out all the terms in the contract
itself but find it convenient to incorporate terms by reference to a variety of
other documents e.g. standard contract terms published by an independent body
or group of institutions, a model code of practice or usage, a set of standard
terms or definitions. Therefore the law extends what is considered to
constitute a consensual undertaking to embrace not only express terms, terms
incorporated by reference and terms implied in fact or from prior course of
dealing, but also rights and duties implied by law or mercantile usage.
UNCODIFIED CUSTOM AND
USAGE
Of great importance as a source of obligation in commercial contracts
are the unwritten customs (a rule of a particular locality) and usages (a
settled practice of a particular trade or profession) of merchants. These have
an impact on the content and interpretation of contract terms. It is this
feature that distinguishes commercial from other types of contracts. This means
that over time a practice that is accepted by businessmen but which the court
has not recognized can become binding and given force.
In fact in some jurisdictions the binding force of mercantile usage
does not depend on adoption by contract, but in theory of English law a usage
takes effect as an express or implied term of the contract between the parties.
It is dependent for its validity on satisfying certain external legal criteria:
1.
Certainty
2.
Consistency of practice
3.
Reasonableness
4.
Notoriety
5.
Conformity with mandatory law
6.
It must be observed from a sense of a legally binding obligation, not
as a matter of mere courtesy or
convenience or a desire to accommodate a customer’s wishes
CODIFIED CUSTOM AND USAGE
It is in the nature of unwritten custom or usage that it’s meaning and
content may be understood differently by different people. Indeed the very
existence of an alleged usage may be challenged. To address such concerns
national and international bodies and associations find it convenient to
formulate the relevant usages in a published code or set of rules which state
or restate best practices. Members would then be required to adhere to
them as a condition of membership, and by incorporation into individual
contracts. Codified customs and usage also depend on their operation on express
or implied adoption in the contract.
DOMESTIC AND
INTERNATIONAL LEGISLATION
Increasingly the law has intervened in commercial activities and
relations through legislation such as the Sale of Goods Act. While there
remains substantial scope for free bargaining between the parties to a
commercial transaction, the parameters within which they are at liberty to make
their own law are steadily shrinking. It is therefore important to bear in mind the diminishing role of the
common law in defining contractual obligations and the growing impact of
enacted law and government intervention and international obligations( such as
International Conventions(CISG) , transnational commercial law and Model laws).
IMPORTANT PRACTICAL
INDICATORS ON CONTRACT MAKING AND INTERPRETATION
THE PROBLEM OF LANGUAGE
Much of the work of the courts is taken up with the construction of
contracts and statutes. Those whose business it is to work with words soon
acquire an appreciation of the limitations of language. The meaning of a word
depends on the context in which it is used and the purposes it is to achieve.
Contrary to popular belief words are not always made clear by definitions and
sometimes these can even obscure rather than clarify meaning.
Words should be construed in a manner as to give effect to the
intention of the parties and that of the law (It is suggested that further
reading should be done by those who want to refresh knowledge in this area).
Therefore in as far as is possible one should use regular words that are
understandable by both parties.
CONTRACT MAKING
It is advisable that contracts are made in writing, and the law
requires that some types must be in writing to have capacity to confer rights
and obligations. Contract of sale of goods should specify the parties, item
subject matter of contract, quantity of goods, delivery dates, warranties or
guarantees or lack thereof, arbitration and termination clauses amongst other
terms. Contracts must be properly negotiated and reviewed to ensure that it
meets the intention of the parties, and make expectations clear- define terms
and ensure there is no ambiguity.
Some types of business already have set language for contract making
and these can be adopted or adapted. Contract of sale of goods should specify
the parties, item subject matter of contract, quantity of goods, delivery
dates, warranties or guarantees or lack thereof, arbitration and termination
clauses amongst other terms.
Contracts must be properly negotiated and reviewed to ensure that it
meets the intention of the parties, and make expectations clear- define terms
and ensure there is no ambiguity. Some types of business already have set
language for contract making and these can be adopted or adapted.
COMMERCIAL CONTRACTS
A Commercial contract is one entered into between merchants acting for
business purposes, and also contracts entered into by merchants and
non-merchants. Repeat transactions between the same parties are a common
feature of commercial life so that contract terms not expressly stated will be
readily implied from a prior and consistent course of dealing between the
parties. Commercial contracts are not homogenous, each type of commercial
contract has rules peculiar to that type which are superimposed on the
principles and rules applicable to commercial contracts at large, and below
them on the general principles of contract law.
Contracts for sale of goods, for example, are subject to rules not
applicable to other types of commercial contracts. Likewise, contracts of
insurance, carriage of goods, finance etc. each possess distinct rules tailored
specifically to the nature and purpose of the contract. In terms of contract type
and structure, when two parties decide to transact they can achieve their
objective through a variety of contract types.
The legal nature of the relationship and structure to be adopted will
depend upon the particular type of contract selected. Examples:
B wishes to acquire goods from S without having to make a lump sum
payment while S does not wish to give up all the rights to the goods until he
has received payment in full. There are several different ways in which these
dual objectives may be attained:
S could contract to sell the goods to B under a conditional sale
agreement that is an agreement providing for payment of the price by
installments and the retention of the title by S until completion of payment.
Alternatively S could sell the goods to be outright under a contract providing
for payment by installment and B charging the goods to S by way of security for
payment, or through hire purchase terms etc. Usually the factors which will
influence the choice of contract type and structure will usually be influenced
by commercial necessity or convenience or legal considerations.
SALE OF GOODS
Specific Objectives under
Sale of Good Are:
1.
Knowledge of relevant statues and common law.
2.
ability to draft contract documents such as sale agreement and agreement
to sale
3.
knowledge and ability to apply principles of construction to specific agreements
4.
knowledge of international sale of goods terms and documentation such
as CIF, FOB, insurance and taxation
5.
Knowledge on documentation relating to auction sales.
PRINCIPLES SOURCES OF
SALE OF GOODS TRANSACTIONS
Sale of goods is covered in various pieces of legislation depending on
the focus of the law, for example, consumer protection, hire purchase etc. The
focus of this topic will however be sale of goods as covered in the Sale of
Goods Act CAP 31 of the laws of Kenya.
The principle sources are therefore:
1.
National legislation -Sale of Goods Act Cap 31
2.
Law of contract- general principles of contract law and case law
except to the extent where these have
been displaced by statute or mercantile usage
3.
Express and implied terms of contract generally
4.
Custom and usage codified and uncodified
5.
International legislation
THE DEFINITION OF SALE OF
GOODS CONTRACT
A contract of sale of
goods is defined in Section 3 (1) of Cap 31 Laws of Kenya. “A Contract of
sale of goods is a contract whereby the seller
transfers or agrees to transfer the property in goods to the
buyer for a money consideration, called the price.”
A sale implies that
the transfer is immediate –“where the property in the goods is transferred from
the seller to the buyer” ,whereas agreement to sale implies that transfer is
delayed- “where the transfer of the property in the goods is to take place at a
future time , or subject to some condition thereafter fulfilled”. An agreement
to sell becomes a sale when (a) the time elapse or (b) the conditions are
fulfilled subject to which the property in the goods is to be transferred.
Sale of Goods Act Cap 31 Laws of Kenya Section 3 (4)
“Where under a contract of sale
the property in the goods is transferred from the seller to the buyer the
contract is called a sale; but, where the transfer of the property in the goods
is to take place at a future time or subject to some condition thereafter to be
fulfilled, the contract is called an agreement to sell.”
Section 3(5)
“An agreement to sell
becomes a sale when the time elapses or the conditions are fulfilled subject to
which the property in the goods is to be transferred.”
The seller transfers or agrees to transfer the
property in goods to the buyer. It should be noted here that what is
transferred is the general property in the goods, which is used by lawyers to
signify title or ownership (however this issue is to be dealt with in detail
under the transfer of property).
The sale of goods law sees items from two different perspectives or
goods composed of 2 major components.
You have property in goods i.e. the title in goods and the physical
aspect which are two different things.
Goods are different from property. E.g. If you have borrowed a shirt, you have
possession but not property or title.
Ownership could be with one person whereas control is with somebody
else. When we talk of goods we are talking of the tangible aspect and when we
talk of property we are talking of ownership. In the definition it is said that
it is a contract by which the seller or the offeror transfers or agrees to
transfer the property to the buyer or offeree.
A contract of sale of goods does not deal with the tangible, it deals
with property. You do not transfer
goods, you transfer property, and you deliver goods and transfer property. Once
the property has been transferred then the buyer must pay a consideration in
your ordinary contract and in this case the consideration must be in money.
Money consideration is called the price.
In a sale of goods contract, the beacons are that the seller agrees to
transfer the property for money consideration called the price.
SALE DISTINGUISHED FROM
OTHER CONTRACTS
Provisions of Cap 31 apply only to a Sale of Goods Contract. There are
8 transactions that resemble Sale of Goods contract but are not a sale of goods
contract.
1.
Contract of Barter or Exchange.
2.
Contract of Gifts
3.
Contract of Bailment
4.
Contract of Hire Purchase
5.
Contract of Loan on Security of goods
6.
Contract of Supply of services
7.
Contract of Agency
8.
Contract of Licences of intellectual property such ‘sales’ of computer
software and patents.
The distinction is important because the results are critical to the
resolution of disputes if they do go to court. Remedies available are different
for different types of contracts. However it should be noted that a contract
may be partly a contract of sale and partly something else. For example a contract for the provision of a
meal in a hotel and construction of machinery are contracts of sale, but in
some sense they also involve the provision of services. The law relating to the goods and the law
relating to the services aspects of such a contract may differ.
Distinction between sale
and exchange: Section 3(1) provides that goods are to be transferred to the buyer for a money
consideration, called the price. This serves to distinguish a sale from a
contract of barter or exchange in the ordinary case. How about where on the one
hand the goods are exchanged for goods plus money on the other hand, as in the
case when a used car is traded in part exchange for a new one- is it a contract
of a sale or of exchange?
It has been suggested that it depends, inter alia, upon whether the
money or the goods are the substantial consideration; the intention of the
parties so long as they do not include provisions manifestly inconsistent with
the intended nature of the transaction, so that where the parties envisage the
transaction as a sale and use terminology more appropriate to a sale, the
contract would be held to be such even if the substantial consideration is
supplied in goods rather than money etc
Distinction between sale
and gift: in
the ordinary sense there is no difficulty in distinguishing between a sale and
a gift. A gift is a transfer of property without any consideration, and is thus
not binding while it remains executor unless made by deed. How about the case
where a free gift is offered on condition of entering into some other
transaction? For example a free gift of a special coin to anyone buying four
gallons of petrol? It was held that although the garage was contractually bound
to supply the coin to anyone buying the four gallons, it was not a sale of
goods contract, but in substance a collateral contract, existing alongside the
contract for sale of petrol.
Distinction between sale
and bailment: A bailment is a transaction
under which goods are delivered by one party (the bailor) to another (the
bailee) on terms which normally require the bailee to hold the goods and
ultimately to redeliver them to the bailor or in accordance with his
directions. The property in the goods is not intended to and does not pass on
delivery, though it may sometimes be the intention of the parties that it
should pass in due course, as in the case of the ordinary hire purchase
contract. A contract of hire is one species of bailment.
Distinction between sale
and hire-purchase: contracts of hire
purchase resemble contracts of sale very closely and indeed in practically all
the cases of hire –purchase the ultimate sale of the goods is the real object
of the transaction. A sale is a contract whereby the seller transfers or agrees
to transfer the property in goods to the buyer, whereas a hire purchase is a
bailment of goods coupled with an option to purchase goods which may or may not
be exercised. Only if and when the option is exercised will there be a contract
of sale.
Distinction between sale
and loan on security: Parties sometimes enter into or go through the motions of entering
into, a contract to sell goods with the intention of using the goods as a
security for a loan. If the owner of
goods A wishes to borrow money on the security of the goods, he may charge or
mortgage them to B on the understanding that A will retain possession of the
goods, A will repay B what he or she has borrowed together with interest, and B
will have a right to take the goods from A if and only if A fails to repay the
loan or interest at the agreed time.
Such a transaction differs from a hire purchase contract which is
designed to enable someone to acquire goods on credit. A loan on security is
designed to enable someone who already owns goods to borrow money on the
security of the goods.
Distinction between sale
of goods and supply of services: Traditionally, the law has distinguished between
contracts for the supply of services and contracts for the sale of goods. Contracts which are often sub-divided, for
instance into contracts for labour and skill, or contracts for labour and
materials, according to whether the supplier was providing services only, or
materials as well. The law in this area is quite problematique and therefore to
avoid too much debate it can be summarized as under the test for deciding
whether a contract falls into the one category or the other is to ask what is
the substance of the contract. If the substance of the contract is the skill
and labour of the supplier, then the contract is one of services, whereas if
the real substance of the contract is the ultimate result, the goods to be
provided, then the contract is one of sale of goods. Hence a contract for the
painting of a picture is a contract for services-the skill of the artist is
clearly more important than the incidental fact that the property in the
completed picture will pass to the client. A contract for the construction of
two ship’s propellers is a contract of sale of goods. Similarly, a contract for
the manufacture of a ship is a contract of sale of goods , but it is not
necessarily pure contract of sale: if the process of manufacture itself forms
part of the contract, the contract in effect consists of two sub parts(1)a
contract under which the supplier is to make the ship-which is a contract for
services, and (2) a contract under which the supplier agrees to sell the
completed ship-in effect, a contract of sale of goods.
Robinson V. Graves [1935] Vol. 1 KB P 579
The issue in this case was the
distinction between sale of goods and supply of services. The
contract here was one whereby an artist agreed to paint a portrait of his
client’s wife. It would appear that
such a transaction should be regarded as one of sale. In the event however this transaction was
held as one for services and in reaching this conclusion, the court sought to
identify the prime purpose of the contract. In the often quoted words of LJ
Greer: -
“If the substance of the
contract … is that skill and labour have to be exercised for the production of
the article and … it is only ancillary to that that there will pass from the
artist to his client or customer some material in addition to the skill
involved in the production of the portrait, that does not make any difference
to the result, because the substance of the contract is the skill and
experience of the artist in producing the picture.”
This case lays down an elastic
test of this nature for distinguishing contracts of sale from contracts for
skill and labour, and a similar approach may sometimes be justified here.
Distinction between sale
and agency: it is important to appreciate
what seems like a clear distinction on the face of it because in certain types
of cases distinction may be a fine one by no means easy to draw. Where for
example, A asks B, a commission agent, to obtain goods for him from a supplier,
or from any other source, and B complies by sending the goods to A, it may well
be a fine point whether this is a contract under which B sells the goods to A,
or is a contract under which B acts as A’s agent to obtain the required goods
from other sources.
Sale
of contract distinguished from patents : Items of intellectual property
such as copyrights, patents and trademarks are not ‘personal chattels or
corporeal movables and so fall outside the definition of goods although
goods may exist which embody these intellectual property rights. In modern times, an important point, not yet
wholly resolved, is whether computer software may constitute ‘goods’ within the
meaning of the Act. Software is normally embedded in some physical form,
such as disks or as part of a package in which it is sold along with computer
hardware, that is computer or computer parts.
It is protected as a literary work by the law of copyright.
Usually
only the medium in which the software is embedded, e.g. a disk is sold. The copyright in the software remains in the
software house which developed it. The
software house licences the user to make working copies of the disks and to
load the software into a computer, acts which otherwise would be infringements
of copyright. Software can also, of
course, be delivered on-line subject to licensing terms.
SUBJECT MATTER OF THE
CONTRACT
MEANING OF GOODS
Goods are defined to “include all chattels personal other than things
in action and money, and all emblements, industrial growing crops and things
attached to or forming part of the land which are agreed to be severed before
sale or under a contract of sale”. The definition is quite extensive and can
potentially cover a lot of things, but nonetheless there are things that do not
fall within this definition. Definition covers most movables but doesn’t
include land, shares, debts, claims etc, which cannot be moved away. Money
sold as curio or collector’s item qualifies but not when transferred as
currency.
Some of the things excluded are non–physical items such as company
shares which are technically ‘things in action’ and intellectual property such
as copyrights patents and trademarks, although goods may exist which embody
these intellectual property rights.
THE POSITION OF COMPUTER
SOFTWARE: DO THEY CONSTITUTE GOODS WITHIN THE MEANING OF THE ACT?
Software is normally embedded in some physical form such as disks, or
as part of a package in which it is sold along with computer hardware that is
computers or computer parts. It is
protected as literary work by the law of copyright. Usually only the medium in
which the software is embedded e.g. disk is sold. The copyright in the software
remains in the software house which developed it. The software house licenses
the user to make working copies of the disks and to load software into a
computer, acts which otherwise would be infringements of copyright. Software
can also be delivered on line subject to licensing terms.
The question as to whether or not a supply of computer software is a
sale of goods, has to be answered by the English Court of Appeal in Beta
Computers (Europe) Ltd vs. Adobe Systems (Europe), where it was held
that the supply of proprietary software for a price was a single contracts sui
generis though it contained elements of contracts such as sales of goods and
the grant of a license. It was an essential feature of such a contract that the
supplier undertook to make available to the purchaser both the medium on which
the programme was recorded and the rights to access and use the software.
In St. Albans City And District Council vs. International Computers Ltd, the
Court of Appeal expressed the view that a computer disk is within the
definition of goods. A computer programme on the other hand is not goods.
However when a defective program is encoded and sold or hired on a disk, the
seller or hirer of the disk will be in breach of the terms as to quality and
fitness implied by the Sale of Goods Act.
In Eurodynamics Systems Plc vs. General Autumation Ltd, 1988, Steyn, J
expressed the view that the transfer of software is a transfer of a product. He
was emphasizing the fact that since the software is supplied on a physical
medium, it should be regarded as physical property like a book or a record. Lord Penrose criticized Lord Steyn
approach on the basis that the product was too complex to narrow the
significant interests of parties to the simple matter of the medium by which it
was transmitted.
Atiyah, P.S 2005, agrees and shares Lord
Penrose view that rights should not depend on the medium of supply. However he poses the question that in view of
technological developments, original copyright works can be now delivered on
line, does that mean that the sale of goods laws will not apply and must be
treated as sui generis? He illustrates using the example of books, stating that
we must distinguish the liability of the author from that of the shop and the
publisher. If the book is missing a
page, or falls to pieces just after it is bought, the shop is clearly liable
under the sale of goods act quality warranties, and so is the publisher who
sold it to the shop. On the other hand, neither is likely to be held liable in
respect of erroneous information in the reference book. He considers this to be
useful starting point in considering the liability of the various undertakings
in the distribution chain of software.
Also Excluded: Distinction between the
products of the soil or things attached to or forming part of the land and the
land itself or interests therein: the
sale of sand from a quarry, for example, is not a sale of things attached to or
forming part of land, but a sale of an interest in the land itself such as a
mining lease in so much as the tenant takes away things from the ground.
CATEGORIES OF GOODS
1.
Existing goods
These are goods that actually exist when the contract is entered into,
these are goods that are owned or possessed by the seller. Existing goods may be specific-meaning goods
identified and agreed upon at the time a contract of sale is made, for example
this particular car or this particular load of potatoes or unascertained- which
is not defined by the Act, but they
seem to fall into three main categories:
1.
Goods to be
manufactured or grown by the seller ,
which are necessarily future goods
2.
Purely generic goods, for example, one
thousand tonnes of wheat , which must be future goods, at least where the seller
does not already own sufficient goods of the description in question which can
be appropriated to the contract. It seems even where he has sufficient wheat
but and such has been referred to in the generic sense, until the wheat has
been appropriated to the contract, the mere fact that the seller has sufficient
goods for the purpose seems to be irrelevant.
3.
An unidentified part of a
whole, for
example, one thousand tonnes out of a particular load of two thousand tonnes.
NB Atiyah comments that the distinction between these categories seems
to be only a matter of degree, and in a particular case it may be slight
indeed. The failure of the Act to draw these distinctions has led to
unfortunate results, such as, in relation to b and c above, difficulties in
connection with the passing of property, risk and in connection with the
doctrine of frustration.
4.
Future goods
These are goods yet to be produced or grown and don’t necessarily exist
and are not in the possession of the seller.
They are basically:
a) Goods not yet in existence
(b) Goods in existence but not yet acquired by the seller
It is probably safe to say that future goods can never be specific
goods within the meaning of the Act. Where by a contract for sale the seller
purports to effect a present sale of future goods, the contract operates as an
agreement to sell the goods sec7(3). The most important question in connection
with future goods, the passing of property, will be dealt with later.
5.
Sale upon a Contigency
NB There may be a contract for the sale of goods the acquisition of
which by the seller depends upon a contingency which may or may not happen. If
the contingency does not occur the contract will not become operative at all
and neither party is bound.
6.
A Spes or Sale of a
Chance
Sale of a spes, a chance must be distinguished from the contingent sale
of future goods, though the distinction is not so much as to the subject matter
of the contract but as to its construction. It is thus possible for a person to
agree to buy future goods from a particular source and to take the chance or
the risk of the goods never coming into existence. For example a person may
agree to buy whatever crop is produced from a particular field at a fixed
price. Such a transactions could be, as
a matter of construction, amount to either (a) a contingent sale as
above, or (b) an unconditional sale, where the seller may absolutely undertake
to deliver the goods, so that in effect he warrants that there will be a crop, in which case, if there
is no crop , he will be liable for non-delivery, or (c ) it may be a sale
of a mere chance , that is the buyer may
take the risk of the crop failing completely, in which case the price is still
payable.
An a spes arises where a potential buyer agrees to buy future goods from
a particular source and agrees to take the risk of the goods never coming into
existence e.g. I agree to buy whatever crop is produced from plot ‘A’ of your
land in Kitale Town at a thousand shillings per bag. The buyer has offered to buy whatever crop is
grown on that land and is taking a chance because the crop might never get
grown. It looks like a gamble and in a
gamble one party stands to lose and one party stands to gain. The buyer takes the risk and undertakes to
pay the price of the non-existent goods.
The seller undertakes to produce and deliver the crop come rain come
shine. So there is no winner and no
loser. If the goods do not get produced
on that piece of land, the seller is bound to deliver and he might have to go
out and buy the goods elsewhere because he must deliver. The buyer by undertaking to pay 1000 still
has to pay 1000 even if the crop price was to drop to 200 per bag because he
has undertaken to do the same. It is a risk by the parties, the seller
undertaking the risk that the goods might never be produced and the buyer
taking the risk that the price might depreciate in the meantime.
KEY TYPES OF GOODS
There are two key types of goods
1.
Specific/ascertained
2.
Unascertained/future goods.
The crux of Sale of Goods Contract is the passing of the property in
the goods from seller to buyer. This can
only happen where the goods are specific but where goods are unascertained,
property cannot pass. Pursuant to Section 18 of the Sale of Goods Act where
there is a contract for the sale of unascertained goods, no property in the
goods is transferred to the buyer unless and until the goods are ascertained. Specific goods are goods which have
been identified, agreed upon and set aside by the parties for the contract and
the goods can be specific either at the time the contract is entered into or
they can be made specific in the course of dealing.
For instance when talking of a motor vehicle, you will be talking about
the engine number and the chassis number being what you specified so only that
vehicle is the specific goods subject of the contract. Only the property in
specific goods will pass. No other goods
will do. Pursuant to Section 19(1) of the Act where there is a contract for the
sale of specific or ascertained goods, the property in them is transferred to
the buyer at such time as the parties to the contract intend it to be
transferred and for the purpose of ascertaining the intention of the parties,
regard shall be had to the terms of the contract, the conduct of the parties
and the circumstances of the case.[4]
With regards to an identified
part of a specific whole, the case of Kursell V. Timber Operators &
Contractors Ltd will be important. The Plaintiff in this case sold to
the defendant all the trees in a Latvian forest which conformed to certain
measurements namely 15 meters on the date of the contract. The Buyer would have 15 years on which to cut
and remove the timber. Almost
immediately afterwards, the Latvian Parliament passed a law confiscating the
forest. The matter went to court and
went to the House of Lords primarily on one issue. Had the property in the trees passed from the
Seller to the Buyer or as one of the Judges did “whose forest and therefore the
trees was confiscated by Parliament?
Remember he who has the property bears the risk. The court held as follows:
“The property in the
goods had not passed to the defendant the buyer as the goods were not
sufficiently identified since not all the trees were to pass to the buyer but
only those conforming to the stipulated measurements namely 15 metres.”
TRANSFER OF PROPERTY
In this context, property means and includes title, ownership. Transfer
of Property involves some action by the parties themselves. If there is a contract to be signed for
ownership to pass from seller to buyer, then you sign and transfer.
In passing of property, the parties need not do
anything. Basically this is ownership
moving from seller to buyer by operation of the law. It is inactive there is no direct
participation of the parties. Property in the goods means ownership in these
goods.
The Practical
Consequences of Transferring Property
1.
If property has passed to the buyer the buyer has a title to them and
even when the seller becomes insolvent after the transfer, the fact that the
seller is still in possession does not entitle the receiver in bankruptcy to
touch the goods. Where there are two
legislations in conflict, ordinary legislation could mean that they have seen
some loopholes that need to be addressed so the latter takes precedent.
2.
If goods are delivered subject to a reservation of a title or property
(ownership) by the seller, then the buyer may have good title to the goods
should the seller become insolvent
3.
The right to sue a third party for loss or damage to the goods rests in
the person who has the property. The
owner is the one who can sue.
4.
The risk whether of damage or loss prima facie passes when property
passes. He who has property bears the
risk.
5.
Once property has passed the seller can only sue for price. The seller cannot file a suit seeking to
rescind the contract.
PASSING OF PROPERTY
Exactly when property passes depends on whether the goods are specific
or unascertained. [5]
Section 19 of the Sale of Goods Act provide that 19(1)“Where there is a
contract for the sale of specific or ascertained goods, the property in them is
transferred to the buyer at such time as the parties to the contract intend to
it to be transferred. 19(2) For the purpose of ascertaining the
intention of the parties, regard shall be had to the terms of the contract, the
conduct of the parties and the circumstances of the case.”
Where the sale involves specific goods, property passes when the
parties intend for property to pass.
Section 19 is the only section in Cap 31 that addresses local
circumstances. Section 19 (2) of the Act on the other hand raises issues of what
to consider when trying to ascertain intentions of the parties.
Under Section 20 of the Act unless a
different intention appears, the following rules apply for ascertaining the
intention of the parties as to the time at which the property in the goods is
to pass to the buyer:
1.
where there is an unconditional contract for the sale of specific
goods, in a deliverable state, the property in the goods passes to the buyer
when the contract is made, and it is immaterial whether the time of payment or
the time of delivery or both be postponed;
2.
where there is a contract for the sale of specific goods and the seller
is bound to do something to the goods for the purpose of putting them into a
deliverable state, the property does not pass until that thing be done, and the
buyer has notice thereof;
3.
where there is a contract for the sale of specific goods in a
deliverable state, but the seller is bound to weigh, measure, test or do some
other act or thing with reference to the goods for the purpose of ascertaining
the price, the property does not pass until that act or thing be done, and the
buyer has notice thereof;
4.
when goods are delivered to the buyer on approval or “on sale or
return” or other similar terms, the property therein passes to the buyer:
1.
when he signifies his approval or acceptance to the seller or does any
other act adopting the transaction;
2.
if he does not signify his approval or acceptance to the seller but
retains the goods without giving notice of rejection, then, if a time has been
fixed for the return of the goods, on the expiration of that time, or, if not
time has been fixed, on the expiration of a reasonable time;
Section 20 (a) to (d) deal with Sale of Goods Contract where the goods
are specific and there are other things to be done. In (b) where goods are specific and the
seller has to put them in a deliverable state, until this has been done and the
buyer notified property does not pass.
Under Section 20 (e) (i) where
there is a contract for the sale of unascertained or future goods by
description, and goods of that description, and in a deliverable state, are
unconditionally appropriated to the contract, either by the seller with the
assent of the buyer or by the buyer with the assent of the seller, the property
in the goods thereupon passes to the buyer; and assent may be express or
implied, and may be given either before or after the appropriation is made;
(ii) where, in pursuance of the contract, the seller delivers the goods to the
buyer or to a carrier or other bailee or custodier (whether named by the buyer
or not) for the purpose of transmission to the buyer, and does not reserve the
right of disposal, he is deemed to have unconditionally appropriated the goods
to the contract.
Section 20 (e) does not deal with specific goods ‘appropriation’ means
selected and put aside. The action of
appropriation makes the goods specific.
You still need to ascertain the intentions of the parties.
Section 20 (d) Illustration: if you go to buy a Matatu and you say you
want such and such a Matatu and you are given one to test drive and when you
come back from the test drive you have already written words on the Matatu,
that act is inconsistent with the rights of the owner. Your action amounts to conversion. S. 20 (d)
(2) the action of painting the vehicle is taken to indicate that property has
passed. The intention is that when the
buyer does something inconsistent with the rights of the seller. S. 20 (e) the
intention of the parties is that property will pass. S. 20 (e) (ii) Property
passes upon delivery of goods in this Section.
Rules in Section 20
1.
Quite often the parties have no clear intention or expressly stated
intention as to when the property will pass and therefore they don’t have the
intention of deciding that actually you do not often get into that discussion
normally. The intentions of the parties
which Section 20 deals with basically are imaginary.
2.
Even if the parties have expressed certain intentions, it will be of no
consequence if property has already passed according to rules laid down in
Section 20. Section 20 deals with
intentions i.e. 20 (e) which says where …….
The property is meant to pass when the goods are either loaded or
delivered to the agent of the buyer.
This is not the truth the truth being that the intentions were never
discussed. It is the courts that will
sit down and apply the said rules after there has been a breach. The intention is only constructed by courts
after the behaviour.
The case of Dennant vs. Skinner & Collom is
Important for:
1.
It shows when the term passing of property is appropriately used. The property will have passed irrespective of
intentions of the parties.
2.
The decision in Dennant vs. Skinner raises a
complication as to whether the Sale of Goods Law is a facilitative or command
law. These two rules are violated here
and one is left wondering how to read
The plaintiff an auctioneer sold a car to Mr. X by auction. Mr. X was a swindler and gave a false name
and address and he asked the auctioneer to allow him to take the car (goods)
away in return for his cheque. The
Plaintiff allowed Mr. X to take away the goods without paying and the
auctioneer was left with a cheque but before the Swindler Mr. X took the goods
away, the Plaintiff required him to sign a document which stated that the title
to the vehicle would not pass until the cheque cleared. Mr. X upon receiving the goods sold the car
to the Defendant and what went to court was the dispute as between the auctioneer
(plaintiff) and the defendant (buyer) as to who had the better title. The issue was whether the property in the car
had passed from the auctioneer to the fraudster since you cannot transfer that
which you don’t own and if X had no property in the car, (the intention of the
parties was that the property would not pass until the cheque was
cleared). We can say that the intention
was clear that property did not pass since the cheque didn’t clear.
The other argument was that in an auction sale under Section 58
property in the goods passes to the highest bidder on the fall of the hammer.
It was held that applying Section 58, property passed to the fraudster when the
hammer fell and by the time the parties signed the document, property had
already passed. Document was signed
after the hammer had fallen and therefore X had property in the goods and could
pass a good title to the buyer. If you
apply Section 20 (a) you arrive to the conclusion that property would pass
after the payment was done.
In the case of auction when is a contract made? Is it at the fall of the hammer or at the
agreed time. Read the case of Kursell V.
Timber Operators & Contractors ltd. Section 20 (a). You come across the
term ‘deliverable state’ goods are in a deliverable state if the buyer will be
bound to take delivery of those goods. Does this mean that if the buyer is not
bound to take delivery of goods, then the goods are not in a deliverable
state? When you talk of deliverable
state, the buyer is not bound to take delivery if the goods are not deliverable
or do not conform to the contractual terms and the buyer cannot be forced to
take delivery.
Defects in the goods do not prevent the passing of property. The fact that goods do not conform to
specifications does not prevent the passing of property. That is why the buyer cannot be forced to
take delivery of goods if they do not conform to the contract. Can a person reject his/her own goods? The intention of the parties should have
been that property will not pass until one has examined the goods and the goods
conform to all specifications of the contract.
The intention in S. 35 that the property will not pass in goods until
they have been examined and that they conform to the description and everything
else in the contract.
Read concept of identification and setting aside.
Identification is most important though it does not conform to
practice. In practice identification is
usually for specification and not amount.
PRICE[6]
A Price in a contract of sale may be:
1.
Fixed by the contract
2.
Left to be fixed in a manner thereby agreed
3.
Determined by the course of dealings between the parties
4.
A reasonable price as a question of fact
It has been noted that the wording of the section 10 on price gives
rise to some difficulty that may not have been anticipated in relation to price
under (b) above.[7]
It assumes that an agreement has been reached by the parties and then proceeds
to explain the methods by which the price can be ascertained. Theoretically, it
should be noted that in the event of an action on the sale , the first point
which must be considered is whether in fact a contract was agreed upon by the
parties, and in the absence of agreement as to the price ,or even the mode in
which the price is to be paid, may show that the parties have not yet reached a
concluded contract. Further complication arises from the provision that the
price can be left to be fixed in a manner agreed at some future date. Does this exclude the possibility that the manner
may simply require the parties to agree on the price?
One view is that the parties simply cannot make a binding contract for
the sale of goods at prices to be agreed, and that section 10 does not apply to
such as case because under that section the buyer would have to pay a
reasonable price, that is a price fixed by a judge or arbitrator, which is not
the same thing as a price agreed between the parties.
There is support for the above view in case law, such as May
& Butcher vs. the King [8]where the House
of Lords held that an agreement for the sale of goods at a price to be later
fixed by the parties was not, in the circumstances of the case, a concluded
contract. Although some later decisions departed from the above case, modern
decisions have reiterated the old leaning that the law does not recognize an
‘agreement to agree’ as a binding contract,( although Atiyah does not support
this position). In an Australian case, Hall vs. Busst (1960) it was
suggested that sec. 10 only applies where goods have been delivered and
accepted , and that it has no application to a purely executory contract( although this dicta have not followed in even in Australia.
Atiyah is of the view that the above suggestion would be good sense, as
it attempts to distinguish between executed and executor contracts for this
purpose. The reasoning is that if
parties have already begun to carry out the contract, it is more troublesome as
well as more unjust to declare the transaction void altogether.
Subsequent cases since 1983, even where not directly related to sale of
goods contracts, have in dicta indicated that where an agreement has been
partly performed, the courts will strain to find some way of enforcing the
intended arrangement even in the absence of agreement on a term which might
have been fatal if the whole agreement remained purely executory.
It seems possible therefore that where the parties agree on a sale of
goods at prices to be agreed in the future, and the goods are actually
delivered and accepted , or the agreement is otherwise partly performed, the courts may now be willing to
treat this as a binding contract to sell
at reasonable prices , and to provide a machinery for the ascertainment of such
reasonable prices, even in the absence of a provision such as an arbitration
clause by which this could be done under the contract itself.
Case law seems to stress that in commercial cases, it is the intention
of the parties which is decisive. A failure to agree even on relatively
important terms is not necessarily fatal. Provided that the parties intended to
be bound, and that the agreement is sufficiently complete to be enforced as a
contract, it is immaterial that they failed to agree on some term which might
appear, objectively speaking, to be important or even essential.
A more recent 1992 case Walford vs. Miles has followed the
original position in Butcher vs. King, and similar
decisions, where the House of Lords held that an agreement to negotiate was not
enforceable. This appears to be the position for the time being in England and
Wales, but clearly the matter is far from settled, and advocates have to be
wary of the pitfalls of opting for or including such provisions in a contract.
AGREEMENT TO SELL AT
VALUATION[9]
Parties can agree to sell goods on terms that the price is to be fixed
by valuation of a third party. Where the third party cannot or does not make
the valuation the agreement is avoided. Where the goods or part of the goods
thereof have been delivered to and appropriated by the buyer he must pay a
reasonable price there for.[10]
Where the third party is prevented from making the valuation by the fault of
the seller or buyer, the party not at fault may maintain an action for damages
against the party at fault.
The position of law is that an agreement for the sale of goods at a
valuation made by a third party must be distinguished from an agreement for
sale at a valuation without naming any third party who is to make the
valuation. Where third party is named sec.11 applies and where the third party
does not make the valuation the contract is avoided subject to provisions of
sec.11 (2) on damages.
In the latter situation, for example, sale of stock ‘at valuation’, the
agreement is in effect a sale at a reasonable price, and if no valuer is agreed
and the parties otherwise fail to come to some arrangement for valuation, the
contract will stand as a contract for sale at a reasonable price under sec.
10(2) above. It may be difficult to envisage circumstances where parties would
deny appointed valuer access to the goods, particularly the buyer, but the
drafters may have wanted to cover for all possible contingencies. Where a sale
at a valuation is agreed upon and a valuation is made by a third party agreed
upon, the parties are bound by the valuation. There are exceptions to the
above, for example, in cases where:
1.
There is negligence by the valuer, for example where he has adopted a
wholly incorrect basis for his valuation, in which case he will be personally
liable for negligence.
2.
Where there is fraud or collusion.
OBLIGATIONS CREATED UNDER
SALE CONTRACT[11]
STATUTORY IMPLIED TERMS
It should be noted that in the act the obligations that are stipulated
fall into two broad categories, namely, conditions and warranties, and that
there are also stipulations as to time and sale by sample. However in the
1960’s it was suggested in a number of decisions that the distinction between a
condition and a warranty was not exhaustive. It was suggested that there were
terms more important even than conditions-fundamental terms, and there was a
category of terms mid-way between conditions and the warranties. This presentation will proceed on the basis
that the obligations created are as follows:
1.
Fundamental terms
2.
Conditions
3.
Innominate terms
4.
Warranties,
5.
Stipulation as to time
6.
Representations
A. FUNDAMENTAL TERMS
For practical purposes it matters little whether a term was called a
condition or a fundamental term. In
either event, a breach of the term, however minor in itself, justified the
innocent party in repudiating his own obligations under the contract, and
treating it as discharged. But the doctrine of the fundamental term was devised
principally to deal with the growing menace of the unfair and unreasonable
exemption clause. It was held in a large number of decisions that an exemption
clause, no matter how sweeping and no matter how broadly drafted, its language
could not protect a guilty person from liability for breach of a fundamental
term of the contract.
In the 1967 case of the SUISSE
ATLANTIQUE, the House of Lords cut this
doctrine down to nothing more than a mere rule of construction, and not a rule
of law. This meant that in the last resort, the parties must be free to make
their own contracts, however unfair or unpalatable the terms might be. So long
as it was absolutely clear that the wording of the exemption clause were
designed to cover the circumstances that had occurred, no matter how
fundamental, the courts were obliged to apply the clause!
Although some inroads were made on this doctrine in subsequent
decisions, it became clear in the case of Great Britain that legislative
intervention was called for. This was
forthcoming in the form of the Supply of Goods (Implied Terms) Act 1973, and
the Unfair Contract Terms Act, 1977 and Unfair Terms in Consumer Contracts
Regulations, with its subsequent amendments.
These laws gave the British courts a substantial degree of control over
unfair exemption clauses. Clauses which are unreasonable can usually be struck down and it will be less necessary
for parties to try and persuade the
courts to construe the exemption clause in a strict way so that it does not
cover the breach of a fundamental term, and increasingly the distinction
between fundamental terms and conditions may cease to be of much significance.
The principal use of the expression fundamental term is in written contracts
where the draftsmen sometimes use it in preference to condition in an attempt
to make it clear that any breach of such a term will enable the innocent party
to terminate. In Kenya the consumer protection law covers quality of goods and
services, and provides that the supplier warrants that these are of reasonably
acceptable quality, and that anything in a consumer agreement that attempts to
negate the implied terms in the sale of goods act is void. The Constitution also provides for consumer
protection in similar wording, including the right to compensation for loss or
injury arising from defects in goods and services.
B. CONDITIONS[12]
The Act does not define the term condition but only explains the term
by reference to its legal effect. It can be defined as a term which , without
being the fundamental obligation imposed by the contract, is still of such
vital importance that it goes to the root of the transaction, and its breach entitles the
injured party the right to repudiate, e.g.
reject the goods or refuse to pay.
IMPLIED CONDITIONS
1.
The seller has a right to sale the goods in the case of a sale
2.
The seller will have a right to the goods at the time when the property
is to pass in the case of an agreement to sale. Example: on Jan 5th a dealer agrees to sell
a painting which he has himself has agreed to buy from a museum. The contract
states that the property is to pass from the dealer to the buyer on March 1.
The dealer will not breach the implied condition on right to sell merely
because he cannot pass ownership to the buyer at the time of the contract. The
dealer will breach condition if he cannot pass ownership on March 1.
3.
That the goods shall correspond with the description
4.
That the goods( bulk) shall correspond with the sample
5.
Fitness for purpose in identified cases
IMPLIED WARRANTIES
1.
Implied warranty that the buyer shall have and enjoy quiet possession
of the goods
2.
That the goods shall be free from any charge or encumbrance in favour
of third party not declared or known to buyer before or at the time of the
sell.
C. INNOMINATE TERMS
The practice for a long time has been to consider the seriousness of
breach in relation to its classification of the term as a condition or
otherwise, and not relating to the consequences of breach. In reality this
meant that it was possible to shut out from consideration as irrelevant the
actual consequences of the breach of contract, yet some breaches have
relatively trivial consequences and do not justify repudiation of the contract.
Since the 1960’s there has been something of the beginnings of a legal
revolution in relation to this concern. The position is that when deciding
whether or not a term is a condition or a warranty the court considers whether
the parties thought that the term went to the root of the contract at the time
when they made the contract.
Innominate terms adopt a different approach. The test to decide whether
a breach of an innominate term allows termination of the contract is to ask
whether the breach which actually occurred deprived the injured of
substantially the whole intended benefit of the contract. If the breach did not
do this, the only remedy is damages. If the breach did do this, then both
damages and termination of the contract is available.
D. STIPULATIONS AS TO
TIME
Unless a different intention appears from the terms of the contract,
stipulations as to time of payment are not deemed to be of the essence of a
contract of sale. Whether any other stipulation as to time is of essence in the
contract or not depends on the terms of the contract. However in commercial
practice there is a strong tendency to treat stipulations as to time as conditions, breach of which is thus a
repudiation which can be instantly accepted, thereby terminating the contract
while leaving open a claim for damages.
This tendency is noticeable especially in commercial contracts where a
contractual breach may create a situation in which the innocent party needs to
know at once what his rights are, he may need to know immediately whether he is
entitled to make alternative arrangements, rather than wait and see what the
consequences of breach are.
It thus seems that in ordinary commercial contracts for the sale of
goods, terms as to the shipment, delivery, payment and the like, as well as to
documents to be presented and other incidental matters to be performed by
either party, will still usually fall to be treated as conditions, any breach
of which entitles the other party in repudiating the whole contract. Lord
Denning has cautioned that courts should not be too ready to interpret
contractual clauses as conditions.
E. REPRESENTATIONS
From the terms of the contract it is necessary to distinguish mere
statements or representations, which are not part of the contract but may have
serious consequences nonetheless. Whether a statement is or is not a part of
the contract is said to depend upon the intention of the parties, but this is
an elusive criterion since the courts have been prepared to hold that an oral
statement may override the written terms of the contract. The tendency these
days frequently appears to be for the courts to hold a statement to be a term
of the contract when they think it reasonable to impose liability in damages on
the person making the statement, and vice versa. Thus to attempt to decide
whether a statement is a term of the contract or a mere representation without reference
to the results is, in many cases, to put the cart before the horse.
THE TRANSFER OF TITLE
The Sale of Goods Act differentiates between the ‘Transfers of Title”
and “Transfer of Property as between a buyer and a seller”. The “Transfer of
Property as between a buyer and a seller” dealt with under sections 18-22, does
indeed have the obvious meaning i.e. the process by which ownership passes fro
one party to the other. In contrast under ‘Transfers of Title’ the concern is
with a number of situations in which a seller who is a non-owner, or a person with a defective title can
nevertheless confer a good title to the buyer and in doing so defeats the
claims of the true owner or of a person with a superior title. Of course these
are exceptional situations under section 23 of the Act which sets out the basic
rule in the ancient maxim nemo
dat quod non habet.
NEMO
DAT QUOD NON HABET PRINCIPLE
This principle deals with the transfer of title
by a non-owner of the goods. A seller with no right to the goods may
nonetheless pass a good title to a third party.
The question that arises is which of the two innocent people is to
suffer for the fraud of a third party. For instance a thief steals goods and
sells them to someone who buys in good faith and for value, a person hands
goods to an agent to obtain offers and the agent sells them without authority
and disposes of the proceeds; In all of these cases the law has to choose
between rigorously upholding the rights of the owner to his property, on the
one hand, and protecting the interests of the purchaser who buys in good faith
and for value on the other hand. As Lord
Denning once put it:
“In
the development of our law, two principles have striven for mastery. The first
is for the protection of property: no one can give a better title than he
himself possesses. The second is for the protection of commercial transactions:
the person who takes in good faith and for value without notice should get a
better title. The first principle has
held sway for a long time, but it has been modified by the common law itself
and by statute so as to meet the needs of our times.”
Cap
31 Section 23 (1) states as follows: -
“Subject
to the provisions of this Act, where goods are sold by a person who is not the
owner thereof, and who does not sell them under the authority or with the
consent of the owner, the buyer acquires no better title to the goods than the
seller had, unless the owner of the goods is by his conduct is precluded from
denying the seller’s authority to sell.”
This rule is frequently dignified by the use of
Latin in the tag nemodat quod non habet, or for short nemo dat. The part in Section 23 stating that a
non-owner cannot pass title – is merely a re-enactment of the common law
principle so it would seem that that part of the subsection, or the common law
in lieu, is of the subsection (beginning with the word ‘unless’) has the
positive effect of enabling a non-owner to pass a good title, although this
also appears to be merely a restatement of the common law doctrine of
estoppel. The only substantive question,
therefore, is whether a person who has merely agreed to buy the goods can rely
upon the doctrine of estoppel.
When we look at
nemodat as a topic, the take-off point is that a person who is not the owner of
goods cannot sell or pass a better title than the owner. Even though you are not the owner you can
sell and pass a good title if you have the consent of the owner. The problem
with nemodat is that it was developed with the aim to do justice, we are not
talking about fairness, we are talking about justice. Fairness is substantive, justice is
procedural. Nemodat rule balances
justice or the legal rules being followed and then fairness on the other hand
i.e. are the social ethos endorsed as the right thing to do?
In the nemodat rule,
we are balancing between justice for 2 innocent parties each claiming ownership
or title to the same goods and asserting that he/she has a better claim on
those goods than the other party. The
problem can arise in any of the following
1.
Where
a thief steals goods and sells those goods to someone else who buys in good
faith, for value and without notice;
2.
Where
a swindler buys goods and induces the seller to let him have possession of the
goods on credit and he promptly resells or pledges those goods for whatever he
can get;
3.
Where
the person hands goods to an agent to obtain quotations for those goods and the
agent sells those goods without authority or disposes of the proceeds of the
sale;
4.
Where
a person sells goods, transferring the property in the goods but retains the
possession of the goods and then fraudulently resells those goods to a third
party.
In all these
scenarios, the law has to choose between upholding the rights to private
property of the owners to the goods and this right is a constitutional right
which is protected that one cannot lose property in their goods. Legal rights to private property are protected
while at the same time trying to promote national and international trade. You have 2 innocent persons claiming title to
the goods and therefore you have to look at the nemodat rule and you are saying
that the basic rule is that a person cannot give that which he/she does not
have. If you have no ownership of goods
you cannot pretend to sell those goods to another person. The court is now
caught up in the exercise of protecting the owner of the goods while the same
time protecting buyers who buy in good faith and without notice.
The Rule of Estoppel
or Exclusion is a rule of evidence and not a rule of law. A person can be precluded from giving
evidence if by his conduct he has led other persons to believe that the goods
were his.
A non-owner cannot
pass any good title to another person except where the owner is estopped from
denying the authority of the seller.
Where a seller sees his goods being sold and he keeps quiet, he is
estopped from giving evidence that the goods were his. His conduct of omission precludes him from
claiming the goods. What is the effect where the owner has been estopped the
person who has the goods keeps the goods.
The effect of estoppel is to invest title to the 3rd party
who is an innocent buyer.
Eastern Distributors Ltd V.
Goldring (1967) 2 QB
In pursuance of a
plan to deceive a finance company, one M signed and delivered forms to C which
enabled C to represent that he had M’s authority to sell a car belonging to
him, it was held by the court of Appeal that M was estopped from setting up his
title against the plaintiffs who had bought the car from C. It was also held that the estoppel in fact
operated to pass a good title to the plaintiffs not only against M himself, but
also against a buyer in good faith from M.
The effect of
estoppel in sale of goods is to pass title.
EXCEPTIONS TO NEMO DAT
It is constitutional
right of every person to private property and the need to promote international
and national commerce at the same time protecting individual rights to own
property. All these issues are balanced
in nemo dat. The basic rule in nemodat is that a person who is not an owner of
goods or who does not sell those goods under the authority or consent of the
owner cannot pass a better title than she/he had. The following are the exceptions
to “nemo dat” principle:
1.
Estoppel- (s.
23(1)
2.
Sale by a factor-
a mercantile agent whose business is to sell or otherwise deal in goods (s.
23(2))
3.
Sale under a
voidable title not avoided at time of sale (s. 24)
4.
Resale by a seller
in possession (s. 26(1))
5.
Sale by a buyer in
possession (s. 26(2))
6.
Sale under statutory
power of sale (e.g. Disposal of Uncollected Goods Act )
7.
Sale under common
law power of sale- e.g. By agent of necessity
8.
Sale under the
order of a competent court
The first exception
is provided by the doctrine of estoppel which is embodied in the concluding
words of S. 23 “… unless the owner of the goods is by his conduct precluded
from denying the seller’s authority to sell.” This provision takes us back to the common
law doctrine of estoppel for it gives no indication when the owner is precluded
from denying the seller’s authority to sell.
However there are two distinct cases where the owner is so precluded:
1.
Where
he has by his words or conduct represented to the buyer that the seller is the
true owner, or has the owner’s authority to sell, this is called estoppel by
representation.
2.
Where
the owner, by his negligent failure to act, allows the seller to appear as the
owner or as having the owner’s authority to sell. This is called estoppel by negligence.
However both types
estoppel rest on some kind of representation or misrepresentation, which may be
by words or conduct of the true owner of the goods. The misrepresentation may
also be by some negligent act or omission of the owner.
There are three
requirements of estoppel.
1.
There
must be a representation of facts
2.
This
representation must be unambiguous
3.
The
representation must be relied upon and acted upon by a third party.
A good illustration
of estoppel by words is explained in the case of Henderson & Co vs.Williams.
ESTOPPEL BY REPRESENTATION
The scope of this
exception depends in part on the scope put on the dictum of Ashurst J in Lick
barrow v Mason
“We
may lay it down as a broad general principle that, wherever one of two innocent
persons must suffer by the acts of a third, he who has enabled such third party
to occasion the loss must sustain it (emphasis added)”
Cases where no representation sufficient to found an
estoppel could be found
1.
Giving
employee authority to dispose of goods
Farquharson
Bros v C King & Co[13]:
the owners of goods, who were timber merchants, employed a clerk who was
authorised to sign delivery orders on the strength of which timber would be
released to customers.
2.
Allowing
third party to have possession of goods and registration documents
Mercantile
Bank of India Ltd v Central Bank of India Ltd [1938] AC 287: S
pledged railway receipts (documents of title) with the Central Bank in return
for an advance. In accordance with usual
practice, the bank returned them to S to enable him to obtain clearance of the
goods, but S fraudulently used them to pledge the goods with the Mercantile
Bank.
Cases
where a sufficient representation was made
Henderson
& Co v Williams[14]
Goods were in a warehouse owned by D. On
the owner’s instructions, the goods were transferred into the name of F. D also supplied P with a written statement
that held to P’s order. Both were
estopped from denying that F had authority to sell.
Eastern
Distributors Ltd v Goldring[15] The
O signed 4 hire purchase forms in blank (the proposal and agreement for a car
and van) and left them with S. Although
the proposal for the car did not go through S carried on with the proposal for
the van (contrary to O’s instructions) and the P finance co bought the car from
S. Held: S was armed by O with documents
which enabled him to represent to P that he was the owner of the van and had
the right to sell.
Representation
may be limited by the circumstances of the case
Motor
Credits (Hire Finance) Ltd v Pacific Motor Auctions Pty Ltd (NB
first instance decision went to PC on different grounds). Representation was only that agent had
authority to sell in the ordinary course of business.
ESTOPPEL
BY WORDS
A good example of
estoppel by words is the decision of the Court of Appeal in Henderson & Co V Williams in
this case, G & Co. were induced by the fraud of one F to sell him goods
lying in certain warehouses of which the defendants were warehousemen. The circumstances were such that the contract
between G & Co and F was void for mistake.
On the instructions of G & Co, the defendants transferred the goods
in their books to the order of F. F sold
the goods to the plaintiffs who, being suspicious of the bona fides of the
seller, made inquiries of the defendants.
The latter supplied the plaintiffs with a written statement that they
held the goods to the order of F, and when this did not satisfy them, they
endorsed it with a further statement that they now held the goods to the
plaintiffs’ order. G & Co., not
having been paid by F, instructed the defendants not to deliver the goods to
the plaintiffs but to themselves, and they gave them an indemnity against so
doing. It was held that both G & Co.
and the defendants were estopped from denying the plaintiffs’ right to the
goods, the former because they had represented that F was the owner by ordering
the defendants to transfer the goods into his name in their books, and the
latter because they had atoned to the plaintiffs, that is represented to them,
that they held the goods to their order.
ESTOPPEL BY CONDUCT
In the case of Commonwealth Trust Limited vs. Akotey the
respondent Akotey who was a grower of cocoa in Ghana consigned by railway 1050
bags of cotton to Laing and sent him the consignment notes. He had previously
sold cocoa to Laing, but on this occasion no agreement of sale had been
concluded, Laing’s offer of $2.50 a tonne having been rejected as too low.
Before this difference as to price having g been settled Laing sold the cocoa
to Commonwealth Trust Limited, the appellant in this case, who bought in good
faith. He handed the consignment notes to their agent who re-consigned the
cocoa to the appellants. The appellants bought in good faith and in full price.
The respondents then sued the appellants for damages for conversion. It was held that the respondents were by
their conduct precluded form setting up their title against the appellants and
their action failed.
ESTOPPEL BY NEGLIGENCE
This is where the
owner is under a duty of care to the subsequent innocent purchaser and he has
by his negligence allowed a third party to represent himself as the owner or
having the owner’s authority to sell. The application of the estoppel by
negligence is severely limited because of the difficulty of establishing a duty
of care. In Coventry
Shepherd & Co v Great Eastern Railway Co the rule of estoppel by negligence applied.
Duty
of care
1.
There is no general duty of care on the owner
of goods to protect his own interest in those goods or to protect the possible
interest of third parties. For example, Moorgate Mercantile Co Ltd v Twitchings,
no duty to register with Hire Purchase Info Ltd (private body keeping register
– 98 % vehicles on record). Applied in Industrial
and Corporate Finance Ltd v Wyder Group.
2.
A rare case where a duty of care was found is
Coventry Shepherd & Co v Great
Eastern Railway Co Ds
negligently issued two delivery orders in respect of the same goods. Person to whom they were issued was thereby
able to pledge and sell goods. Held
estopped. Documents had a mercantile
meaning attached to them and therefore owed a duty to merchants and people
likely to deal with those documents.
Breach
and causation
3.
Even if duty of care established, can be
difficult to prove breach and causation.
In Mercantile Credit Co Ltd v
Hamblin, held by CA under a duty of care re the preparation and custody
of contractual documents (e.g. like Shepherd
and Eastern v Goldring) but not
estopped because:
1.
On the facts not unreasonable to have trusted
the dealer – well known and apparently reputable
2.
Even if had been negligent the proximate
cause was the fraud of the dealer.
1.
SALE
UNDER THE FACTORS ACT 1889 : SALE BY A
MERCANTILE AGENT
The second exception
of the nemo dat principle is somewhat controversial and is found in section 2
of the Factors Act of 1889 of England. Section 23(2) of the Sale of Goods Act
carries a similar exception. This section says that:
(2) Nothing in this Act shall
affect—
(a)
The provisions of any enactment enabling the apparent owner of goods to dispose
of them as if he were the true owner thereof;
Section 2 of the
Factors Act 1889 provides:
Where
(a) a Mercantile Agent is, (b) with the consent of the owner, (c)
in possession of goods or the documents of title to goods, (d) any sale, pledge or other disposition of the
goods made by him (e) when acting
in the ordinary course of business as a mercantile agent, shall … be
valid as if he were expressly authorised by the owner of goods to make the
same; provided that (f) the person taking under the disposition acts in
good faith, and has not at the time of the disposition notice that the person
making the disposition has not authority of the same.
Section 26 (1) and
(2) of the SGA reproduces section 1 of the Factors
Act. Section 1 of the Factors Act uses the term merchantile agent and
define s it as follows:
For
the purposes of this Act the expression “merchantile agent “shall mean a
Merchantile agent having in he customary course of his business as such agent authority either to sell goods
or to cosign goods for he purposes of sale, or to buy goods, or to raise
money on the security of goods.
Section 2 of the
Factors Act stipulates that a sale by a merchantile agent passes a good title
to third parties despite the fact that merchantile agent is not the owner of
the goods. The case of Kapadia vs. Laxmidas held indirectly
that the Factors Act is a statute of general application to Kenya.
CONDITITONS
TO BE FULFILLED BY THE MERCHANTILE AGENT
1.
Must
be a Merchantile Agent
Section 26(3) defines
a merchantile agent. The person selling the goods must be a merchantile agent
at the time he sold the goods.
2.
The
Merchantile Agent must be in possession of the goods with the consent of the
Owner
The merchantile agent must be in possession of
the goods with the consent of the owner. The question of ownership was
addressed in the case of Lloyds bank limited vs. American National
Trust and Savings Association. In this case the plaintiff lent money to
X who was a merchantile agent on the security of certain documents (bill of
lading). The bills of lading had been pledge with them. The documents were then
returned to X in order to enable him obtain the goods and sell as a trustee for
the bank. However X fraudulently pledged the same documents with the defendant
for another advance. The plaintiffs sued the defendant for the recovery of
these goods documents. The defendant’s defence was that they were protected by
section 2 of the Factors Act of 1889. One of the issues to be determined was
who the owner of the goods was. It was held that X the merchantile agent as
well as the plaintiff were the joint owners of the goods. Secondly, that the defendants had acquired a
good title under the Factors Act as against the plaintiff.
The question of
consent with regards to ownership deals with three there categories if issues.
A merchantile agent will have consent of the owner to posses the goods:
1.
If he obtains those good by larceny by trick
2.
If he obtains those goods by larceny by bailee
3.
If he obtains those goods by fraud or by
false pretences
For purposes of the
Factors Act however fraudulently the consent had been obtained by the
merchantile agent from the owner, the consent will be deemed to be proper
consent to the agent having possession of the goods. The only situation in
which the merchantile agent is deemed not to have the consent of the owner is
in situations where out rightly steals the goods.
1.
Larceny
by Trick
In the case of Folks
vs. Kings an owner of a car delivered it to a merchantile agent for
purposes of sale. The owner specified the price at which the car would be sold.
However, the merchantile agent could sell it at a lower price only with the
express consent of the owner. The merchantile agent intended to sell the car
immediately and pocket the proceeds. He obtained the car and sold it to at
third party who bought it in good faith and without notice if the fraud. The
merchantile agent pocketed the proceeds and delivered the car to King. Upon
discovery of the fraud the owner sued Mr. King for the return of the car or
alternatively the value thereof and damages for conversion. The defendant’s
defence was that he had acquired a good title under section 2 of the Factors
Act of 1889. The court held that the defendant had indeed acquired a good title
under section 2 because under the Act a merchantile agent had obtained the
goods with the owner’s consent. Although thus was larceny by trick the court
held that it could not read the mind of a merchantile agent.
2.
Larceny
by Bailee
A bailee tricks the
owner of the goods and sells it to a third party. This is illustrated in the case of Jerome vs. Bentley. In
this case the plaintiff who was an owner of a diamond ring entrusted it to a
certain Major Tatham. Major Tatham undertook to sell it on behalf of the
plaintiff. It was agreed that if he could not get a buyer within seven days he
would return the ring to the plaintiff.
Seven days elapsed and there was no buyer but Major Tatham proceeded to
sell the ring and pocketed the proceeds. He was subsequently criminally
convicted and the plaintiff sued the defendant for the return of the ring. The
court held that Major Tatham had not passed a good title to the defendant since
he had sold the ring after the expiry of seven days. However of the question of
consent, it was held that Major was in possession of the ring with the consent
of the owner.
3.
Obtaining
Goods by Fraud or by False Pretences
In Pearson
vs. Rose and Young[16] the
plaintiff delivered his car to X a merchantile agent in order to obtain offers
but he did not give the merchantile agent authority to sell it. The agent
obtained possession of the registration book by a trick in circumstances that
clearly showed that the owner had not consented to parting with possession of
it. The merchantile agent then promptly sold the car as he had intended from
the very beginning. The plaintiff sought to recover the car from the defendant
to whom it had been sold. It was held that the question as to whether the agent
had committed larceny by trick was immaterial. The only question was whether
the goods were in his possession with the consent of the owner. He did not
however have the consent of possession of the registration book with the
consent of the owner. Further that a sale without the registration book would
not have been a sale in the ordinary course of business. The defendants were
therefore unprotected by the Factors Act.
4.
The
Agent must have acted or Sold in the Ordinary Course of Business
This is basically to
say that he should have acted in the ordinary course of business as a
merchantile agent. However, it is not necessary that the act be a usual one.
For instance, in the case of Oppenheiner vs. Attenborough[17] fraudulently
obtained possession of diamond from a diamond merchant and pledged those
diamonds with pawn brokers. The agent was a diamond broker and it was proved
that diamond brokers do not usually pledge. It was held that the agent’s act
was nevertheless in the ordinary course of a merchantile agent and the pawn
broker was therefore protected.
According to Lord
Buckley acting in the ordinary course of business is acting within the hours of
business at a proper place of business and in other respect in the ordinary way
in which a merchantile agent would act.
The fourth condition is that the buyer must
prove that he took the goods in good faith and without notice that the sale was
made without the owner’s authority.
Finally
the
transaction effected by the merchantile agent and the innocent party must be a
sale, pledge or other disposition.
3. SALE UNDER A SPECIAL POWER OF
SALE
The third exception to the nemo dat principle is contained under
section 23(2) (b) and is referred to a sale under a special power of sale. The subsection is to the effect that nothing in this Act shall affect the validity of any contract
of sale under any special common law or statutory power of sale or under the
order of a court of competent jurisdiction. This
therefore qualifies the nemo dat principle
contained in section 23(1).
There are several common law
powers of sale which may be exercised by various persons.
First, pledges of goods or documents of
title can sale those goods pledged to them and be able to pass a good title. A
pledge at common law carriers with it an implied power of sale.
Secondly, agents acting within the
scope of their apparent authority are viewed in common law as having power to
sale goods and pass a good title. Furthermore agents of necessity who are
disposing of goods belonging to the principal can pass good title. However an agent
relying on the principle of necessity must show that he had no opportunity of
communicating with the principal to obtain instructions. Secondly the agent
must have acted in the interest of the principle and not his own interest.
Thirdly auctioneers fall in another
category of persons who are deemed to have a common law power of sale.
Auctioneers in possession are able to sell the goods and pass good title.
Lastly sale by executors or
administrators of estates of deceased persons are sale on the basis of a common
law power of sale. When acting in their
representative capacity, they can sell goods belonging to the estate and pass
good title.
Apart from
common law powers of sale there are also situations of statutory powers of
sale. The first such power is
conferred upon the unpaid sellers within the meaning of section 40(c) and
section 48(2). If a person has sold goods but he has not been paid for those
goods the sale of Goods Act gives him powers to resell the goods. In such
circumstances the original purchases cannot sue a third subsequent purchaser.
secondly under section
96(1) of the Land Registration Act, 2012 a statutory power of sale is given
to a chargee where a chargor is in default of the obligations under a charge
and remains in default at the expiry of the time provided for the rectification
of that default.
Thirdly, under the Distress for Rent Act, a
landlord can sell the property which he has seized from the tenants premises
for the non-payment of the rent and pass a good title. Similarly, a trustee in
bankruptcy under the Bankruptcy Act is entitled to sell the property of a
bankrupt person and convey a good title. I the area of companies, the
liquidators of a company under the Company Act have powers to sell the property
of the company in a liquidation of the company and pass good title.
Finally, under an order of the court any of the
orders issued by the courts for the disposal goods can be executed by a court
broker who then passes a good title to the purchaser within the meaning of section
44 of the Civil Procedure Act[18].
The courts may also authorise Sale of Goods where a decree holder has sought to
sell the goods because the party is unable to clear the money owed. The decree holder applies to the court to
attach the goods; neither the court nor the auctioneers are owners of the goods
but they can sell the goods.
4. SALE UNDER A VOIDABLE TITLE
This is embodied under section 24 of the Sale
of Goods Act, which states that “When the
seller of goods has a voidable title thereto but his title has not been avoided
at the time of the sale, the buyer acquires a good title to the goods, provided
he buys them in good faith and without notice of the seller’s defect of title.”
this section declares the general rule that that a party cannot avoid a
voidable contract once a third party rights have been acquired. The commonest
case in which a seller will have a voidable title is where he has obtained the
goods under a contract induced by misrepresentation (whether fraudulent or
innocent misrepresentation) but a contract can also be voidable on other
grounds such as duress and undue influence, mistake and drunkenness. It is important to distinguish between a
contract of sale which is void ab initio and one which is merely voidable
because section 24 only protects the third party in the case of voidable
contracts but not in the case of void contracts.
In Lewis vs. Averay, Lewis in Bristol,
advertised his Austine Cooper car for sale in the newspaper and agreed to sell
it at $450 to a man calling himself Greene, who claimed to be a well known
actor, Richard Greene, and showed a Pinewood Studio pass as evidence of this
identity. The rogue “Greene” was allowed to take way the car in exchange of a
cheque which was later proved to be worthless. Three days later the rogue sold
the car to Averay, a music student living in London, who bought in good faith.
The Court of Appeal held that the first sale was voidable for fraud, but not
void for mistake of identity, with the result that Averay got a good title.
The third party will be protected if he buys
the goods before the original contract has been avoided. As a general rule the
defrauded party can only rescind the contract by communicating with the other
party to the contract notifying him of the rescission. In other words the
claims of the buyer who relies on the section 24 will be defeated if, before he
makes his purchase, the original owner has validly exercised his right to avoid
the first transaction. This is normally done by giving a notice to the other
party, or by retaking possession of the goods.
However this rule since to be modified in the case of Car & Universal Finance Ltd v
Caldwell[19] ,
in this case Caldwell was induced to sell his car to Norris by way of fraud.
The court noted that although the innocent party rescinding a voidable contract
must normally communicate this to the other party, this was not the case in
this particular case. In this case the other party was a rogue who had acquired
a voidable title and then disappeared. Secondly it was held that the owner’s
action in going to the police showed a clear intention to avoid the contract.
Therefore the rogue’s title had been effectively avoided before the sale to the
defendant who thus acquired no title.
5.
SALE BY SELLER IN POSSESSION
The fifth exception to the nemo dat rule is in
section 26 (1) of the SGA. This section stipulates that
“Where a person having sold goods continues or is in possession of
the goods, or of the documents of title to the goods, the delivery or transfer
by that person, or by a mercantile agent acting for him, of the goods or
documents of title, under any sale, pledge or other disposition thereof, to any
person receiving them in good faith and without notice of the previous sale
shall have the same effect as if the person making the delivery or transfer
were expressly authorized by the owner of the goods to make it.”
There are several conditions that
must be fulfilled before this exception is invoked. The person must have sold
the goods but continues to be in possession of the goods and he must be in
possession of the goods under a contract of sale wherein the property has
already passed. There must be no breach in the continuity of physical
possession. If there is such a breach the seller can pass title notwithstanding
any transaction between him and the original purchaser which might alter the
legal title under which the possession was held.
It is not necessary that the
possession be with the seller himself. Possession by an agent of the seller
will be sufficient for the purpose of this provision. This was the position in
the case of City Fur Manufacturing Company vs. Furenbond[20] .
6.
SALE BY BUYER IN POSSESSION
Found in section 26(2) and is the
opposite of section 26(1). It is to the effect that “Where a person having bought or agreed to buy goods obtains, with the
consent of the seller, possession of the goods or the documents of title to the
goods, the delivery or transfer by that person, or by a mercantile agent acting
for him, of the goods or documents of title, under any sale, pledge or other
disposition thereof, to any person receiving them in good faith and without
notice of any lien or other right of the original seller in respect of the
goods shall have the same effect as if the person making the delivery or
transfer were a mercantile agent in possession of the goods or documents of
title with the consent of the owner.”
The conditions to be fulfilled in this respect are as follows:
The buyer must have obtained the
goods with the consent of the seller. It is immaterial how that consent is
obtained. The first buyer must have bought or agreed to buy the goods. This
applies whether or not the property in the goods has passed to the first buyer.
There must be a contract of sale
within the meaning of the SGA. There must be a contract under which the seller
transfers or agrees to the property in the goods to the buyer. A mere option to
sell is not a contract of sale until it has been exercised.
The meaning of “consent” must be
the meaning given to this word by the Factors Act. The possession must be
actual physical possession of the goods or documents of title to goods and it
must be obtained by the buyer in his capacity as a person who has bought or
agreed to buy the goods.
Finally the third party must take
the goods in good faith and without notice of any lien or other right of the
original seller in respect of those goods.
7.
SALE IN A MARKET OVERT
Section 22 of the SGA has another exception to
the nemo dat rule which is to the
effect that where goods are sold in a market overt, that is according to the
usage of the market, the buyer acquires a good title to the goods provided that
he buys them in good faith and without notice of the of any defect or want of
title on part of the seller. Market overt is an open public and a legally
constituted market. Under English Law it could be by Royal Charter or by
prescription or under statutory powers. It id often said that every shop under
the city of London is a marker overt as far as goods sold therein are
concerned. This exception is not under
the Kenya SGA.
PERFORMANCE OF THE
CONTRACT
When parties to a sale of goods contract enter into that contract there
are certain expectations from both parties.
The seller has duties to perform and so does the buyer. These obligations unless discharged, neither
can say that they have met the obligations of the contract.
DUTIES OF THE SELLER
1.
Pass a good title
The seller has the duty to transfer the
property or title to the goods to the buyer. This is phrased in the Act as the
seller having the right to sale, even if not the power to confer title. Under
Section 14 of Cap 31 the seller has a duty to pass a good title and under the
Act, there is an implied act that the seller shall pass a good title to the
buyer. The seller has a right to sell
the goods whether he has the title or has authority to sell the goods. The seller is in effect under an obligation
to pass a good title to the buyer. A
good title is a title without any encumbrances.
In a contract of sale there is an implied
condition under 14 (a) that in the case of sale he has a right to sell the
goods and in the case of an agreement to sell he will have such a right at the
time when property is to pass. This
requirement does not require that the seller to be the owner, only that he has
authority to sell. If there is a breach of a condition, the innocent party has
a right to repudiate a contract or if he doesn’t choose to repudiate, he has a
right to claim for damages (i.e. he will be treating it as breach of a
warranty) in the sale of goods the innocent party is allowed to recover monies
paid if there is failure to transfer ownership.
The section thus covers the buyer from disturbance from the seller, in
which case the buyer has also a right of action in tort. It also protects the
buyer from third parties where the disturbance has arisen as a result out of
the acts or defaults of the seller.
2.
Duty
to deliver the goods
This duty is a
somewhat ambiguous concept, for it covers three entirely different
possibilities. Apart from this, generally it is not the duty of the seller to
deliver goods in the popular sense, but the duty of the buyer to take them.
DELIVERY: there may be a duty to deliver to the buyer
goods in which the property has already passed, and he must therefore deliver
the particular goods and no other.
DELIVERY: the seller duty to deliver may be to procure
and supply to the buyer goods in accordance with the contract, but without
particular goods being designated to which the duty of delivery attaches, and
therefore refers to sale of purely generic goods, and seller is free to deliver
any particular goods answering to the description.
DELIVERY: it may be that the seller has a personal duty
to deliver a particular lot of goods although the property has not passed to
the buyer, in the case of agreement to sale specific goods, and the seller
cannot resale without being in breach.
This is, for example, the effect of a notice of appropriation in the
c.i.f contract which does not pass the property, but fixes the goods to be
delivered.
Similarly, in a f.o.b
contract where the seller ships goods but retains the bill of lading as
security, the seller will come under an obligation to deliver to the buyer the
actual goods shipped , though the property remains in the seller for the
moment. It should be noted that these three possibilities are not mutually
exclusive, but are rather three stages in the performance of a contract. Indeed
the three stages may be merged as where goods are appropriated to the contract
fixing the duty to deliver and passing the property at the same time.
MEANING
OF DELIVERY
The legal meaning of
delivery is very different from the popular meaning. In law the delivery means
the voluntary transfer of possession which is a different thing from the
dispatch of the goods. There is no general rule requiring the seller to
dispatch the goods to the buyer ( read rules on delivery sec 30).However in
modern conditions of business, a contrary intention will frequently be inferred
from the circumstances of the case. For example where a buyer ordered certain
goods from the seller in the form “please supply us with the following goods”,
an Australian court held that it was the seller’s duty to send the goods to the
buyer.
However it is the
responsibility of the seller to see that the goods are in a deliverable state
Delivery may take one of the following forms:
1.
There may be physical transfer of the actual
goods themselves. This may be the most obvious case, although difficult
questions may arise in deciding whether the physical transfer is enough to
transfer legal possession.
2.
The seller may transfer possession to the
buyer by handing over to him the means of control over the goods, for example
keys to the warehouse in which they are situated.
3.
Through acknowledgement called attornment,
where goods are in the custody of warehousemen. Where the seller gives the
buyer a delivery order or warrant for goods stored in warehouse, this does not
transfer possession or property until the warehouse keeper attorns by accepting
the order or warrant, thereby acknowledging that he hold the goods on his
behalf.
4.
Goods may be delivered by the delivery of
documents of title such as bill of lading, or any other document in the course
of business as proof of the possession or control of goods, authorizing the
possessor either by endorsement or delivery of the documents to transfer goods
thereby.
5.
The parties may agree that the sellers should
hold the goods as the buyer’s agent or bailee.
6.
Delivery of the goods to the buyer’s agent
transfers possession to the buyer himself.
PAYMENT
AND DELIVERY
Unless otherwise
agreed payment and delivery are concurrent conditions. It is not necessary for
the seller actually to tender delivery before being entitled to sue for the
price or damages if it is clear that the buyer would have refused to accept the
goods, it is enough that he (seller) was ready and willing to do so.
Duties of the Parties
Seller: to deliver the goods (s. 28)
Buyer: accept and pay for the goods (s. 28)
Unless otherwise
stated, these are concurrent conditions (s. 29)
S. 31: delivery must be of agreed quantity- too
much or too little entitles buyer to reject the whole
If quantities are
stated as “more or less” a reasonable margin is allowed
S. 32: unless otherwise stated, buyer is not bound too
accept delivery by installments.
Breach of Contract by buyer
Buyer is in breach
if he wrongfully fails to accept or pay for the goods in accordance with the
terms of the contract.
S. 39: a seller is deemed to be unpaid if:
a) When the whole of the price has not been paid or
tendered;
(b) When payment is through a conditional a bill of
exchange/negotiable instrument and the condition on which it was received has
not been fulfilled by reason of the dishonour of the instrument.
Remedies of unpaid seller
1.
Action for the
price-where property has already passed to buyer or a payment date has been
agreed.
2.
Action for damages
– where buyer wrongfully refuses to accept goods
3.
Right of
lien-right to retain goods until price is paid
4.
Stoppage in
transit- right to resume possession of the goods as long as they are still in
transit until payment is made
5.
Right of resale-
e.g. where goods are perishable
Breach by Seller
Where he
wrongfully neglects or refuses to deliver the goods to the buyer.
Remedies of buyer
1.
Damages for
non-delivery
2.
Specific
performance- in case of breach to deliver specific or ascertained goods.
CHAPTER FOUR
THE LAW OF AGENCY
4.1 INTRODUCTION
Subject to some well-known exceptions, it is an established common law
rule that whatever a person can do personally; he can also do through another
person, an agent. Secondly and as a necessary corollary, it is also a
recognized rule that he who does an act through another does it by
himself. Thus the acts of an agent are
deemed to be the acts of the person who employs him, known as the principal.
An agent is a person appointed expressly or otherwise to bring his
principal into contractual relationship with the 3rd party. Once the
agent has brought his principal into the contractual relationship with the 3rd
part he drops out and his principal and 3rd part become liable to
each other on the contract. It can be called a relationship between the
principal and the agent, where the principal expressly or impliedly authorizes
the agent to work under the principal’s control and on his behalf to negotiate
on behalf of the principal, or to bring him and third parties into contractual
relationship.
4.1.1 WHAT ARE THE
ESSENTIALS OF A CONTRACT OF AGENCY
1. There must be an appointment of an agent by the principal.
2. The principal must confer the authority upon the agent to act for
him.
3. The authority conferred should be such as will make the principal
answerable to 3rd parties.
4. The relationship of agency being based on confidence between the
principal and agent, no consideration is necessary.
The essential or basic feature of agency is the power of one
person (agent) to alter the legal position of another (principal) by making
contracts on his behalf or by of disposing of his property. Thus the agent must
have capacity to bind the principal and make him answerable to a third person
by bringing the principal into legal relations with the third person thereby
establishing a privity of contract between the two, principal and third
person. Primarily the power may arise:
1.
By consent;
2.
By operation of law; or
3.
By the doctrine of apparent authority.
Under common law, as already stated, any person can act through an
agent unless such person occupies a position requiring personal performance or
where such person is a party to a contract which impliedly or explicitly
prohibits delegation to an agent.
Examples are, for example, a marriage or certain service such as that of
a judge or magistrate.
4.1.2 SOURCES OF AGENCY
LAW
Any contractual relationship is governed by the terms of the contract
and general contract law, and by particular principles of the common law,
including equity, relating to agency, and any statutory provisions applicable
to that type of contract in question.
4.1.3 THE LEGAL USE OF THE TERM “AGENT”
The word “agent” is very “commonly and constantly abused.” Many business people for some or no reason
choose to call themselves agents when in fact they are the principals.
The law of agency does not come into play every time a person
represents another. A wife, for example,
who represents her husband at a social function such as a harambee does
not thereby become his agent. On the
other hand, a father who sends his son to the nearby kiosk to buy him milk
makes an agent of the son and will be liable to the kiosk operator for the
price of such milk. This is because agency
implies authority to affect another’s legal position.
4.1.3.1 AUTHORITY AND
POWER OF AGENT
Agency may be therefore regarded as a particular form of authority,
namely, to create or effect legal relations between P and T. Authority to do
acts which are not intended to produce this result does not give rise to an
agency relationship
1.
Agency law deals with three distinct relationships, between P and A,
between P and T and between A and T
2.
The authority of an agent must be distinguished from his power.
3.
A transaction entered into by A within the scope of his actual
authority from P will, of course bind P. but P will also be bound if A acts
within his apparent authority. In such a case, though A does not have the right
to enter into the transaction on behalf of P, the law invests him with the
power to commit his principal to the transaction
A’s power normally derives from some authority conferred by P, but this
is not necessarily so. In extreme cases, such as where the P’s property is at
imminent risk and has to take urgent action to save it and is unable to
communicate with P or to obtain an adequate response to his request for
instructions, the law treats A as an agent of necessity to take the necessary
remedial action, as where the master of a ship enters into a salvage agreement
with T, on behalf of P to save P’s cargo, or where A is in possession of perishables
belonging to P and sells them for P’s benefit
before they become rotten.
4.2 CLASSES OF AGENTS
Agents may be classified as to: -
1.
The extent of their authority and,
2.
The nature of the work they perform.
4.2.1 THE EXTENT OF AUTHORITY
4.2.1.1 UNIVERSAL
A person whose authority to act for another
is unlimited may be referred to as a universal agent. This is a rare kind of agency in
which the principal appoints an agent to handle all his affairs. The agent has authority to bind his principal by
any lawful act that he does on behalf of the latter. It is referred to as universal. It is a form of general
power of attorney which must be in writing
4.2.1.2 SPECIAL AGENTS
A special agent is one who is employed to make only a particular
contract or has authority to act for some special occasion or purpose which is
not within the ordinary course of his business or profession6. Where a person (agent) is appointed by
another to handle a transaction which does not form the agent’s normal business
activities, this is a special agent
e.g. an estate agent asked by a friend to sell a car or a bank manager asked to
sell a house on behalf of his friend or an agent employed to dib an
auction. The authority of the agent is
therefore very limited and ends as soon as the specific act is performed.
4.2.1.3 GENERAL AGENTS
A general agent is one who has authority, arising out of and in the
ordinary course of his particular trade, business or profession, to do some act
or all acts on behalf of his principal in relation thereto, or one who is
authorized to act on behalf of the principal generally in transactions of a
particular kind or incidental to a particular business7. This is an
agent who is appointed to act in transactions of a designated class or
generally, so as to be within the ordinary course of his business.
A branch manager of a company is usually deemed to have general authority to represent and
bind his principal in all business of the kind that the company carries
on. The manager as agent thus has implied authority to represent
and bind his principal in all matters incidental to or which fall within the ordinary scope of
the business in question; e.g. a bank branch manager.
A third party dealing with such agent is not affected by any secret
restrictions on the agent’s usual or apparent authority. The principal is bound by all the agent’s
acts done within the scope of his authority, regardless of any secret
instructions limiting such authority unless such entailment is notified to
third parties dealing with the agent.
An undisclosed principal, it has also been stated, must not be allowed
“to absorb the profits and then when the pinch comes to escape responsibility
on the ground of orders to his agent” restricting the agent’s authority as this
would be “a plain fraud on the public”8. In the leading case9the manager of
a public house was forbidden to order tobaccos by his principal, but did
so. The seller of the tobacco had not
even heard of the principal and in fact thought he was contracting with the
manager (agent). It was held that
the principal was liable to pay the seller, since a manager of a public house
would usually have authority to make orders of this kind, and the seller could
therefore rely on the agent’s ostensible authority in the absence of express
knowledge of the limitation imposed by the principal.
4.2.2 NATURE OF WORK
PERFORMED
According to the nature of work performed by agents the following more
common types of general agents are briefly discussed below.
4.2.1 MERCANTILE AGENT
Both under common and statute a mercantile agent is one who has, in the
customary course of his business as such agent, authority either to sell or to
consign goods for the purpose of sale, or to buy goods or to raise money on the
security of good10 . Thus it may
be inferred from this definition that a mercantile agent must be a person who has a business, and who,
in the course of that business, buys and sells goods for other people. An agent
may be a mercantile agent although he has no general occupation as an agent; or
has only one customer. He may be such
agent even though his general occupation is that of an independent dealer in
the commodity entrusted to him. But in
each case he should be acting in his capacity as a mercantile agent and must
not be a mere servant or shopman11. The above definition does
not however cover all kinds of mercantile agents, such as broker, auctioneer,
commission agent, Del credere agent, and banker and so on.(can also be referred
to as role of agents)
FACTORS AGENTS
A Factor is a person in possession of goods belonging to his principal
to be sold for the benefit of the P.
It is customary for factors to sell goods in his own name without
disclosing the identity of the P. However if he does disclose the name of the
P, that fact alone does not mean that he would cease to be a Factor. A Factor,
who in the customary course of his business has authority to sell goods, or to
consign goods for sale, or to buy goods or to raise money on the security of
goods, is termed a mercantile agent.
Where a mercantile agent, with the consent of the P, is in possession
of goods or documents of title to the goods, any sale or other disposition
transacted by him in the ordinary course of business in respect of those goods
is as valid as if they were expressly authorized by the principal, provided
that the third party did not know of the agent’s lack of authority.
CONSIGNMENT
The enterprise delivers goods to the consignee to hold in the first
instance as the bailee, but on terms that the consignee is to buy the goods if
he notifies his of intention to do so, and he is deemed to have elected to buy
them if he fails to return the goods within a given time or otherwise adopts
the prospective purchase transaction, typically by selling the goods.
DISTRIBUTORSHIP
1.
An agent can be appointed to buy goods and resell them in his own
account
2.
A business may use a single distributor or a complex network of
distributors to market its goods
3.
A supplier may favour a distribution agreement where it is trying to
break into a new market, hence taking advantage of the distributor’s local
knowledge; or the nature of the products require little or no direct contact
with the end user or customer
4.
In contrast, to agency relations, strictly speaking, the distributor is
an independent party who bears risks in all transactions to third parties
subject to supplier’s liability for defective goods
5.
Distribution agreements fall into a number of categories:
1. SOLE DISTRIBUTION
AGREEMENT
6.
Where the supplier undertakes not to appoint another distributor for
his goods in the territory, but is free to sell his goods directly to the
customers in competition with the distributor.
7.
A supplier who wishes to develop or protect his corporate image may
choose sole agreement. Such agreement may also be suitable where the nature of
the goods requires an enhanced level of service or advice at the point of sale
to customers, or where the supplier will be required to provide after sale
support.
2. EXCLUSIVE DISTRIBUTION
AGREEMENT
8.
Which gives the distributor the exclusive rights to sell the product in
a specified territory
3. SELECTIVE DISTRIBUTION
AGREEMENT
9.
Where supplier appoints a certain number of distributors to promote his
goods in a territory based on certain qualitative criteria which effectively
limited the number of distributors that can be appointed
10.
A selective distribution agreement may not encourage as much intra-
brand competition as exclusive agreements, and so are more likely to raise
questions of anti competition. Such concerns may be off- set where goods are
cheaper to the customer due to a reduction in logistical costs brought about by
a selective agreement.
4. NON-EXCLUSIVE
DISTRIBUTION AGREEMENT
The distributor agrees to take the suppliers goods but in knowledge
that he will be competing with other distributors and the supplier. The terms
of such agreement distributor than exclusive or sole distribution agreements
4.2.1.1 BROKER
A broker is a mercantile agent who in the ordinary course of his
business is employed to make contracts for the purpose or sale of property or
goods of which he is not entrusted with the possession or documents of
title. He is employed to buy and sell
goods on behalf of another, but no possession and therefore no right of lien.
4.2.1.2 AUCTIONEER
An auctioneer is an agent who is employed to sell at a public
auction. He may or may not be entrusted
with possession of goods or property to be sold or of the documents of title
thereto. An auctioneer may act as agent
for both seller and buyer12
4.2.1.3 COMMISSION AGENT
A commission agent is one employed to buy and sell goods, or transact
business generally for other persons. In
return, he receives a money remuneration which is referred to as a commission.
4.2.1.4 BANKER
There is a complex implied contract between a bank and its customers,
which imposes many duties on the bank similar to those of an ordinary agent as
we have seen above. But the relationship is mainly that of debtor and creditor. Where the customer’s account is in credit the
bank is the debtor. In so far as a banker has a legal obligation to make
payments on behalf of his customer directs the banker to pay by either draft or
order (e.g. by cheque) of the customer.
4.2.1.5 DEL CREDERE
A del credere agent is one employed to sell goods and who
promises to make sure that clients introduced by him to his principal will pay
for the goods sold. It is also applied
to an agent who becomes surety for the solvency of persons to whom he sells
(Italian–del+of the; credere= to believe or trust)13.
1.
The Del credere agent takes on additional risks. He is prepared, upon
the payment of a satisfactory commission, to indemnify the principal if the
transaction falls through and the principle suffers loss as result
2.
The terms of a del cerdere agency are such that the agent only agrees
to indemnify the principal in the event of the buyer not taking delivery of the
goods or becoming insolvent and unable to settle the purchase price
3.
The del credere remains an agent throughout , and he is therefore not
to be held liable for the non-performance of the contract by his principal
4.
There are no formal requirements for the formation or creation of a del
credere agency. Its existence can be implied from the parties conduct
5.
The Del credere’s primary appeal is in the comfort for principal’s that
the transaction will be performed. That attraction is now covered, in the case
of international sales, by modern mechanisms, including documentary credit
system etc
1.
OTHER NON-MERCANTILE TYPES OF AGENT
4.2.2.1 ADVOCATES/COUNSEL/SOLICITORS
They are agents of their clients when, inter alia, they effect
compromise on matters connected with, but not merely collateral, to the
litigation in question. In Lawrence Musyoka Wambua vs. LM Wambua and
Company Advocates v United Insurance Company Limited 15 it was clarified that a
counsel duly appointed by a party to act on his behalf is a recognized agent of
the party by whom appearances, applications and acts may be made or done as
mandated by Order III, rule 2, of the Civil Procedure Rules.
4.2.2.2 INSURANCE AGENT
An insurance agent or insurance broker is employed to negotiate and
effect policies of insurance. By
established insurance practice, such person is deemed to be agent for the
insured and not for the insurance company.
The insurance conducts, say, a running down or road accident case on
behalf of a defendant or defendants. In
such a case the Defendant is bound by the action of the insurance company. The
insurance company itself may be deemed to be an agent, too. For example, where the company conducts, say,
a running down or road accident case on behalf of a defendant or
defendants. In such a case the defendant
is bound by the action of the insurance company.
4.2.2.3 CLEARING AND FORWARDING AGENT
A Clearing and forwarding agent is one who undertakes the shipment or
transmission of goods. Such agent incurs
personal liability for freight charges whether transmission is by sea or by
air, according to custom of the trade.
He should facilitate the safe arrival of goods.
4.2.4.2 ESTATE AGENT
An estate agent is a person who, in connection with the acquisition or
disposal of any land or other premises, brings together or takes steps to bring
together the person wishing to dispose thereof and a person prepared to acquire
it. He may also undertake to negotiate
the terms of a proposed transaction on behalf of either party. His powers are extremely limited. Unless specifically authorised to do so, he
has no power to make a contract between their client and prospective
purchaser. But he usually has powers to
make representations about the property:
In Spiro v. Lintern17 there was a power to make a
contract.
4.2.4.3 DIRECTORS
Directors are in law agents of the company when they act as board of directors.
A company is an artificial person and is taken to act through its appointed or
elected representatives of the shareholders, who are the directors.
4.2.4.4 PARTNERS
A partner is an agent of the firm and his other partners for purpose of
business of the firm.
4.2.4.5 WIFE
A wife whether living with her husband or not is in certain
well-defined cases, an agent of the latter
4.3 AGENCY DISTINGUISHED FROM OTHER RELATIONSHIPS
It is important to distinguish an agent from other persons who may
perform functions similar to his.
4.3.1 TRUSTEES
Like trustees agents stand in a fiduciary relationship to their
principals and must not make secret profits and must not allow their interests
to conflict with their duties. However
the main differences are:
1.
a trustee has legal ownership of property, but an agent, at best, has
only the legal power to dispose of property;
2.
An agent is a representative of his principal; a trustee usually is
not.
4.3.2 SERVANTS AND INDEPENDENT CONTRACTORS
The distinction between agents, on the one hand, and servants and
independent contractors, on the other, is essentially one of function. An agent
is employed to make contracts and to dispose of property. Servants and
independent contractors do not ordinarily create legal relationship between the
employer and third parties and are usually employed for other tasks and the
master has a right to control how the work is to be done in the case of
servants. An agent is bound to follow
all the lawful instructions of the principal but it is not subject to the
direct control and supervision of the latter.
However he has a widen latitude of discretion and usually enjoys greater
independence and freedom from control than a servant.
Another distinction is that an agent may work for several principals at
the same time. This rarely applies to a
servant who usually serves one master only. In Haji Khamisha Juma Essak v. High Commissioner for Transport18
it was submitter on behalf of the Plaintiff that two persons who were working
on his behalf as clearing agents were not in law acting as the Plaintiff’s
agents but as independent contractors because they did this kind of work for
others as well. The Court found that the
two worked on behalf of the Plaintiff, who put them in funds to pay charges,
the two were paid for their duties. It held that they were agents of the
Plaintiff and not independent contractors.
In practice, there is really no absolute distinction because it is
possible for a person to be both servant and agent (e.g. a sales
representative) or an independent contractor and agent (e.g. a free-lance
commercial traveler, that’s a person who travels over a large area visiting
shops, institutions, offices etc. with samples of goods, trying to obtain
orders).Here the concepts overlap. But a
person may be a servant only e.g. a labourer or an independent contractor only
e.g. an electrician.
Partners and Company directors may be said to be agents without at the same time
being either servants or independent contractors.
4.3.3 BAILEE
A bailee is a person who receives possession of goods from (or for) the
owner (bailor) for a specific purpose. Where e.g. a
person (bailor) deposits goods in a railway luggage office or pawns his goods,
the bailee is under a duty to take reasonable care of the goods and to return
them in accordance with the contract of bailment. Bailment overlaps with agency
where the agent receives possession e g. factors (i.e. agents entrusted with
possession of goods for the purpose of selling them for his principal) and
other mercantile agents.
4.4 THE FORMATION OR CREATION OF AGENCY
The law of agency is a special branch of the
law of contract, as we have already seen above. Agency may be created by:
1.
express agreement/appointment/consent;
2.
implication or conduct under the doctrine of apparent authority;
3.
operation of law; or
4.
ratification
5.
estoppel
4.4.1 EXPRESS AGREEMENT/APPOINTMENT
In its simplest form a business transaction involves only two persons,
namely: - the seller and the buyer. Very
often, though, one or both of the two are acting for another or others. The one or both will have either been asked
or appointed expressly to act as buyer or seller for the person asking or
appointing.
An agent may be expressly appointed either verbally or in writing. Here the principal authorizes the agent to
carry out an assignment on his behalf and the agent does as instructed. The appointment need not be in any particular
form and a verbal appointment is sufficient even though the contract the agent
is required to make must be in writing.
In other words, it may be expressed orally, in writing or by deed
(usually called a “power of attorney” If the agent is required to make a
contract under seal, however, he must be given authority under seal; that is,
given a power of attorney.
Agency by express agreement will, of course be consensual but it need
not be contractual. In other words,
agency depends on agreement and not necessarily on contract. This is because
agency may be gratuitous, too. A purely
consensual agency lacks consideration whereas a contractual agency imposes an
obligation on the agent to carry out his functions in return for remuneration.
4.4.2 IMPLIED AGENCY
Implied agency arises from the conduct or situation of the parties, and
is used in contradistinction to the expression “express agency”19.
A person who holds out another, by words or conduct, as having authority to
enter into contracts on his behalf, will be bound by such contracts. He will be estopped from denying the agency
created thereby. Where, for example, A
usually pays for goods ordered by B, the latter becomes the former’s
agent. A will be bound to settle debts
incurred in the same way as if he had expressly authorized them: Summers -v- Solomon20
In Ryan v Pilkington21, an estate agent was instructed
by the owner to find a purchaser for a private hotel. He did so and accepted from the prospective
purchaser a small deposit “as agent” of the owners. The estate agent was not expressly given
authority to accept deposits. It was held
that the agent had acted within the ostensible scope of his authority. In other words, whether he has authority to
make a contract or not, the estate agent has implied authority to accept a
deposit from a potential purchaser.
4.4.3 OPERATION OF LAW
There are situations where the law, for reasons of policy, presumes an
agency relationship between parties who have not agreed to create such relationship
and have not represented to third parties dealing with them that one is acting
as agent for the other. Here may be
considered agency arising by necessity, cohabitation and statute.
4.4.3.1 NECESSITY
Agency of necessity occurs when a person is entrusted with another’s
property and it becomes necessary to do something to preserve that
property. In such a case, although the
person who is entrusted with the property has no express authority to do the
act necessary to preserve it, because of the necessity such authority is
implied.22.
Put in another way such agency arises by operation of law where for
example, a person is faced with an emergency and it becomes necessary in order
to preserve the property or interests of another person which are entrusted to
him and which are in imminent jeopardy, to act for that person without his
authority23 (quoted in B.S Markesinis& RJC Munday)24.
In Great Northern Railway v. Swaffield25horse was sent by
train, but when it arrived at the station of destination, nobody took its
delivery. The railway Company was
obligated to feed the horse. It was held
that the railway company was an agent of necessity and could recover the amount
spent on feeding the horse. Later Sims
& Co. v. Midland Rail Co26as it was held
that a sale of butter consigned though a railway company by the company,
when, due to a strike, transit was delayed was held to be binding on the
consignor. By
the word “necessity” is meant “the force of circumstances which
determines the course a man ought to take”, that is, a course “which, to
the judgment of a wise and prudent man, is apparently the best for the
interests of the persons for whom he acts in a given emergency”27.
Four conditions must be satisfied before any agency can be created by
necessity:
1.
There must be an actual
and definite commercial necessity for the creation of the agency, i.e. there
must be a genuine emergency.
There is no agency of necessity unless there is a real emergency, such
as may arise out of the possession of perishable goods or of livestock
requiring to be fed. In Prager v
Blatspiel Stamp &Heacock Ltd28 it was held that as skins were
not likely to deteriorate in value if
properly stored, there was no necessity for their sale by an agent for a fur
merchant who could not send them to the latter in Bucharest on account of the
occupation of Rumania by German forces.
Neither could the agent communicate with the merchant. The agent was found liable in damages.
2.
It must be impossible to
get the principal’s instructions
In Springer -v- Great Western
Railway Company29, tomatoes were
consigned by S from Jersey to London.
The ship delivered them to Weymouth three days late and, owing to a
railway strike, the tomatoes could not be unloaded until two days later. When unloaded they were found to be bad and
the railway company decided to sell them locally. No communication was made to S. It was held that the railway company
was liable in damages to S., as they should have communicated with him and
asked for his instructions as soon as the ship arrived. Modern communications
facilities of today such as telegrams, fax, telephones, e-mail, tend to make it
difficult to meet this condition today.
3.
The agent of necessity must act bona fide in the interests of all
parties concerned.
4.
The act must be
done for the benefit of the owner and not merely for the convenience of the
agent: Sachs -v- Miklos30.
4.4.3.2 COHABITATION
There is a rebuttable presumption at common law that a wife living
together with her husband has her husband’s authority to pledge his
credit for necessaries. What are
necessaries will depend on their style and standard of living. The husband may disprove such presumption if:
1.
he expressly forbade his wife to pledge his credit; or
2.
he expressly warned the supplier not to supply his wife with goods on
credit; or
3.
his wife was already sufficiently supplied with goods of the kind in
question; or
4.
his wife was supplied with a sufficient allowance or sufficient means
for the purpose of buying such goods without pledging the husband’s credit; or
5.
The order, though for necessaries, was excessive in extent or, having
regard to the husband’s income, extravagant31.
The application of these common law principles in the present Kenyan
situation requires care and might differ from one social or economic community
to another.
“If the husband has been in the
habit of paying his wife’s bills with a particular supplier, his wife’s agency
will be implied by his conduct, and he can only escape liability by
expressly informing the supplier that his wife’s authority is revoked. If the supplier gave credit to the wife
personally and not to the wife as her husband’s agent, the husband is not
liable”32.
In Chahaganlal P.Jani v. RanchoddasKalvanji&Another33 although
the wife was no longer maintained by her husband she continued to live in his
house and the local grocer kept separate accounts for them. However when her bill was not paid the grocer
sued her husband. The Chief Justice
approved of the following statement by the trial magistrate: “The husband, being bound in law to maintain
his wife, she can, if he fails to support her in a manner suitable to her
station, bind him as his agent for necessaries.
The husband cannot deprive the wife of this authority unless the wife
voluntarily leaves the husband’s house and lives apart”. This authority was, however, no more than a
presumption in favour of his implied authority to her to pledge his credit in
respect of the necessaries, which might be rebutted by evidence negativing it.
Where a husband put up an advertisement in the newspaper and forbade
persons to supply his wife, who was living apart from him, on his credit the
court was reluctant to deprive the wife of her reasonable express, in Harris
v. Morris34of
the advertisement the court said that “that cannot avail him, for if he put her
out of doors, … for the law has said, that were a man turns his wife out of
doors, he sends with her credit for her reasonable expenses”. It is immaterial that he even gave particular
notice to individuals not to give her credit.
4.4.3.3 STATUTE
A number of statutes stipulate that certain persons shall be deemed to
be agents in certain situations. Partners for example are each
other’s agents for making contracts in the ordinary course of business35.
4.4.4 RATIFICATION
This is the granting of authority by a principal to an agent after
initially an unauthorized act is caused by the agent. If an agent has no
authority to contract or exceeds the authority he has, the contract is not
binding on the Principal. However, the principal may confirm or adopt the
contract made by the agent without authority or in excess of his authority.
That confirmation of adoption is referred to as ratification and makes the
contracts binding on the principal.
4.4.5 ESTOPPEL
Agency by estoppel means that a person by his words or conduct has made
a 3rd party to believe that the person with whom he is contracting
is an agent of the first mentioned person. The 1st mentioned person
is estopped from denying the face that the person with whom the 3rd
party contracted is the agent.
4.5 THE AUTHORITY OF THE AGENT
The power of the agent to affect the relations between his principal
and third parties is the central feature of agency. As we have seen above (formation of agency),
this power may broadly arise from:-
1.
·express authorisation by the principal;
2.
Conduct of the principal which creates appearance of authority even
though no such authority exists; or
3.
·the
law
4.
Ratification
Broadly two types of authority are discernible from these:
1.
Actual or real authority; and
2.
Authority which arises from the conduct of the principal but does not
in fact exist, i.e. ostensible authority, which is merely a form of estoppel.
4.5.1 TERMINOLOGY
From the outset it is important to note that types or a kind of
authority of the agent is bedeviled by terminological befuddlement. Scholars, judges and lawyers in general have
manifested considerable differences in their understanding and classifications
of the various types of authority of the agent.
For example there appears to be much difficulty in distinguishing
between actual, implied and apparent authority.
But in the end some of the distinctions are of no consequence in
practical terms. We shall attempt to classify the authority of the agent under
the following subheadings:
1.
express actual authority including authority conferred by law;
2.
implied actual authority;
3.
usual or customary authority;
4.
ratification;
5.
authority by operation of law; and
6.
apparent (ostensible) authority;
4.5.2 EXPRESS ACTUAL AUTHORITY
“Actual” authority has been defined as “a legal relationship between
principal and agent created by a consensual agreement to which they alone are
parties”, per Diplock LJ in Freeman and Lockyer -v- Buckhurst Park
Properties (Mangal) Ltd36.
It is the authority, which the agent actually has according to the
agreement. It is real
authority. “It is express when
given by express words, such as when a board of directors passes a resolution
which authorises two of their number to sign cheques”37.
Express authority may be conferred on an agent either in writing or
orally. Express authority given in writing may be under hand or under
seal. Authority given under seal is
known as a power of attorney. The
extent of such authority is dependent upon the true construction of the words
used. The scope of a written agency agreement should be ascertained by applying
ordinary principles of construction of contracts including any proper
implication from express words used, usages of trade or the course of business
between the parties. The precise limits
of an oral agreement are a matter of evidence.
An appointment by deed will be strictly construed and the authority
limited to the purpose for which it was given.
Instructions to the agent must be explicit; otherwise the agent
cannot be held liable (and the principal will be bound) if he acts according to
a reasonable construction of such instructions.
In Ireland -v- Livingston 38, Lord Chelmsford
said: “.... if a principal gives an order to an agent in such uncertain terms
as to be susceptible of two different meanings, and the agent bona fide adopts
one of them and acts upon it, it is not competent to the principal to repudiate
the act as unauthorised because he meant the order to be read in the other
sense of which it is equally capable. It
is a fair answer ... to tell the
principal that the departure from his intention was occasioned by his own
fault, and that he should have given his order in clear and unambiguous terms.”
Quaere: Should the agent not seek
clarification if he is aware of the ambiguity?
(Yes, if it is commercially practicable to seek and obtain such
clarification).
4.5.3 IMPLIED ACTUAL AUTHORITY
We have seen that actual authority may be conferred on an agent by
express words (oral or written). Such
authority may also be conferred by implication, i.e. “inferred from the conduct
of the parties and the circumstances of the case, such as when the board of
directors appoints one of their number to be managing director. They thereby impliedly authorise him to do
all such things as fall within the usual scope of that office “, per Lord
Denning MR in Hely - Hutchinson -v- Brayhead Ltd & Another39
In practice the agent is sometimes obliged to perform acts beyond or in
addition to those contained in his express appointment. Such powers as may be necessary for or
incidental to, the performance of his express authority are known as implied
authority. The expression is here
used to describe “an extension of an express authority which is necessary to
give the express authority full business efficacy”40 .For example,
an agent employed to “sell” a house has authority to sign the relevant
memorandum of contract. But authority to
make a contract containing special conditions is not lightly to be inferred and
every case must be examined on its own merit41. When such implied authority arises from
logical construction of express authority it is indeed real authority.
4.5.4 USUAL
OR CUSTOMARY AUTHORITY
Usual or customary authority arises from settled and well-understood
trade, business or professional usages and customs. Agents who practice a
particular trade business or profession are normally authorised to do everything,
which is usually, or ordinarily done in such trade, business or
profession. It is a concept within
implied authority, which derives from trade, business or professional
practices. The usual authority of an agent forms part of the implied
authority, unless it is restricted.
1.
General rules: An agent has
implied authority to perform such acts as are usual in the trade, profession or
business he carries e.g. auctions, stock broking and estate agency. An agent has implied authority to act in
accordance with such customs as prevail where he is employed, so long as such
customs are reasonable and lawful. In Howard
-v- Sheward42, it was held that an agent for a house
dealer had implied authority to warrant the soundness of the houses he was
selling and if the houses turned out not to be sound, the principal, and not
the agent, will be liable to the purchaser. But a custom that is fundamentally
inconsistent with the agency relationship will not bind the principal.
2.
Restriction of usual authority:
A third party without notice of a restriction on an agent’s usual
authority is not affected by such restrictions.
3.
Note: Specific cases falling under this
such as auctioneers, brokers, estate agents, Del credere agents and
confirming houses.
4.5.5 AUTHORITY BY RATIFICATION
Ratification occurs where an initially unauthorised act is
subsequently affirmed (or ratified) by the principal and thereupon becomes
binding. It is a case of real
authority given after the event has taken place. A person’s action does not
bind another (principal) where:-
1.
Having been duly appointed as an agent (i.e. with actual authority) he
exceeds his authority as specified by his principal; or
2.
Having no authority at all he purports to act as an agent.
But in each case if subsequently the other (principal) expressly or by
implication validates or otherwise approves such action, he (the principal)
will have assumed liability by ratification.
In other words, “a person ratifying the act of another, who, without
authority, had made a contract openly and avowedly on his behalf, is deemed to
be, though in fact he was not, a party to the contract” per Lord McNaughton in Keighley Maxsted& Co. -v- Durant43.
Ratification is conditional on the following:-
1.
The agent must expressly have contracted as agent. If he merely intended to contract as agent
but had no authority but purported to act for an undisclosed authority, there
can be no ratification44.
An agent was authorised by the appellants (principal) to purchase a
quantity of wheat at a certain price on joint account for himself and the
appellants. He was unable to buy at the
agreed price but concluded a contract with the respondents at a slightly higher
price without revealing that he was also acting for the appellant. The following day the appellants purported to
ratify the agreement but later failed to take delivery. The seller sued them (principal). It was held by the House of Lords that
a contract on behalf of a third party, but without his authority, cannot be
ratified by him so as to enable him to sue or be sued on the contract if the
person who made the contract did not make it clear at the time of its making
that he was acting for another party.
The agent’s act
was unauthorised and since the principal was not disclosed the principal could
not ratify neither was he liable. The
case of an agent “who may intend to act for another, but at the same time keeps
his intention locked up in his own breast” is thus excluded.
2.
There must be a principal in existence on behalf of whom the agent
claims to be contracting. Thus a newly
incorporated company cannot ratify a contract made by an agent before the
company’s formation45
3.
The principal must be
ascertainable or must have been named.
In Re Tiedemann and Lederman Freres46 the facts here
were the exact converse of those in the Keighley case. Here A
sold wheat on behalf of P. The market rose and A then re bought the wheat and
sold it to T at a profit. This purchase
and sale was made by A on his own behalf but in his dealing with T he used the
name of P for financial reasons. Later P
purported to ratify the contract. It was held that he could do so47.
4.
The principal must have had full contractual capacity at the date of
the contract and at the date of ratification.
If, at the time of the contract the principal was an enemy there can be
no valid ratification: Boston Deep
Sea Fishing and Ice Co. Ltd. -v- Farnham (1957) 1 WLR 1051.
5.
The act in question must be one
capable of being ratified; ultra vires act or a forgery cannot be
ratified.
6.
At the time of ratification the
principal must have full knowledge of all material facts or must have
agreed to48. The effect of ratification is to retrospectively
validate a contract made by an agent without authority.
4.5.6 AUTHORITY (AGENCY) BY OPERATION OF LAW
As we have seen above, agency by operation of law refers to cases where
the parties have neither agreed to create an agency relationship nor have they
represented, to third parties dealing with them that one of them is acting as
an agent for the other. In these, the
agency relationship arises because the law, for a number of reasons of policy,
provides that the relationship shall be one of agency.
There is a type of agency loosely referred to as agency of necessity
i.e. agency which arises due to the necessity of circumstances such as where a
person (whether already duly appointed as an agent or not) is compelled to
exceed his instructions in an emergency. In certain limited circumstances, the
law may presume agency in favour of e.g. a deserted wife lacking means of
support for herself and children.
An agency may also be expressly created by statute. For example, a statutory agency arises in
respect of the unpaid seller of goods exercising his right to re-sell24. Again, a person who is obliged to
supply food and water to impounded animals becomes an agent by operation of law
and may recover the cost of such provisions.
Quaere: Are most, if not all, cases of agency not as a result of operation of
law in the sense that the parties are the ones who create certain factual
situations to which the law ascribes legal consequences? Note: Some
authors treat agency by operation of law as part of implied authority.49 This
comes out more so in cases where a wife or even a mistress cohabiting with her
lover, pledges the man’s credit in certain cases.
4.5.7 APPARENT (OSTENSIBLE) AUTHORITY
In Rama Corporation v Proved
Tin and General Investments Ltd Slade J. said that “ostensible or
apparent authority which negatives the existence of actual authority is merely a form of estoppel”. In other words, it is simply a form of
holding out by the principal to a third party that an agent has appropriate
authority although in fact such authority does not exist.
Thus where the chairman/director of a company signs a letter of
appointment of a staff member, the company will be bound by his action even
though no resolution of the board of directors exists supporting such
appointment on the terms specified in the letter51, where several acts
of the chairman/director suggested that the appellant company knew that he held
himself out as acting on the company’s behalf “thus impliedly representing that
he had authority to do so”,52.
“In my view, it is immaterial whether [the director] has authority to
enter into the contract. The appellant
company cannot repudiate the actions of the chairman/director done within the
scope of this ostensible authority”, ibid.
As a form of estoppels it is clear then that a party cannot invoke this
in his aid unless:-
(a) A representation was
made to him by the principal;
(b) He relied on such
representation; and
(c) His position
altered as a result of reliance on such representation,
Such representation may be by words or conduct, to the aggrieved party
whether made negligently or intentionally.
It must such representation as affirms the agent’s authority to act on
behalf of the principal e.g.
1.
A principal who writes to his bank to the effect that the agent has
authority to draw cheques affirms, by words, the agent’s authority to so act on
his behalf.
2.
A husband who pays for goods supplied to his wife by a trader similarly
creates the appearance of the wife’s authority to pledge his credit. He will be held liable to pay for more goods
supplied by the trader in reliance of such holding out, until the trader
receives actual notice that the wife’s authority has ceased53
But, where the third party had actual or constructive notice or if the
facts should have put him on inquiry or aroused suspicion, the principal cannot
be held liable. For example, where an
agent purports to have unlimited or unrestricted power to draw cheques on
behalf of the principal.54 Likewise, where an agent is known to act
pursuant to a written power such as a power of attorney, third parties are
expected to examine the document, as the principal cannot be held liable for
unauthorised acts of the agent which are apparent from the document.
4.6 PRINCIPAL AND AGENT
4.6.1 FORMALITIES
Most agency relationships are based on consent, whereby the principal
authorises the agent to enter into contractual relation on his behalf with
third parties. No formalities are
required for the appointment of an agent.
He may so authorise the agent by express appointment or by
implication. Where authority is
subsequent to the act of the agent this is referred to as ratification. Ratification arises where a duly appointed
agent exceeds his authority but the principal expressly or impliedly ratifies
the transaction and accepts liability.
Powers of attorney fall under express appointments, which must be done
in writing (by deed); but in most other cases the authority can take any
form. Indeed an 1833 English authority
suggests that even in cases which require writing, a person (agent) can bind
another (principal) if he executes a document in the latter’s presence and by
his authority even where the agent is not validly appointed in writing: R v Longnor (Inhabitants)55. Agency may also be inferred even though no
words indicate agency relationship in a written contract: Victory Shipchandlers
-v- Leslie & Anderson Ltd56.
Under the Law of Contract Act although an interest in land cannot,
subject to certain exceptions, be given or disposed of except in writing signed
by the party creating or disposing of it or by “some person authorized by him
to sign it”, an agent does not in fact require to be authorized by his
principal in writing to dispose of an interest in land!
4.6.2 CAPACITY
The principal must have full contractual capacity to make the contract
to be entered into by the agent but the agent need not have full capacity. This is because the agent does not contract
on his own behalf. He is a mere link
between two contracting parties. Thus an
infant may be an agent.
The insanity of a principal for example terminates his agent’s
authority even though the agent may be unaware of the insanity at the material
time57
. So long as there is no conflict or breach of his duties to either
principal an agent may act for the other party (principal) in the same
transaction. For example, an advocate
acts for both vendor and purchaser in a contract of sale of land, and an
auctioneer signing a memorandum for both vendor and purchaser.
4.6.3 CONSIDERATION
Agency may exist on a voluntary basis and free of charge but in a
majority of cases remuneration is an implied or express component. A gratuitous agency is created where e.g. a
daughter agrees to do her mother’s shopping or where a son attends to the
family’s provision kiosk.
4.6.4 DUTIES AND RIGHTS OF AGENT AND PRINCIPAL
The duties and rights of the principal and agent may derive either from
the agreement between them or merely from the fiduciary nature of their
relationship.
4.6.4.1 DUTIES OF AGENT TO HIS PRINCIPAL
(a) Due care, skill and diligence
An agent is bound to exercise his duty with care and diligence and
should apply such skill as he possesses. A sales agent for example must obtain
the best price reasonably obtainable. If
he has procured a better offer, which has been conditionally accepted, he has a
further duty to communicate this to his principal58. And he must
disclose to him any information, which he has which might influence the
principal in making the contract. In Heath -v- Parkinson 59,
H was employed by P to sell the lease of P’s premises. P had reason to believe that his superior
landlord would not consent to the premises being used for a tailoring
business. Several tailors were anxious
to buy the lease, and H obtained from the landlords an assurance that they
would consent to a tailoring business being carried on. He concealed this from P. And so induced him
to sell for a lower figure than he otherwise would have done. It was held
that H was not entitled to his commission as he had not properly carried out
his duty. The basic principle here is
that a person professing a particular calling must show the degree of skill
appropriate thereto (spondesperiatimartis). In other words whether or not he has the
necessary qualities, skills or knowledge is not material in such a situation.
Quaere: Whether there is a distinction between a paid agent and a gratuitous
one: Whether an advocate owes a higher
duty to his client who pays his full fees than to a client whom he appears for
gratis or on the basis of a pauper brief.
(b) Personal performance
The relation between the principal and the agent is a personal
one. Save for a few exceptions, an agent
must not delegate the performance of his duties; delegates non potest
delegare. This is because
personal quality and skill of the agent is central in the relationship.
Exceptions:
1.
In case of necessity or where it is customary to delegate60.
2.
But an estate agent who has been appointed “Sole agent” has no implied
authority to appoint a sub-agent:
John McCann & Co -v- Pow.61
3.
Where the principal expressly authorises the agent to delegate;
4.
Where a power to delegate can be inferred from the circumstances of the
case;
5.
Administrative routine acts such as signatures can be delegated by the
agent, once he has carried out the required performance, to, say, other
assistants and clerks.
Where an agent delegates, there is no privy between the principal and
the delegatee. Consequently the
delegatee cannot sue the principal for payment nor can the principal sue the
delegatee for not having adhered to the original terms of the agency.
6.
Good faith
Under the agent’s general duty of good faith there are the following.
1.
The agent must promptly disclose to the principal any material
information he may receive in the course of carrying out his duties.
2.
He must not disclose to a third party any confidential information entrusted to him by his
principal. See Weld Blundell v Stephens62; L.S. Harris
Trustees Ltd v Power Packing Services (Hermit Road) Ltd63.
An ex parte injunction known as Anton Piller injunction may be
granted in exceptional circumstances to a principal who fears that he may
suffer damage if the agent destroys or disposes of confidential information64.
3.
He must not let personal interests conflict with his duties: Armstrong
v. Jackson65.
4.
He must not make any secret profit (including bribe) from his
agency, which would obviously lead to a conflict between his duty and
personal interests.
An agent must account to his principal for any profit which he makes,
without the principal’s consent in the following situations:
1.
Profit made out of any property with which he has been entrusted by his
principal: Shallcross -v- Oldham (1862)
2.
Money or profit received by the agent on account of the position of
authority to which he has been appointed by the principal: In Reading -v-
Attorney-General 66.a sergeant in the Army,
received large sums of money from M. for sitting in uniform in the front of
loaded lorries as they went through to Cairo, so that the lorries were not
inspected. It was held that the
Crown as his employer was entitled to the money because R had obtained it by
the use of his uniform and the opportunities and facilities attached to it.
3.
Profit made out of any information or knowledge, which the agent has
been employed to collect or discover, or which he has otherwise acquired for
the use of his principal67
Note, however, that the agent is not accountable when the information
or knowledge is not of special or secret nature and he is not dealing with the
property of his principal: Nordisk Insulin laboratorium -v- C.L. Bencard68. An agent cannot be prevented from taking
advantage of an opportunity of earning money, even if such opportunity comes
his way because of his employment as agent, so long as he does not use his
principal’s property or break his contract by so doing: Aas -v- Benham69.
The duty of good faith does not as a general rule automatically end on
the termination of the agency. The
nature of the agency itself will often determine the duration. But where he has
committed a breach of his duty (e.g. by taking secret commission) the agent
owes no duty to disclose this to his principal.
4.
Duty to account
An agent must pay over to his
principal all sums received by him which are due to the principal, whether or
not such payment was so received illegally.
To buttress this principle, an agent must
1.
keep the principal’s property distinct from his own;,
2.
keep an account of all transactions entered into on behalf of the
principal; and,
3.
Be able to produce this account to the principal or his appointee.
Besides the general rules a number of statutes and regulations specify
the types of accounts to be kept by certain agents who receive property on
behalf of their principals, such as the Advocates (Accounts) Rules and the
Advocates (Deposit Interest) Rules.
4.
Obedience
Agents must keep within his express or implied authority. He disregards at his peril any clear and
lawful instructions given to him. Where
the instructions are uncertain the agent should ensure he acts reasonably and
in the interests of his principal.
4.6.4.2. GENERAL REMEDIES AVAILABLE TO PRINCIPAL FOR
BREACH OF DUTIES BY AGENT
1.
Damages for breach of contract;
2.
Damages in tort e.g. where the agent has refused to return the
principal’s property (detinue) or conspiracy with a third party;
3.
Suit for money had and received, in case of secret profits or for an
account. Application for an order for
account is also available where the agent fails to keep proper account70.
4.
Dismissal for breach of duty without notice: Boston Deep Sea Fishing
and Ice Co. -v- Ansell 71.
5.
Refusal to indemnify or to pay commission or other remuneration to the
agent: In Andrews -v- Ramsay & Co72, A instructed R
to sell property and agreed to pay him £50 commission. R sold and received £100 from purchaser as
deposit, of which he paid £50 to A, retaining the other £50 in payment of his
commission, with A’s consent. A learnt
that R had also received £20 as commission from the purchaser and sued to
recover this £20 and also the £50 he had paid to R. It was held that he was entitled to
recover both sums.
6.
As against both the briber and the agent bribed the principal has
alternative remedies. He may sue for
money had and received under which he can recover the amount of the bribe. He may also sue for damages for fraud, under
which he can recover the amount of the actual loss arising from his entering
into the transaction in respect of which the bribe was given. He cannot,
however, recover both: Mahesan s/o Thambiah -v - Malaysia
Government Officers’ Cooperative Housing Society Ltd. 73
7.
The Principal can repudiate the contract, whether or not the secret
payment had any effect on the agent: Shipway
-v- Broadwood.74
8.
As bribery is a criminal offence, the principal may also prefer
prosecution against the agent.
4.6.4.3 DUTIES OF THE PRINCIPAL
The principal has two main duties towards his agent. These are the duty to pay the agent his
commission or other remuneration agreed and the duty to indemnify the
agent for acts lawfully done and liabilities incurred in the execution of
his authority.
1.
Commission or other remuneration
The amount of the commission and
the terms under which it is payable depend wholly on the agreement terms. There is no general rule.
Examples:
1.
If a commission is payable on the sale of a particular thing the agent
is entitled to his commission if the thing is sold to a buyer whom he has
introduced, even though he may not have negotiated the terms of the sale and
even though the terms were accepted contrary to his advice: Burchell -v-
Gowrie and Blockhouse Collieries Ltd75. But he
must have been the effective cause of the sale.
2.
If an agent introduces a person “willing and able to purchase” he is
not entitled to commission if the person he introduces can only buy subject to
contract or subject to satisfactory survey: Graham & Scott (Southgate)
Ltd -v- Oxlade76.
3.
The agent is due his commission where he finds a “prospective
purchaser” who in good faith seriously contemplates the purchase and makes an
offer, even if, in the end, he might not be ready, willing and able to purchase:
Drewery and Drewery -v- Ware-Lane77.
4.
When property is entrusted to an agent to sell there is, in the absence
of any provision to the contrary, an implied term that the owner himself may
sell or employ other agents to sell the property: Brinson v Davies 78. However, no other agent may be so employed
where an agent is the “sole agent”, although the owner may still sell the
property and pay no commission: Bentall, Horsely and Baldry v Vicary79.
Note: A merchant appointed as “sole selling agent”
by a manufacturer is not an agent if the former buys the goods from the latter
and markets them. The merchant is simply
a distributor whose profit is the difference between the buying and selling
price. In this case, the manufacturer,
having given exclusive distribution rights to the merchant, cannot sell his
goods to anyone else: Lamb &
Sons -v- Goring Brick Co.80.
5.
An agency created for a fixed time will, if revoked before expiration
of such time, entitle the agent to damages because the agent is thereby
prevented from earning his commission.
6.
In exceptional cases, commission may be payable even after
termination of agency.
7.
An agent who receives an advance on his commission from his principal
will be bound to account for any excess on termination of his contract: Bronester
-v- Priddle81.
1.
Indemnity
For acts lawfully done and liabilities incurred in the course of the
agency the principal must indemnify the agent: Christoforides -v- Terry82.
The right to indemnity will be lost where the agent acts beyond his authority
or performs his duty negligently. In Davison
-v- Fernandes83, F asked D, his stockbroker, the price of some
stock ex dividend. D quoted the price,
which was cum dividend, but negligently omitted to tell this to F. So, F, thinking that the price was ex
dividend, authorised D to sell. D sold
and, in due course under rules of the London Stock Exchange, had to pay the
dividend to the purchaser. It was held
that D was not entitled to be indemnified by F.
4.6.5 RIGHTS OF THE AGENT
“The rights
of an agent against his principal flow from the principles:
1.
that an agent, as the representative of his principal and acting wholly
on his behalf, is entitled to be indemnified for such liabilities incurred and
losses suffered as were in contemplation when the agency was undertaken, or as
were stipulated by the contract of agency, and
2.
That, where he is an agent for reward, his principal must not
wrongfully hinder his opportunity of earning the reward.... [His] rights are to
be discovered by reference to the terms, express or implied, of the contract
between him and his principal”84.
1.
Indemnity
An agent who incurs or is forced
to expend money in the performance of his agency is entitled to indemnity from
his principal unless this right is excluded under contract. Example:
Where a principal instructs an auctioneer to sell by auction goods that
do not belong to him (principal) and the agent is compelled to pay damages for
conversion to the owner, the principal is liable to indemnify the agent: See Adamson
v Jarvis85.But there are exceptions:
1.
The agents’ acts must be authorised or ratified.
2.
the agent must not be in breach of his duties to the principal
3.
The act of the agent must not be an illegal act.
4.
Lien
A lien on or upon something is
the right to keep somebody’s property until a debt owed in connection with it
(for repair, transport etc.) is paid86. It is the right to hold and retain another’s
property until a claim is satisfied. But the lien must not be inconsistent with
the contract between the parties or with the special purpose for which the
goods or chattels were entrusted to the agent.
The inconsistency must be clear. In respect of all claims against his
principal arising out of his employment, an agent has a lien on the goods and
chattels of the principal, whether for remuneration earned or for expenses or
liabilities incurred.
(Note: Possessory Lien is the right to retain until a claim is
met; possession musts be continuous, rightful and not for a particular
purpose. Maritime lien is a right
specifically binding a ship or cargo for payment of claim arising under
Maritime law; it is not founded on possession
Equitable lien is a charge on property conferred by law until
claims have been satisfied; it is attached independently of possession and
binds all who acquire the property with notice of the lien. Unpaid seller’s lien is the right of
an unpaid seller to retain possession of them until payment or tender of the
price where e.g. the buyer becomes insolvent87.
5.
Remuneration or commission
An agent is entitled to be paid
an agreed remuneration or commission.
There must however be an express or implied agreement to pay
remuneration or commission. With respect
to the latter, there is a presumption of payment due to the agent wherever the
agent is employed to act in circumstances which, to the knowledge of the
principal, would raise such presumption, e.g.
where a person is engaged to sell goods or land or in some other normal
commercial activity, his commission or remuneration becomes payable. The amount
payable will depend on the express terms of the contract and on any relevant
trade usage.
6.
Account
7.
An agent has a right to have an account taken.
8.
Stoppage in Transit
Where an agent has bought goods on behalf of his principal with his own
money or under such circumstances as to incur personal liability towards the
seller for the price, he stands towards his principal in the position of an
unpaid seller. Consequently he possesses the same rights of stoppage in transit
where he has delivered the goods to a carrier for transmission to the
principal.
9.
Right to interpleader
Subject to certain exceptions,
an agent who is in possession of any money, goods or chattels to which
conflicting claims are made by his principal and a third party may interplead
notwithstanding his agency. He must be
completely impartial in this, and he must not claim any interest for himself in
the subject matter except for his costs and charges.
4.7 RELATIONSHIP BETWEEN PRINCIPAL AND THIRD PARTY
The principal is responsible for all contractual or tortious acts of
his agent within the authority (of all types) of the agent. In exceptional cases, the principal may be
criminally liable even where he took no part in, authorised or connived at the
act or default of the agent88. The principal’s relations with
third parties may be considered under the following:
1.
Contractual Relations
2.
Tort liability
3.
Criminal Liability
4.
Dispositions of Property
4.7.1 CONTRACTUAL RELATIONS
(a) Doctrine of privity & Limitations
It may be recalled that according to the doctrine of privity of
contract no person other than the parties to a contract may acquire or incur
liabilities under it. In agency, once an agent has made a contract on behalf of
his principal he virtually moves out of the scene. Privity of contract then exists between the
principal and the third party. But the
results of an agent’s contract differ and depend on whether the principal was named, disclosed whether (named or unnamed)
or undisclosed.
An agent for a named
principal acquires or incurs neither rights nor liabilities under the contract
and drops out as soon as it is made (see Gadd v. Houghton (1876) 1 Ex.
D. 357) except where the agent agrees to assume personal responsibility or
signs a bill of exchange in his own name or where there is some trade custom
which makes him personally liable. In
the last case where for example an agent is contracting on behalf of an
overseas principal he will be held liable89. Where an agent
informs the third party he is contracting with that he is acting on behalf of a
principal whose identity he does not reveal the principal is unnamed but
is said to be disclosed. The
legal rights and liabilities of the principal and the third party are the same
as if the principal is named.
Where the agent has acted within his express, implied or usual
authority, the general rule is that the principal can sue and be sued on the
contract except in the following cases:
1.
Where the contract expressly provides that the agent is the sole
principal;
2.
Where the terms of the contract are inconsistent with agency; and
3.
Where the identity of the principal is material to the third party e.g.
contract for personal service or of marriage90
The principal is undisclosed when the agent does not disclose
his existence to the third party. In
this case the agent incurs personal liability and may be sued directly by the
third party. And the position is not
altered by the fact that the third party knows of the existence of a principal
so long as he relies only on the transaction between him and the agent91. The third party does, however, have
the option to enforce the contract against the principal as soon as he
establishes his (principal’s) identity.
He cannot sue both principal and agent and he must act with reasonable
dispatch against the principal after his identity is revealed.
Limitations
Deed executed in the name of agent: At common law, a contract under seal executed
by an agent in his own name cannot be enforced by or against the principal,
even though it is expressly stated that the agent is contracting on behalf of
the principal. But if he executes a deed
as trustee for his principal of the rights conferred by the deed, the principal
may enforce the contract.
Bills of exchange: A principal is not liable upon any bill of exchange, cheque or
promissory note unless his name appears thereon92. But his signature may be written
by the hand of the agent.93
Foreign principal: Where the agent acts for a foreign principal there is no presumption
that the agent necessarily incurs personal liability, but the fact that the
principal is a foreigner is a factor to be taken into account in establishing
whether in the circumstances the contract is enforceable by or against the foreign
principal or against the agent personally: Victory Shipchandlers -v- Leslie
& Anderson Ltd94.
Third party election: If a third party after entering into a contractual
relationship with a person finds that the latter was actually an agent of a
principal who has suddenly entered the scene, he may chose to sue the principal
on the contract. His right to sue the
agent cannot be brought to an end by the mere appearance of the principal on
the scene. But once he elects to sue the
agent the principal is discharged and vice versa. The election to pursue his
rights against the agent must be unequivocal.
Demand for payment from and threats to sue the agent do not
automatically amount to a clear exercise of this option: Calder v. Dobell95. Likewise proving in an agent’s bankruptcy has
been held inadequate to show the fact of such unequivocal choice: Anderson
v. Gandossequi96.
But election is conclusively proved where the third party obtains
judgement against the agent.
(b) Settlement with agent
If a principal who owes a debt to a third party pays his own agent but
the agent fails to account to the third party, the principal will be made to
pay again to the third party. There are
numerous cases where a borrower from a financial institution is instructed to
repay through an advocate who fails to remit the money thus received by
him. It would appear that the borrower
would still have to pay the lending institution (and possibly sue the
advocate). A “debtor must seek out his
creditor and pay him” 97 .
However there are cases which show that there are many exceptions to
this general rule, especially where the principal is undisclosed. The third
party is not discharged from his liability to the principal by any payment to
or settlement with the agent, unless such payment or settlement is ratified by
the principal or is made in the ordinary course of business or in accordance
with the agent’s authority, express, implied or apparent. Nor is he, in the absence of express
authority, discharged by payment by a negotiable instrument (Williams -v- Evans98unless
justified by usage.
(c) Set-off
Where the principal is disclosed, a third party who is creditor to the
agent cannot set off the debt due to the agent against a debt due from the
third party to the principal. Set-off is
not allowed unless authorised by the principal. But where the principal is
undisclosed the principal will be bound by the third party’s right of set-off
against the agent. This is because the
third party would have contracted with the agent believing him to be the
principal.
(d) Fraud, Misrepresentation & Concealment
As a general rule, if while negotiating a contract, an agent acting
within the scope of his authority is guilty of fraud or innocent
misrepresentation or of concealment of essential facts, which ought to be
disclosed to the third party, the contract is voidable. The third party may rescind it and recover
any benefit which has passed there under to the principal, whether or not the
principal was privy to the fraud, misrepresentation or concealment.
(e) Corruption
If in a transaction the principal later discovers that a third party
had paid or promised a bribe to the agent the principal may:
(i) Repudiate the contract and have it set aside
or,
(ii) Affirm it and obtain such relief as the court
may think fit to give him. There is an
irrefutable presumption that the payment in the nature of a bribe was made with
the intention that the agent should be influenced by it. It is therefore immaterial to inquire
whether or not the agent was in fact influenced by the bribe.
4.7.2 TORT LIABILITY
Where a principal gives his agent express authority to do a
particular act which is wrongful in itself, or which necessarily results in a
wrongful act, the principal is responsible, jointly and severally with the
agent, to third parties for any loss or damage occasioned thereby.
The principal is also jointly and severally responsible with the agent
for acts of the latter done within the scope of his apparent or ostensible
authority or his implied authority. Selle& Another -v- Associated
Motor Boat Company Ltd and others99. Likewise, in motor-car cases, the owner of a
motor-car (principal) is considered to be liable for the driver’s negligence if
the latter (agent) drives it wholly or partly for the owner’s purposes. It is immaterial that the authority was
carried out in an imperfect or improper manner. It is also immaterial that actual malice is
an essential ingredient of the wrongful act: Cornford -v- Carlton Bank100
. Nor does it matter that the wrongful
act is a crime101 (Moris -v- C.W. Martin &
Sons Ltd 102 and the agent has been convicted Dyer -v-
Munday103. A
forgery if committed within the ostensible scope of the agents authority,
imposes liability on the principal: Uxbridge Permanent Benefit Building
Society -v- Pickard104. The position remains the same even where the
act in question has been expressly prohibited by the principal.
If however the act of the agent falls entirely outside the scope of his
authority the principal cannot be held responsible: Sanderson -v- Collins105.
(a)
Fraudulent misrepresentation
Where an agent is personally guilty of fraudulent misrepresentation and
has apparent authority to make the representation, the principal is
responsible. An action of deceit lies
against him. But this does not apply
where the fraud is primarily practiced on the principal: KweiTek Chao -v-
British Traders and Shippers Ltd106. Once the third
party acts on the misrepresentation it is irrelevant that the fraudulent
misrepresentation was made before the agent’s authority was granted: Briess
v Woolley107. The principal will be responsible for any
fraudulent misrepresentation as if there was actual fraud and dishonesty on his
part if he knew to be false a representation made by the agent in the honest
belief that it is true: Armstrong -v- Strain108. But he will not be so liable where the agent
makes the representation innocently without his knowledge although he knew the
facts, which rendered the representation false: Armstrong v Strain109.
4.
Negligent misrepresentation
The principal may be vicariously
liable in negligence for the negligent misrepresentation of the agent. He may also be liable in respect of the
supply of false information to the agent which results in misrepresentation by
the agent to persons to whom the principal owes a duty of care: W.B Anderson
& Sons Ltd v Rhodes (Liverpool) Ltd110.
5.
Representation as to credit
The principal is not liable in an action for deceit for any
representation as to the character or credit of another person made by his
agent, unless such representation is in writing signed by the principal
himself. A signature by the agent is not
enough even though expressly authorised or adopted by the principal: William
-v- Mason111.
4.7.3 CRIMINAL LIABILITY
As a general rule no act or default on the part of an agent imposes any
criminal liability on the principal in respect thereof, except if he
(principal) takes part in, authorises, or connives at the commission of such a
default.
Exceptions: The principal may however be criminally liable at common law for a public
nuisance committed by him through the instrumentality of the agent. He may also be liable if a statute imposes
criminal liability upon the principal in respect of specific acts or defaults
of the agent. E.g. under certain foods
and drug legislation such liability would normally exist without proof of
criminal intent. These exceptions do not apply where negligence is an essential
ingredient in the offence.
4.7.4 PROPERTY
Fraudulent action of an agent in the disposition of a principal’s
property does not affect the position as between the principal and a third
party even if the agent had express, implied, usual or apparent authority. The agent is here in a fiduciary position
where he is entrusted with property to be applied for the benefit of the principal
and to be accounted for in that regard.
A third party taking such property with due notice must account to the
principal.
4.8 RELATIONS BETWEEN AGENT AND THIRD PARTIES.
4.8.1 LIABILITIES OF THE AGENT
(a) Disclosure or
non-disclosure of Principal
(i) Agency not disclosed: An agent who contracts in
his own name without disclosing either the name or existence of his principal
is personally liable on the contract to the third party. This is so even if he actually is acting on
behalf of the principal. And unless the
third party elects to look for the principal alone, the agent will remain
liable even after the third party discovers that he is a mere agent: Dramburg
-v- Pollitzer112.
However, the third party has a choice, on discovering the principal or
the agent, or both. This is referred to as third party’s election. Once he has made an unequivocal choice to sue
the agent, to sue either the principal or the agent, or both but only in the
alternative, because he would have made a contract with only one person giving
rise to only a single obligation. Thus where the principal pays money to his
agent for the benefit of a third party that does not discharge the principal’s
liability to the third party if the agent fails to pass the money to the third
party. The general rule is that a debtor
must seek out his creditor and pay him.
It makes no difference whether the agency was disclosed or not at the
time of the transaction: Irvince v. Watson113. Nor does
it matter that the third party was unaware of the agency: Heald v. Kenworthy114.
(ii) Existence known but Identity of Principal not disclosed: Except in certain trade usage
which many require the principal to be named, an agent will not be made liable on the contract just because he does not
disclose the name of his principal so long he has disclosed his existence. It must be clear from the construction of the
contract as a whole that he contracted as agent only and that he undertook no
personal liability. Describing himself
as agent does not by itself exonerate the agent and the contract and
surrounding, circumstances may reveal otherwise.
The following words may negative responsibility of the agent: “as
agents”, “on account of”, “on behalf of”, “for”. They are conclusive when qualifying
signature. But the word “agent” alone
does not necessarily have the same qualifying effect. It may be used as a description or as a
qualification115.
Similarly the addition of the words “secretary” or “director” to the
signature of a company’s agent will not be sufficient to avoid his personal
responsibility.
(iii) Principal disclosed: an agent, who discloses both the existence and name
of the principal will as a general rule, not be liable on the contract to a
third party. Whether or not he had
authority to make the contract will be immaterial.
Exceptions are
1.
where personality is imposed by express terms of the contract;
2.
where ordinary course of business necessitates personal liability;
3.
where usage imposes personal liability;
4.
Where he is the real principal.
The agent may however be liable for breach of warranty in cases where
he is found to have had no authority.
(iv) Documents signed in agent’s name: An agent who executes a
deed in his own name is personally liable upon it, whether he discloses the
name and existence of the principal or not. However, unless he signs his own
name the agent is not liable in respect of bills of exchange, cheques, and
promissory notes which he signs on his principal’s behalf.116 Where the
principal is a company registered under the Companies Act, Cap 486, and an
agent signing a contract on its behalf must add the name of the company. The word “Limited” or the contraction “Ltd”
must also be included in the contract in the case of a limited liability
company: Stacey Co Ltd -v- Wallis117.
(b) Warranty
of Authority
Implied Warranty: A person who purports to do any act or make any contract as agent on
behalf of a principal is deemed to warrant that he has in fact authority from
such principal to do the act or make the contract in question. If he has no such authority he is liable to be
sued for breach of warranty of authority by any third party who was
induced by his conduct to believe that he had such authority, and who, by
acting upon such belief, has suffered loss in consequence of the absence of
authority: Starkey -v- Bank of England 118. In this
case,
One of two trustees of stock standing in the joint names in the books
of the Bank of England sold it under a power of attorney, to which the
signature of the co-trustee was forged.
Starkey, a stockbroker, bona fide acting upon this power of attorney
induced the bank to transfer the stock to the buyer. It was held that Starkey had impliedly
warranted his authority to the bank, and was therefore liable to indemnify the
bank against co-trustee’s claim for restitution. Whether or not the agent
himself believed in the existence of his authority does not matter: Starkey
-v- Bank of England119. It is immaterial also that
the agent’s belief in his authority extends to an authority which he believed
that he had but in fact never had, or to an authority which he originally had
but which has ceased without his knowledge or means of knowledge: In Yonge v
Toynbee120.
Solicitors were instructed by T to defend threatened proceedings on his
behalf. Before the proceedings started,
T., without the solicitors’ knowledge, became insane. This revoked their authority. (See chapter on Termination of Agency)
The solicitors delivered a defence and then learned that T was insane. The plaintiffs asked for the defence to be
struck off and for the solicitors to pay costs.
It was held that the solicitors, by acting for T, had impliedly
warranted that they had authority to do so, and therefore they were liable for costs.
Buckley L.J. said: “It has been pressed upon us that a solicitor is an
agent of a special kind with an obligation towards his client to continue to
take on his behalf all proper steps in the action. The particular nature of his agency is not, I
think, very material. [During the
material period] the solicitors had the means of knowing and did not in fact
ascertain that the defendant had become of unsound mind. In the interval they did acts which amounted
to representations on their part that they were continuing to stand in a
position in which they were competent to bind the defendant. This was not the case. They are liable, in my judgement, upon an
implied warranty or contract that they had an authority which they had not”121.If
the agent expressly disclaims any present authority at the material time then
he will not be liable for breach of warranty.
Again, he will not be liable if the other party knows he has no
authority: Halbot -v- Lens122; also Lilly, Wilson &
Co -v- Smales, Ecles& Co123. In the Lilly case,
S signed a charterparty45 “by telegraphic authority as
agents”. Owing to a mistake in the
telegram the rate of freight offered was wrong, and S was sued in breach of
warranty of authority. It was held,
on its being proved that by mercantile usage the form of signature negative
liability, S was not liable.
Also where the other party is fully acquainted with the facts from
which the inference of authority is drawn, the agent will not be liable for
breach of warranty. Similarly when the
evidence of the agency is an inference of law, the agent is not liable,
provided that the facts are equally known to both parties: Eagles field -v-
Marquis of Londonderry (1878) 38 LT. 303.
Summary
It should be noted that action for breach of implied warranty of authority
is based, not on the original contract, but on the implied representation by
the agent that he had authority to make the original contract.
1.
The action can only be brought by the third party, not by the
principal.
2.
The agent is liable whether he has acted fraudulently or innocently,
and even if his authority has been terminated, without his knowledge, by death
or mental disorder of the principal. Yonge
-v- Toynbee (1910) 1 KB 215.
3.
The agent is not liable if his lack of authority was known to the third
party, or if it was known that he did not warrant his authority or if the
contract excludes his liability.
4.
If the principal gives ambiguous instructions and the agent acts on
them bona fide and in a reasonable way, he will not be liable in action for
breach of warranty even if he has interpreted them wrongly: Weigall& Co
-v- Runciman& Co (1916) 85 LJ KB 1187.
5.
The agent warrants his authority not only when he purports to contract
on behalf of another but also when, purporting to act as an agent he induces a
third party to enter into any transaction with him on the faith of such agency: Starkey -v- Bank of England (1903) AC
114.
6.
The measure of damages for
breach of warranty of authority is the actual loss sustained47
Liability to Repay Money: Generally, an agent is not personally liable to repay
money he received from a third party on behalf of his principal when the third
party becomes entitled to repayment, whether the money remains in the agent’s
hands or not. Exception: The agent may however be held personally liable
to repay the money to the third party in the following circumstances:
1.
where the third party pays money to the agent under a mistake of fact;
or
2.
where the agent receives the money in consequence of some wrongful
act;
3.
Where the agent has acted as a principal in the transaction in
consequence of which the money was paid to him.
In the first two cases if the agent is not party to the wrongful act
and he has paid over money to his principal or his principal is a foreign
sovereign immune from suit, he will not be liable to repay the money.
Direction by Principal to pay Third Party: The agent who assents to
his principal’s direction to pay a third party any money he has or is about to
receive renders himself personally liable to the third party with notice of
such assent. He will also be liable if
he enters into an unconditional undertaking to pay the third party or to hold
it on his behalf: Crowfoot -v- Gurney
(1832) 9 Bing 372.
4.
Tort Liability & Breach of Trust
Tort Liability: Any agent who commits a wrongful act in the course of his employment is
personally liable to a third party who suffers loss or damage thereby, whether
or not the act was expressly authorised or ratified by the principal. Whether or not the agent did the act
innocently or without knowledge that it was wrongful is immaterial, except in
cases where actual malice is essential to constitute the wrong.
Conversion: An agent will be guilty
of conversion and liable to the true owner of goods or securities which he
acquires, actually or constructively, but which do not belong to his principal
if he deals with them in any wrongful manner e.g. by selling them, delivering
them to a stranger or otherwise disposing of the property in them. It is immaterial that he believed the goods
or securities to be those of his principal and dealt with them according to the
principal’s instructions.
The following situations would constitute defenses to a charge of
conversion against the agent:
1.
Where the true owner is stopped from denying the principal’s authority
to dispose of them e.g. where the principal is a mercantile agent, or buyer or
seller in possession of goods or the documents of title thereto with the
consent of the true owner48 here the agent is a banker
receiving payment of a cheque on behalf of a customer49
2.
Where the agent who is not in possession of the goods or securities
merely negotiates a contract of sale between his principal and the third party
3.
Where the agent with possession does not purport to dispose of the
property in the goods or securities and merely deals with the possession of
them as directed by the principal. But
such dealing must not constitute obvious wrong.
Breach of Trust: An agent in possession of
property, held in trust for another by his principal, who makes a disposition
of such property which is inconsistent with the trust will not be guilty of a
breach of trust if he acted according to instructions of his principal. But if he had notice of the trust at the
material time and was aware that the disposition was in breach of the trust
them he will be found guilty: Magrus -v- Queensland National Bank.
4.8.2 RIGHTS OF THE AGENT
4.8.2.1 RIGHT TO ENFORCE CONTRACT
As we have seen an agent who names his principal and makes a contract
expressly as agent on his principal’s behalf, cannot enforce the contract. This is so even if he is the real
principal (Bickerton v Burrel (1816) 5 M & S 383) unless the
other party has affirmed the contact with knowledge of the fact that “the
agent” is the principal.
The agent can however enforce the contract in the following instances:
1.
Where he makes a contract in his own name without disclosing the
existence of a principal
2.
Where he renders himself personally liable on the contract
3.
Where he purports to act for an unnamed principal who is non-existent;
4.
Where he is the real principal even though he has named another person
as principal and makes the contract as agent and the third party has affirmed
the contract with knowledge of this fact.
4.8.2.2 RECOVERY OF MONEY PAID
An agent who has paid money on behalf of his principal to a third party
under such circumstances that the principal, if he had paid the money himself,
would be entitled to recover the money, may bring an action in his own name for
money had and received against the third party.
4.8.3 PARTNERSHIPS AND LIMITED COMPANIES
4.8.3.1 A PARTNER’S SCOPE OF AUTHORITY
A partner is an agent of the firm and his other partners for the
purpose of the business of the partnership.
Consequently the acts of every partner bind the firm and his other
partner if such acts are done “for the carrying on in the usual way business of
the kind carried on by the firm.” 50 The relationship
between partners and persons dealing with them are based on the usual agency
rules. It is stipulated that every
partner in a firm is “liable jointly with the other partners for all debts and
obligations of the firm incurred while he is a partner” but a person under the
age of majority, although he may be admitted to benefits of partnership,
“cannot be made personally liable for any obligation of the firm”. But his share in the firm’s property is liable
for the obligations of the firm.
4.8.3.2 COMPANY DIRECTORS AND AGENTS
A limited company is liable for the acts of an agent with actual
authority or if it ratifies such acts. The Company will also be liable for the
acts of a person held out (say by the directors) as managing director. A third
party cannot plead apparent authority against the company if the transaction in
question is clearly inconsistent with the memorandum and articles of
association of the company or other public documents which can be inspected at
the Companies Registry. In Emco Plastica
Int’l Ltd v. Freeberne (1971) EA 432 an argument by the appellant company
that the respondent, the company secretary was an insider and therefore was put
on inquiry in regard to the powers of directors and in particular should have
known that the managing director did not have powers to offer certain terms in
his (Secretary’s) contract of service was rejected. There was no provision in the Articles of
Association that was clearly inconsistent with the functions of a
managing director. The Secretary, it was
held, was not placed in a position different from that of an outsider who is
entitled to assume in the absence of knowledge to the contrary that a director
signing a contract has the authority to do so,” Per Lutta J.A, at p. 436.” There was no evidence adduced to indicate
that the respondent knew or ought to have known that he was not entitled to
rely on the contract of service offered to him” by the company’s managing
director, per Mustafa J.A. at p. 437.Any defect in the internal management of
the company into which a third party cannot inquire will not defeat his claim
unless he knew of it or the surrounding circumstances should have made him
suspicious.
4.8.4 TERMINATION OF AGENCY
An agency may be terminated by the conscious or deliberate act of the
parties or, by operation of law.
4.8.4.1 ACT OF THE PARTIES
An agency relationship may come to an end prematurely when the parties
to an agreement have mutually agreed to a discharge of such relationship. In other cases the agency will terminate when
the agent has fulfilled his mandate.
Where an agent is employed for a fixed term his agency ends when the
period of time has expired. Again, the
principal is generally free to revoke and the agent is free to renounce his
agency. In other words an agency may be
terminated by the act of the parties through mutual agreement, performance or
revocation.
(a) Mutual agreement
Like any other contract an agency may be brought to an end through mutual
agreement of the parties, the principal and the agent.
(b) Performance
Performance of the contract in question terminates the agency, i.e.
where the agent has accomplished his mission.
(c) Revocation
The power of the principal to revoke the agent’s authority at
any time is subject to certain important limitations. If he exercises his power in breach of his
contract with the agent in certain cases he may be liable in damages.
Certain classes of agency agreement are held to be irrevocable as the law seeks to protect the interests of
the agent or third parties.
1.
Authority coupled with an interest.
An authority coupled with an interest has been defined as “where an
agreement is entered into on a sufficient consideration, whereby an authority
is given for the purpose of securing some benefit to the donee of the
authority”, per Williams J. in Clerk -v- Laurie (1857) 2 H & N 199
at p. 200. In Gaussen -v- Morton (1830) 10 B & C 731, A principal
who owed a large sum of money to William Forster, conferred upon the latter a
power of attorney to sell certain lands and to discharge the debt out of the
proceeds of the sale. He later sought to
revoke his agent’s authority. It was held
that the agency created was irrevocable as it constituted an authority coupled
with an interest. The object of the
agent’s mandate here was to secure the debt owed to him by the principal.
For an agency to be treated as irrevocable, therefore, its explicit
object must be to secure some particular interest or to confer some particular
benefit upon the agent. The mere fact
that revocation of the agent’s mandate will prevent his earning commission, for
example, is not considered as a sufficient interest to make the agency
irrevocable: Frith -v- Frith(1906) 94L.T.38351
2.
Executed authority
Where the agent has commenced performance of his mandate and incurred
liabilities for which the principal must indemnify him, the courts will treat
such agency as irrevocable. In Read -v- Anderson (1884) 13 QBD 779, an
agent was employed to lay bets on his principal’s behalf and to settle them if
they were lost. The agent incurred
liabilities in performance of his duties.
It was held that the principal could not unilaterally revoke his
agent’s authority. An authority cannot
be revoked if it has passed an interest and has been executed.
3.
Statutory authority
Certain statutes provide protection to parties against the effects of
revocation of an agent’s authority. For
example, under the Bankruptcy Act, Cap 53, certain transactions which would
otherwise be invalidated by the bankruptcy of a person are protected where some
conditions are complied with: s. 50, ibid.
4.8.4.2 OPERATION OF LAW
An agency is automatically terminated by the following circumstances.
1.
By death of the principal or agent;
The death of either the principle or the agent brings the agency
relationship to an immediate end, unless the agency is an irrevocable one. The contract of agency is considered to be a
personal one in which the identify of the parties is of central importance. When the agent dies his obligations do not
pass to his executors. In Companari -v- Woodburn (1854) is CB 400. An
agent was employed to sell a picture on the understanding that he would be paid
£100 only if he succeeded in selling it.
Before affecting a sale his principal died, thus revoking his
authority. Knowing nothing of the death
the agent proceeded to sell the picture.
He then sought to recover his commission from the principal’s personal
representative. It was held that
he could not recover commission under the contract which had been
automatically terminated by the principal’s death.
(It should be noted however that the court granted the agent
compensation on a quantum meruit for the services he had rendered). Upon
the principal’s death, any acts, which the agent purports to perform in the
principal’s name, are no longer binding.
Nevertheless, any rights against the principal, which had already vested
in the agent prior to death, may still be exercised against the estate of the
principal.
(b)By bankruptcy of
principal, or agent if, in the case of the agent, it makes him unfit to carry
out his duties. In general, bankruptcy
amounts to legal incapacity but those rules are subject to important
qualifications.
(c) By insanity of principal or agent, if the
insanity is such as to prevent them from contracting. Although the mental disorder of the principal
revokes the authority of the agent, the principal will be bound by contracts
made with third parties who have no notice of that incapacity. In Drew -v- Nunn ; (1879) 4 Q BD 661 .The
defendant had appointed his wife as his agent and given her authority to deal
with the plaintiff, D. He later became
insane, but his wife continued to order goods from D who was unaware of D’s insanity. When D recovered his health he refused to pay
for the goods and was sued for the price.
It was held that D was liable to pay for the goods.
Note however that in Yonge v
Toynbee (already cited above, chapter 8) the Court of Appeal
seems to hold that the third party (in this case of wife of D) may
alternatively be held liable as agent.
2.
By intervening illegality (e.g. where the principal being a
foreigner in this country becomes an enemy in status on account of outbreak of
war between Kenya and his country): See Stevenson
& Sons Ltd -v- Akt-fiirCartonnagen – Industries (1917).
(e) By effluxion of time (where agency was created for a limited
time)
(d) By frustration, (e.g. the basis of the
contract has been destroyed, or an essential event has failed to occur, or the
Government has interfered or there is a change in the law or method of
performance has become impossible.
4.8.4.3 EFFECT OF TERMINATION
Termination of an agency is usually effective as between the principal
and the agent; but vested rights do not necessarily cease thereby. In the case of the third parties, for
example, an agent stripped of actual authority may still have apparent
authority.
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