CHAPTER7: DEBT CAPITAL

·       It may be the case that a companycan acquire all the capitalit needs throughthe selling of shares

·       However, in many companies, this will not be the case and the company will need to obtain additional capital by borrowing it from others

·       Such capital is known as ‘debt capital’ or ‘loan capital’and can be obtained in several ways,e.g. using an overdraft facility,obtaining a loan from the bank, or mortgaging the property of the company

1.       DEBENTURES

·       A debenture isadocument by which a companycreates or acknowledged a debt, whethersecured or unsecured à Section 3, CA 2015: a debenture is defined, in relation to a company, as including debenture stock and other securities of a company (whether or not constituting a charge on the assets of the company)

·       Companies can raise significant amounts of debt capital using debenture stocks – these are similar to shares, except that the holder of a debenture stock is a creditor and not a member, and is therefore entitled to interest on the loan (the debenture) but will not receive a dividend

·       A secured loan is one where the loan agreement provides the lenderwith a claim over the company’s assets,so that if the

company defaults on the loan, the lender can seize the relevantassets and sell them in order to satisfy the debt owed

·       A further benefit of secured loans is that, in the event of the company being liquidated, secured creditors have the right to be paid before the unsecured creditors. Given that insolvent companies will have limited assets, this is an extremely important advantage

1.1    DEFINING A DEBENTURE

CASE

HOLDING

Levy v Abercorris Slate and Slab

Co [1887]

‘Debenture’ is not a term of art, but has been defined to mean simply any document

that creates or acknowledges a debt

Lemon v Austin Friars

Investment Trust Limited [1926]

It is impossible to give an exhaustive definition of a debenture, but an acknowledgement

of indebtedness is its primary feature

Fons Hf v Corporal Limited &

Another [2014]

Debentures have the ‘ordinary meaning of an acknowledgement of debt recorded in a

written document’ à the word ‘debenture’ has origins in the Latin word for ‘owing’

1.2    DEBENTURE AS A SECURITY DOCUMENT

·       In practice, a finance lawyeris most likelyto associate the term ‘debenture’ with a documentthat:

o   Is executed in favour of a creditor;

o   Includes a covenantto pay the creditor; and

o   Grants security over the whole or substantially the whole of a company’sassets

·       Because a debenture in a literal sense is merely an instrument evidencing corporate indebtedness, and might itself be unsecured or irredeemable, many leading textbooks choose to avoid the term altogether, preferring to use the terms ‘mortgage’ or ‘charge’ when referring to instruments that create securityinterests

·       Typically, a debenture as a securitydocument creates:

o   A fixed chargeover the assetsof the company which are not disposedof in the ordinary courseof business;

o   A floating charge over the rest of the company’sundertaking; and

o   It may also take an assignment by way of security over choses in action and mortgages over specific assets such as real estate or shares

·       Adebenture of this nature grants the creditorrights as mortgageeor chargee, e.g. the authorityto appoint an administrator or administrative receiver with wide powers to run the company’s business and realise its assets in the event of defaulton the debenture repayment

2.       CHARGES

·       Any form of securitywhere possession of property is not transferred will be classified as a charge

·       The creditor who obtained the charge is called the ‘chargee’ and the borrower who granted the charge is known as the ‘chargor’ or ‘surety’

2.1    FIXED CHARGE

·       The simplestform of charge is the fixed charge,so called becauseit is taken over a fixed, identifiable asset of the company,

e.g. a building, a vehicle, or a pieceof machinery

·       Should the debtor company default on the loan, the creditor can look to the charged asset to satisfy the debt, usually by selling it and recovering the proceeds of sale

·       The most straightforward and common example of a fixed charge is a mortgage à the debtor company (the mortgagor) will borrow capital from the creditor (the mortgagee) and the loan will be secured on a fixed asset of the company (e.g. a building). Should the companydefault on the loan, the creditor can obtain possession of the mortgagedasset and sell it

·       Unless the charge contract provides otherwise, a company can grant multiplefixed charges over a specificasset, with prior charges having priority over subsequent ones (unless the terms of the prior charges provide that subsequent charges can be made that take priority)

·       Fixed charges are advantageous for creditors because:

o   They allow the creditor to take security over a fixed, identifiable asset and ensure that the creditor ranks ahead of all other creditors in the event of the company being liquidated; and

o   It limits the debtor’s abilityto deal with the chargedasset (however, this created inflexibility for the debtor)

2.2    FLOATING CHARGE

·       A more flexible form of chargeto the fixed charge was required, leadingto the creation of the floating charge

·       There is no legal definition of what amountsto a floating charge, but in Re Yorkshire Woolcombers’ Association Ltd [1903],three defining factors were identified:

o   The charge will be taken over a class of assets (e.g. machinery, raw materials, or even the entire undertaking), as opposed to a specific asset;

o   The class of assets chargedis normally constantly changing (e.g. raw materials will be used and replenished); and

o   Floating charges leave the companyfree to use and deal with those assets

·       This charge ‘floats’ over the chargedassets, but is not fixed on them, so the company is free to use and dispose of those

assets

·       The company can even grant fixedcharges on the assets over which the charge floats,which may (depending on the terms of the floating charge) rank ahead of the floating charge (Wheatley v Silkstoneand Haigh Moor Coal Co [1885])

·       However, the company cannot create a subsequent floating charge over the exact same class of assets as a prior floating charge, unless the first chargee agrees. The company can, however, create subsequent floating charges over part of the assets charged by a prior floating charge and the general rule is that later charges rank behind earlier ones (although the terms of the first charge may provideotherwise)

·       Upon the occurrence of certain events, the charge will cease to float and will become affixed to the charged assets, whereupon the company’sability to deal with the charged assets will be limited (‘crystallization’). Certainevents will always cause a charge to crystallize, including:

o   The company going into liquidation;

o   The appointment of a receiver; and

o   Anevent that a clause in the securitycontract specifies as causing automaticcrystallisation (‘automatic crystallisation clause’)

FIXED CHARGE

FLOATING CHARGE

Legal or equitable?

Can be legal or equitable

Can be equitable only

Subject matter of charge

Usually taken over specific, identifiable assets

Usually taken over a class of assets or the

entire undertaking

Effect     on              the              charged

asset(s)?

The ability of the chargor to deal with the

charged asset will usually be limited

The chargor will usually be free to deal with the

charged assets

Better              suited         for              which

areas?

Better suited for assets that the company does

not need to deal with or dispose of

Suitable for all types of assets

Priority?

Ranks ahead of all other debts

Ranks behind fixed charge holders, liquidation

expenses and preferential creditors

Reliant on liquidator?

Not reliant on the liquidator – Fixed charge holders can obtain the charged asset and sell it

to satisfy the debt owed

Floating charge holders are reliant on the liquidator to obtain satisfaction of their debt

Set aside by liquidator?

A liquidator has no power to set aside a fixed

charge

A liquidator has the power to set aside certain

floating charges

2.3    DETERMINING THE CLASSOF A CHARGE

·       Identifying whether a particular charge is fixed or floating is not always straightforward and a charge holder may use this ambiguity to his advantage (e.g. by creating a charge with the characteristics of a floating charge, but later arguing that i t is in fact a fixed charge in order to gain priority upon liquidation)

·       Accordingly, the approach the courts use in determining whether a chargeis fixed or floatingis of crucial importance

CASE

HOLDING

Agnew v Commissioner for Inland Revenue [2001]

The process for determining the classification of a charge is two-fold:

(i)             The court will look at the charge instrument in order to determine the rights and obligations that the parties intended to grant each other – it is not the task of the court to determine what type of charge the parties intended to create

(ii)            The courts will use these rights and obligations to determine, as a matter of law, whether the charge was fixed or floating

Street v Mountford [1985]

Since the courts are not concerned with the type of charge that the parties intended to

create, it follows that the courts will not regard the parties’ own classification of the charge as conclusive

Russel Cooke Trust Co. Ltd v Elliott [2007]

The courts will contradict the parties classification of the charge if the rights and obligations imposed by the charge are not consistent with the label that the parties have attached to it à in this case, the High Court held that what was described in the charge

instrument as a floating charge was actually a fixed charge

Re Spectrum Plus Limited [2005]

A company obtained an overdraft facility from a bank, with the bank taking what was purported to be a fixed charge over the company’s book debts as security. The charge required that the company could not sell, charge, or assign the book debts without the bank’s consent, and that the proceeds of the book debts were to be paid into the bank account that the company held with the bank. The company was, however, free to draw upon the account, providing that the overdraft facility was not exceeded. The company entered liquidation and, in order to determine the priority of the company’s creditors, the court had to determine whether the charge was fixed or floating

Held: The House held that the charge was a floating charge. Lord Scott stated that the key feature of a floating charge was that it grants the chargor (the company) the right to use the charged asset, including removing it from the scope of the charge. As the company could draw from the bank account, the rights granted to the chargor indicated

strongly that the charge was a floating charge

2.4    REGISTRATION

·       For obvious reasons, prior to providing a company with capital,a potential creditorwill want to know of any charges over

the company’s assets

·       Accordingly, successive Companies Acts have long providedfor a system of registration of charges

CHAPTER8: PARTNERSHIPS

·       Kenyan law recognises 3 forms of partnerships: generalpartnerships; limited partnerships (LP); and limitedliability partnerships (LLP)

·       Section 3, Partnership Act 2012 (‘PA 2012’) defines partnership as the relation which exists between persons carrying on a business in commonwith a view to profit

·       General Partnerships are governedby the PA 2012:

o   Many general partnerships (or ordinary partnerships, as they are sometimesknown) arise withoutthe knowledge of the persons involved; it is a matter of fact whether a general partnership exists and the parties cannot simply determinethis for themselves

o   Normally, the general partnership relationship is governed by a contractual document/agreement, but the essence of a partnership is the continuing relationship, personal as well as commercial, with the contractual agreementbeing only an indication of the relationship (Hurst v Byrk [2001])

o   When the courts have to consider whether a general partnership exists, they look at the substance of the arrangements and notthe stated intentions of the parties

o   One advantage of a general partnership over LPs and LLPs is that they are simple and cheap to set up; no formal agreementis necessary as the terms of the PA 2012 will apply in default of agreement

o   Nevertheless, it is advisable for the partners to formalise arrangements by entering into a private partnership agreement

·       Kenyan Limited Partnerships are also registered under the PA 2012:

o   Section 2, PA 2012: a LP must be formed between two or more persons and carry on a business in common with a view of profit

o   In form, an LP broadlyresembles a generalpartnership, except that an LP has two categories of partner:

i.            General partners – they have the responsibility for managing the LP’s business and have unlimited liability for the firm’s debts and obligations; and

ii.            Limited partners – who invest capital in the LP, but do not take an active role in the LP’s operation and

have limited liability up to the amount of capital that they have contributed

o   LPs are governedby a relatively light regulatory and statutory regimeas compared to companies

o   This flexibility afforded to LPs means that they may vary in size and nature from two-person LPs to largerLPs with more complex structures (they are often used as vehiclesfor venture capitalfunds)

·       Limited Liability Partnerships are incorporated under the Limited Liability Partnerships Act 2011 (‘LLPA 2011’)

o   An LLP is a body corporate with a legal personality separatefrom that of its members

o   The limited liability status of LLP membersmakes an LLP a popular choicefor many professional partnerships

o   However, in return for such limit on liability, the accounts of the LLP are public and there is the administrative and cost burden of regularly filing returns and forms with theRegistrar of Companies

FEATURE

GENERAL PARTNERSHIP

LIMITED PARTNERSHIP

LIMITED LIABILITY

PARTNERSHIP

PARTIES

Partners

General Partners: responsible for managing the LPs business and have unlimited liability for the firm’s debts and obligations

Limited partners: who invest capital in the LP, but do not take an active role in the LPs operation, and have limited lability up to the amount of

capital they have contributed

Members à

An LLP must have at least two designated members who have particular                               administrative responsibilities and function within the LLP

GOVERNING LEGISLATION

Partnership Act 2012

Limited Liability Partnership Act 2011 à

Partnership law applies to an LLP except as specifically provided in

the LLPA 2011

SEPARATE LEGAL PERSONALITY

No – E.g. when a general partnership or legal partnership owns a building, then the building is owned by the partners and held in trust for the partnership (i.e. the title deed will have the name of the partners)

Yes à An LLP is a body corporate and a legal entity separate from its members (S. 6, LLPA 2011).

It has unlimited capacity and can do anything that a legal person

can do (S. 6(3), LLPA 2011)

FORMATION

No registration required à

Yes, registration is required à

Yes à

FORMALITIES

A general partnership can come

An LP must be registered at the

An LLP is incorporated by filing an

AND

into existence without formalities.

Registrar of Companies by filing an

electronic application through e-

REGISTRATION

It is a question of fact whether or

application for registration of   a

Citizen for the incorporation of an

not a general partnership exists.

limited partnership (S. 68 – 70 PA

LLP and paying the required fee to

2012). The LP comes into existence

the Registrar of Companies.

on the date of the Certificate of

The LLP is created when the

Registration

Registrar of companies issues a

Certificate of Incorporation

LIMITED

No à

Yes à

Yes à

LIABILITY     FOR

Partners are jointly liable for debts

For limited partners only.

The LLP members act as agents of

PARTNERS/

and obligations of the general

A limited partner’s liability is limited

the LLP and, in general, are only

MEMBERS

partnership business (S. 7, PA

to the   amount   of their agreed

liable up to the amount they have

2012).

contribution. Limited partners are

contributed to the LLP.

Partners are   also   jointly   and

not liable for debts or obligations in

However,     there                     are                     some

severally liable for the wrongful

excess of this amount, provided

exceptions – S. 10, LLPA 2011.

acts or omissions of their fellow

they do   not   take   part   in   the

partners in the ordinary course of

management of the LP (S. 4(2)(b),

the partnership business or with

PA 2012).

the authority of other partners (S.

General partners have unlimited

21, PA 2012).

liability (S. 4(2)(a), PA 2012).

MINIMUM AND MAXIMUM NUMBER                     OF PARTNERS/

MEMBERS

Minimum number: 2

No upper limited.

Minimum                    number:                1                    general partner and 1 limited partner

No upper limit.

Minimum number: 2 members, who must be designates members

No upper limit.

Partners can be companies.

Partners can be companies

Members can be companies

FILING REQUIREMENTS

None

Certain changes to the LP and the partners, their liability and the sums contributed have to be registered

Annual accounts, confirmation statement, changes to members details and status, changes to registered office and place of inspection of records, details of mortgages and charges, all have

to be registered

ACCOUNTING REQUIREMENTS

No formal requirements other than S. 16 PA, 2012 – ‘Accounting and Partnership Records’

(1) Every partner shall have the responsibility to ensure that –  

a.   Accounting records of transactions affecting the partnership in which he is involved are properly kept; and

b.   The record are, on request, made available to the partnership or to any partner.

Section 29, LLPA 2011:

LLPS must lodge annual declarations of solvency or insolvency with the Registrar.

(1) A limited liability partnership shall lodge with the Registrar a declaration by one of its managers that in the opinion

(2) Any partner shall have the duty to cooperate with the person keeping records of the partnership or drawing up the accounts of the partnership on behalf of the partnership

of the manager, the partnership either –  

a.    Appears, as at that date, to be solvent; or

b.    Does not appear, as at that date, to be solvent

(2) The declaration shall be lodged not later than fifteen months after the registration of the LLP and subsequently once every calendar year at intervals of not more than 15 months

Section 30, LLPA 2011:

Limited Liability partnerships are to keep proper accounting records.

(1) An LLP shall keep such accounting and other records as will –  

a.     Sufficiently explain the transactions and the financial position of the partnership; and

b.     Enable a profit and loss account and a balance sheet to be prepared, from time to time that gives a true and fair view of the state of affairs of the partnership

INTERNAL REGULATION

Governed by private partnership agreement with default rules in PA 2012 applying in absence of a specific agreement.

There are no constitutional documents.

Governed by private LLP agreement with default rules in LLPA 2011 applying in absence of specific agreement.

No constitutional documents.

DUTY OF GOOD FAITH BETWEEN

MEMBERS

Yes

No à Unless provided for in the LLP agreement

EXECUTION OF DOCUMENTS

SIMPLE CONTRACTS

A partnership has no legal personality and contracts with third parties through one or more of its partners, or other duly authorised agent. The formalities for executing a written contract that    is    intended    to    bind    a

partnership depend on the legal

A limited partnership has no legal personality and so will usually contract with third parties through its general partner(s). each general partner’s capacity to contract depends on the nature of its own legal personality.

A simple contract with an LLP can be made in either of the following ways:

i. By the LLP itself, in writing and under its common seal (S. 7(2) LLPA 2011); or

personality of the person executing the contract for the partnership.

ii. On behalf of the LLP by anu person acting under its authority, whether express or implied (S. 43(1)(b), CA 2006, as modified)

DEEDS

An individual partner does not have authority to execute a deed on behalf of a partnership unless he or she has been expressly authorised to do so by a deed (Berkeley v Hardy [1826]).

Deeds should be executed by all the parties in a partnership unless one partner has been given the requisite authority by deed, e.g. through a power of attorney, to execute the deed on behalf of all the partners.

Where a deed is executed by a partner on behalf of the partnership:

·       The form of execution will depend on the legal personality of the executing partner;

·       The instrument should make it clear that: the deed is made in the firm’s name; the obligations in the deed are undertaken by the partner’s as a whole (not just the executing partner); and, the person executing the deed does do as an agent of the firm (S. 20, PA 2012)

The general partner must be given express authority, conferred by deed, to execute the proposed deed on the LP’s behalf.

Where a deed is executed by a general partner on behalf of a Limited Partnership:

·       The form of execution will depend on the legal personality of the executing partner;

·       The instrument should make it clear that: the deed is made in the firm’s name; the obligations in the deed are undertaken by the partner’s as a whole (not just the executing partner); and, the person executing the deed does do as an agent of the firm (S. 20, PA 2012)

An LLP may execute a deed by:

·       Affixing the   LLP’s   common

seal (if it has one);

·       Signature on behalf of the LLP, either: two members of the LLP, or, a single member of the LLP in the presence of a witness who attests the member’s signature

Whether the member executing a document on an LLP’s behalf is itself a body corporate, it must act through the agency of a duly authorised natural person (CA 2015).

HOLDING ASSETS

A general partnership does not have a separate legal personality so it cannot own assets in its own name.

Assets are normally held in the name of individual partners who hold the assets as trustees for the partnership.

An LP does not have separate legal personality so it cannot hold assets in its own name.

Assets are usually held either:

·       On trust by one or more nominee (often the general partners); or

·       By all the partners

An LLP can hold assets in its own name.

TAX

TRANSPARENCY

Yes

CESSATION OF PARTNERSHIP

Dissolution of an LP occurs when the partnership relationship terminates. Dissolution can be brought about by:

i.            Expiration of a fixed term or the end of the venture for which the LP was established;

ii.            Illegality;

iii.            Any limited or general partner may make an application to the court for dissolution of the LP on grounds of: another partner’s permanent incapacity; conduct by a partner calculated to prejudice the carrying on of the business; deliberate or persistent breach of the LP agreement by a partner; the partnership business only being carried on at a loss; or a dissolution being ‘just and equitable’.

BUT: the death or bankruptcy of a limited partner and the mental disorder of a limited partner, unless their share cannot otherwise be ascertained and realised, are not grounds for

dissolution of an LP by the court.

Positive steps must be taken to terminate an LLP. It will not dissolve automatically.

The routes to termination are:

i.        Striking off by the Registrar

ii.       Winding up (voluntarily or compulsorily)

CHAPTER9: COMMON LAW OF AGENCY

1.       WHAT IS THE COMMON LAW OF AGENCY?

·       The words ‘agent’ and ‘agency’ are often used in business, and even by courts, to refer to relationships which fall short of the classiccommon law definition of the agency relationship

·       In the broadest sense of the word, the common law of agency determines who (if anyone) is acting on behalf of whom, with what authority, and for how long, when three or more persons or groups of persons become involved in dealings with each other

·       When examining dealings among three or more persons, it can be difficult to work out which person is acting on its own behalf (i.e. the principal) and which person is actingon behalf of another (i.e. the agent), e.g.:

o   Where there is no written agreement, it may not be clearwhether an intermediary is acting as a sales agent for a vendor,or purchasing agent for the buyer;

o   Sometimes, all the parties might be actingas principals (e.g. seller, resellerand end-user purchaser)

·       Common law of agency extends to any situation where it is agreed, expressly or otherwise, that one person should do something on behalf of another

·       Note: the authority granted to the agent may fall short of an authorisation to enter into binding legal relations on behalf of the principal, and without prior reference to the principal

1.1    ESSENTIAL FEATURES OF A COMMON LAW AGENCY

·       An agent is a person with power to create, change or terminate the legal relationsof another, i.e. the principal

·       In the classic common law agency relationship, the agent has the power to bind and give rights to its principal when dealing with another principal

·       The relationship us usually (not always) established by consent, eitherexpress or implied

·       Once the two principals are in a legal relationship with each other,the agent dropsout of the transaction, with no furtherrights or dutiesconcerning the transaction itself but with residual rightsagainst its principalarising out of the transaction

CASE

HOLDING

Garnac Grain Co. Inc v HMF Faure and Fairclough Ltd [1968]

‘The relationship of principal and agent can only be established by the consent of the principal and the agent. They will be held to have consented if they had agreed to what amounts in law to such a relationship, even if they do not recognise it themselves and even if they have professed to disclaim it … But the consent must have been given by

each of them, either expressly or by implication from the words and conduct’

Phonogram Limited v Jane

[1982]

‘The general principle is, of course, that a person who makes a contract ostensibly as an

agent cannot afterwards sue or be sued upon it’

1.2    RELATIONSHIP BETWEEN LAW OF CONTRACT AND COMMON LAW OF AGENCY

·       Agency relationships are most often created under the law of contract, but the relationship between principal and agent need not be contractual à anagent can act gratuitously, without any compensation or reward

·       Agency relationships have many implied rights and duties which will not be implied undera purely contractual relationship

CASE

HOLDING

Yahuda Fire & Marine Insurance v Orion Marine Insurance Underwriting

Agency Limited [1995]

‘Although in modern commercial transactions agencies are most invariably founded upon a contract between principal and agent, there is no necessity for such a contract to exist. It is sufficient if there is consent by the principal to the exercise by the agent of authority and

consent by the agent to his exercising such authority on behalf of the principal’

1.3    LIMITED AGENTS

·       A ‘full common law agent’is an intermediary with the authority to change the legal positionof its principal

·       A‘limited agent’ refers to an intermediary that has been granted a limited authorityto represent the principal, withoutany authority to change the legal position of the principal

·       Examples of roles which may not give rise to a full common law of agency:

(i)            Company director: usuallya full common law agent of the company

(ii)            Company employee: may be a full common law agent of the company, depending on the seniority, job title, how she/he is held out by the company, etc. (while otheremployees may be limitedagents only)

(iii)            Estate agent:not a full common law agent of the seller,because he/she does not have power to enter into legally bindingcommitments on behalfof the principal (though he/shemay sometimes owe fiduciary duties)

(iv)            Recruitment agent:not a full common law agent of the candidate, but merely has the task of bringingthe employer and prospective employee together

(v)            Auction house: usually a full common law agent for the seller and, if necessary, the buyer (Phiips v Butler [1945])

2.       ADVANTAGES, DISADVANTAGES AND RISKS OF AGENCY

ADVANTAGES OF APPOINTING AN AGENT

DISADVANTAGES OF APPOINTING AN AGENT

LAW COST BUSINESS EXPANSION: an agent allows the principal to expand its business without making a significant further

investment

LOSS OF CONTROL: the principal surrenders a measure of control when he/she appoints an agent for any task

FOREIGN EXPERTISE: appointing a cross-border agent may allow the principal to tap into experience and expertise to operate its business in a foreign territory, e.g. some local laws may forbid the conducting of business in their territory without

involvement of a local national (e.g. the UAE)

REDUCED REVENUE: in the case of a business agency, the principal will usually be obliged to give the agent some of its margin. Generally, a principal will need to reimburse the agent in one way or another

ANONYMITY: the agency arrangements may be of a type that

allows the principal to remain anonymous

GROUP RELATIONSHIP: it is a convenient way of bringing group members into a contractual relationship – where one member

of a corporate group can contract on behalf of others

INCAPACITY: e.g. where the principal is indisposed, the agent

can deal with his or her affairs

ADVANTAGES OF ACTING AS AN AGENT

DISADVANTAGES OF ACTING AS AN AGENT

REMUNERATION: the agent will usually be compensated in one way or another for acting as an agent, and this may be protected for a certain period under the Commercial Agents Regulations

Apart from the risks inherent in any business, there are few disadvantages in acting as an agent, since the central concept of common law agency is that the agent drops out of the chain of liability once a contractual relationship is secured between

two principals.

LOWER START UP COSTS AND REDUCED RISK: the agent of a

business can benefit from the success of a business that is already well established

RISKS FOR THE PRINCIPAL

RISKS FOR THE AGENT

UNAUTHORISED ACTS: the agent might act beyond the scope of its actual authority, but not beyond the scope of its apparent authority, so that the principal is saddled with unexpected

liability

LIABILITY ON THE PRINCIPAL’S TRANSACTION: the agent might

become liable on a transaction, instead of, or in addition to, the principal, e.g. by accidentally exceeding its authority

CIVIL OR CRIMINAL LIABILITY: following from the above, the agent might make the principal civilly or criminally liable. A principal is liable for the torts of its agent in accordance with

the normal principles of vicarious liability

BREACH OF WARRANTY OF AUTHORITY: there is danger of an action for breach of warranty of authority if the agent misrepresents its authority

BRIBERY: the agent might make corrupt payments and contribute to criminal liability on the part of the principal under the Bribery Act 2016 if the principal has failed to implement

procedures to reduce the risk of bribery

3.       CREATION OF AGENCY

Express

Appointment

Implied Appointment (Conduct)

Appointment

by Necessity

Appointment by Ratification

3.1    EXPRESS APPOINTMENT

·       An agency is often created by express appointment, which may or may not be accompanied by a contract à oral agency appointments are also possible

·       The grant of authoritymay be formal, e.g. by way of aPower of Attorney, or informal, e.g. by letteror email

o   The instrument creatinga Power of Attorney must be executedas a deed by the donorof the power

o   The Power of Attorney has effect on its own, withoutthe need of a contractsupported by consideration

·       There are some statutory provisions that apply to the appointment of an agentfor certain transactions:

o   Actual disposition of interest in land: interests in land may be created or disposedof by an agent, and dispositions of equitable interests may be effectedby an agent, but only if that agent has been authorised in writing to do so

o   Contracts for the sale or other disposition of an interestin land

o   Delegation of trustee powers: as a general rule of trust law, trustee – having voluntarily agreed to act as such – cannot delegate the exercise of their powers and duties. However, the instrument establishing the trust may specifically authorise delegation

·       Authority to execute adeed must be conferred by a deed – usuallya Power of Attorney (Powell v London &Provincial Bank [1893])

·       Aformal Power of Attorney is not necessary in most commercial transactions to enable the agent to commit the principal, however,to indicate agency the agent will sign contracts “for and on behalfof [the principal]”

·       A formal Power of Attorney, however, might prove to be aconvenient document to show third parties so as not to disclosethe commercial arrangements between principal and agent – such a structure might be particularly useful for cross-border situations where local laws or procurement practices require translates and notarised confirmations of authority to be lodgedwith government agencies

3.2    IMPLIED APPOINTMENT [CONDUCT]

·       An agency can come into being through the conduct of the parties, e.g. a principalmight recognise or acquiesce in the acts of another, and those acts might be consistent with the principal/agent relationship (Targe Towing Limited v Marine Blast Limited [2004])

·       To determine whether there is an impliedagency, the behaviourof the parties is assessed objectively

o   The conferring authority does not have to be proved by direct evidence– even circumstantial evidence will suffice

o   Circumstantial evidencecan include things said by the agent to the other party (Monde Petroleum SA v Wrsternzagros Limited [2016])

·       In general,implied agency may be summarised as:

o   Where an agent alleges to have been authorised, the question is whether or not the agent is reasonable in forming the impression that it has been authorised by the principal to do whatever it did

o   Where an agent allegesnot to have been authorised, the consent of the agent may be inferred from the fact that it acted on behalf of a principal

o   Note: the mere fact that an agent did what was requestedby the principal does not mean that it did so on the

principal’s behalf

3.3    APPOINTMENT ON THE BASIS OF NECESSITY

·       In certain cases, the law may treat an agent as ‘an agent of necessity’ – i.e. to do something which the agent would not otherwise have authority to do on behalf of its principal, where there is already an agency relationship, or even where there is no pre-existing agency relationship at all

·       This agencyof necessity ordinarily arises in the following situation:

(i)            The principal’s propertyis at risk;

(ii)            The agent needs to take urgent actionto save it;

(iii)            The agent is unable to obtain expressauthority from the principal in time to take the necessary remedialaction

·       Examples of an agentof necessity includethe following:

o The master of a ship enters into a salvage agreement to save the principal’s cargo (The Unique Mariner (No. 1) [1978])

o   A warehouse is storing produce on behalf of a principal and realises that the produce must be sold before it perishes à in China Pacific SA v Food Corp of India [1982] , the House of Lords held that a gratuitous bailee who incurredreasonable expenses in discharging his duty of care to preserve goodsfrom deterioration by exposure to the elementswas entitled to reimbursement from his bailor

·       Taking the second example,several possibilities arisedepending on the facts:

(i)            The warehouse acts as an agent for the principal so as to commit the principal to sell the produceto the purchaser, so that there is a contract between the purchaser and the principal;

(ii)            The warehouse sells the produce as principal, is liable itselfto the purchaser for any breach of contract, and must accountto the principal for the purchase price; or

(iii)            The warehouse is entitled to compensation from the principal under the law of restitution

3.4    APPOINTMENT BY RATIFICATION

·       An act done by an intermediary on behalf of a disclosed principal, but without authority, may be treated in law as the act of the principal is subsequently ratified or adopted by that disclosedprincipal

·       Ratification is defined as ‘the approval after the event of the assumption of an authoritywhich did not exist at the time’

(Harrison & Crossfield Limited v Londonand North-Western Railway[1917])

·       The lack of authoritymay arise because:

o   No authorityof any kind was grantedin the first place, in which case ratification operatesas an original appointment;

o   An agent exceeded its actual authority,in which case ratification operatesas an extension of authoritygranted under pre-existing appointment

·       Ratification has been referredto as a unilateral act of the will, and does not depend on estoppel

·       There is alsono need for the principal to communicate the fact of ratification to the thirdparty

·       Silence or inactivity may not be enough to constitute ratification, but may do so if the inactivity results in a state of affairs which is inconsistent with treating the transaction as unauthorised (Yona International Ltd v La Reunion)

3.4.1        WHEN IS RATIFICATION ADVANTAGEOUS?

·       Ratification is useful when a principal wants to benefitfrom a contract entered into by an intermediary, even though the intermediary was notoriginally authorised to enter into that particular transaction or kind of transaction. E.g.:

o An insured individualmight want to take advantage of an insurancepolicy covering a particular type of loss that it suffered, even though his agent had no authority to obtain that kind of cover

o Or, a third party might want to argue that a principalhas ratified the contract entered into by the agent, so that

the principal cannotuse the agent’slack of authority to be relieved of liability under the contract

·       Re Tredemannand Lederman Freres [1899]: the principalmay ratify the transaction and benefit from the profit made by the agent, even if the agent fraudulently entered into the transaction apparently in the name of its principal

3.4.2        LIMITATION OF THE RATIFICATINO DOCTRINE

·       Ratification cannot take place if the approval of the unauthorised act of an agent is by an undisclosed principal

·       Only the party on whose behalfthe agent purportedto act can ratify the contract (Jones v Hope [1880]), moreover, ratification is not effective where to allow it would be unfairly prejudicial to the other party

CASE

HOLDING

Keighley, Maxted & Co. v Durant [1901]

An agent purchased wheat in its own name, intending it to be a joint purchase for the benefit of another, but without authority, and so the subsequent approval of the transaction by the other purchaser did not amount to ratification. As a result, the supplier did not succeed in holding the initially undisclosed joint purchaser liable for the failure of both purchasers to take

delivery of the wheat

3.4.3        EFFECT OF RATIFICATION

·       Ratification is the retrospective creationof an enforceable contract betweenthe principal and the third party

·       As with any other agency agreement, the agent drops out of the transaction but retains its right to be paid fees and expenses in accordance with the agreement

·       The principal in these situations might be considered to have waived any claim it might have had against the agent for exceeding its authority, but it might still have a claim if it suffered additional loss as a result of the agent’s acting beyond the scope of its authority

4.       TYPES OF AUTHORITY AN AGENTCAN HAVE

4.1    EXPRESS ACTUAL AUTHORITY

·       An agent is said to have actual authority when what it does is authorised by its principal – whether expresslyor impliedly

·       The agent is entitled to act in accordance with its own reasonable interpretation of express authority which has been granted, and the principal will be bound accordingly

CASE

HOLDING

Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964]

‘An ‘actual’ authority is a legal relationship between principal and agent created by a consensual agreement to which they alone are parties. Its scope is to be ascertained by applying ordinary principles of construction of contracts, including any proper implications from the express words used, the usages of the trade, or the course of business between the parties. To this agreement the contractor is a stranger; he may be totally ignorant of the existence of any authority on the part of the agent. Nevertheless, if the agent does enter into a contract pursuant to the ‘actual’ authority, it does create contractual rights and liabilities

between the principal and the contractor’

4.2    IMPLIED ACTUAL AUTHORITY

·       Actual authority may also be implied from the wordingof an express appointment

CASE

HOLDING

Hely-Hutchinson v Brayhead [1968]

Lord Denning relief on freeman and Lockyer v Buckhurst Park Properties and then went on to say the following:

‘An actual authority may be express or implied. It is express when it is given by express words, such as when a board of directors pass a resolution which authorises two of their number to sign cheques. It is implied when it is inferred form the conduct of the parties and the circumstances of the case, such as when the board of directors appoint 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. Actual authority, express or implied, is binding as between the company and the agent, and also as between the company and others, whether they are within

the company or outside it’

Howard v Baillie [1796]

An agent that is instructed to achieve a particular objective has implied actual authority to take

such steps as may be necessary to achieve that objective

4.3    APPARENT OR OSTENSIBLE AUTHORITY

·       An agent is said to be acting within the scope of its apparent or ostensible authority (and therefore able to commit the principal) if:

a.        The principal in some way represents or holds out the agent as having an authority which is wider than the agent’s

actual authority (the person makingthe representation must have some authority to make representations);

b.       The agent commits the principal to a thirdparty within the scope of that wider,apparent authority; and

c.        The third party makes a commitment or otherwise alters its position in relianceon that representation of authority

·       Where the agent acts within the scope of his apparentauthority, the principal is bound to the same extent as if he actually authorised the transaction expressly

CASE

HOLDING

Freeman and Lockyer v Buckhurst Park Properties

‘An ‘apparent’ or ‘ostensible’ authority … is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the ‘apparent’ authority, so as to render the principal liable to perform any obligations imposed upon him by such contract. To the relationship so created the agent is a stranger. He need not be (although he generally is) aware of the existence of the representation but he must not purport to make the agreement as principal himself. The representation, when acted upon by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter

into the contract’

4.3.1.     THEORY BEHINDDOCTRINE OF APPARENTAUTHORITY

·       The logical basis for the doctrine of apparent authority has been found in the idea that the transaction, when viewed objectively, simplyresults from an agreement, as with the formation of a contract: “where an agent is ostensibly authorised to make an offer on behalfof the principal, any offer the agentsubsequently makes that does not appear to transgress the scope of the authority conferred indicates, viewed objectively, the willingness of the principal to contract on the terms stated”

·       The alternative approach, as outlined above and followed in many of the cases, is that the doctrine of apparent authority is based onestoppel

·       One problem with the estoppel approach is that, while the principal is estopped from denying the contract that has been entered into in reliance on the representation of authority, it acquires no rights under the contract. The doctrine of estoppel in thiscontext confers rights on the third party, but not on the principal

4.3.2.     IMPORTANCEOF DOCTRINE OF APPARENT AUTHORITY

CASE

HOLDING

Freeman and Lockyer v Buckhurst Park Properties

‘In ordinary business dealings the contractor at the time of entering into the contract can in the nature of things hardly ever rely on the ‘actual’ authority of the agent. His information as to the authority must be derived either from the principal or from the agent or from both, for they alone know what the agent’s actual authority is. All that the contractor can know is what they tell him, which may or may not be true. In the ultimate analysis he relies either upon the representation of the principal, that is, apparent authority, or upon the representation of the

agent, that is, warranty of authority’

4.3.3.     KNOWLEDGE OF LACK OF AUTHORITY

·       A third party can generally rely on ostensible authority provided it does not have knowledge of a relevant restriction or lack of authority, and where there are no suspicious circumstances

·       Questions to ask when deciphering the ‘apparent authority rule’ include: was the belief reasonable? Did he have actual belief in the apparent authority, regardless of the reasonableness or otherwise of the belief? Did the third part act dishonestly, in bad faith,or irrationally in relying on the agent?

·       Lord Neubergerin Thanakharn v Akai Holdings Limited [2010] stated that apparent authorityis essentially a species of

estoppel by representation:

o   Under the law of misrepresentation, it is no defenceto an action for rescissionthat the representee might have discovered its falsity bythe exercise of reasonable care

o   Ifa party has relied upon the truth of a representation, it is no answer to say that, if he had thoughtabout it, he must have known that it was untrue

o   If the representation is clear and unequivocal, the recipient is under no obligation to ascertain whetherit is true

– it would be otherwiseif the reliance were dishonestor irrational, and this wouldamount to turninga blind eye or beingreckless

4.3.4.     USUAL AUTHORITY

·       Anagent has authorityto do what is usual for someone in the agent’s position – ‘usual authority’ can be considered as a type of impliedauthority; a type of apparent authority; or, an independent kind of authority

·       Usual authority may be restricted by instructions from the principal, but a third party dealing with the agent without noticeof the restriction is allowedto rely on the agent’s apparentauthority

·       The principalis liable for all the acts of the agent which are within the authority usuallyconfided to an agent of that character, e.g. one wouldexpect a horse-dealer to have authority to warrantthat the horse was sound

4.3.5.     AUTHORITY IMPLIEDFROM A CUSTOM OF THE TRADE

·       This is a type of ‘usual authority’, but with tighter rules on the application of the doctrine due to the fact that most case s have arisen in relatively sophisticated trading situations

·       When an agent’s authority is derived from trade usages and customs, the same must be more thanpatters of consistent behaviour – they must be accepted in the trade as binding à Drexel Burnham Lambert International BV v Nasr [1986]: ‘what has to be shown by evidence is that the custom is recognised as imposing a binding obligation’

·       A party relying on a bindingcustom or practicemust show that the practiceis:

(i)            Certain – it is clearly established;

(ii)            Notorious – so generally known that an outsider makingreasonable inquiries couldnot fail to be aware of it;

(iii)            Recognised as legallybinding;

(iv)            Reasonable – e.g. custom giving rise to conflicts of interest are not considered reasonable; and

(v)            Consistent with the express terms of the contract in question

5.       EXCLUSIVE, NON-EXCLUSIVE AND SOLE AGENTS

EXCLUSIVE RIGHTS

These prevent the principal from actively seeking sales in the agent’s territory, and from appointing other agents or distributors there. However, the principal may reserve certain rights to itself, e.g. right to continue

to supply certain identified customers/classes of customers in the territory without involving the agent

SOLE RIGHTS

These prevent the principal from appointing another agent for the territory and other distributors, resellers,

etc. but will not prevent the principal actively seeking sales itself in the territory

NON-EXCLUSIVE

RIGHTS

These leave the principal free to appoint other agents and resellers, and actively seek sales in the territory

itself (at the same level of customers as the agent)

6.       MAIN LEGAL PRINCIPALS UNDER ENGLISH LAW

6.1    DISCLOSED PRINCIPAL

·       A ‘disclosed principal’ is one where the third party is aware that the agent is acting on behalf of another person

·       A disclosedprincipal may eitherbe:

o   An identified principal: the third party knows the identity of the person with whom it is contracting (via the agent)at the time the contract is made

o   An unidentified principal: the third party knows the agent is acting on behalf of another person but does not know the identity of the other person. However, identification could, if necessary, take place at the time the contract is made.

·       Thus, if a third party is aware that an agent is acting as agent on behalf of a principal (whether identified or not) and the agent acts within the scope of its authority (actual or ostensible):

o   Direct contractual relations will be established between the principal and the third party, so that only the principalcan sue or be sued on the contract; and

o The agent is not generally liable on the transaction to the third party unless he agrees to be so (expressly orthrough trade custom)

6.2    UNDISCLOSED PRINCIPAL

·       An agency is referred to as an ‘undisclosed agency’ where a third party does not know that an agent is acting on behalf of another person, because that fact has not been disclosed

·       The third party believesit is contracting directly with the agent, believing the agent to be the principal, when in fact the agent is actingon behalf of anotherentity (its principal)

·       Where a third party does not know that the agent is actingon behalf of a principal, several scenarios are possible:

a.        If the third party is never aware that the person with whom it isdealing is an agent, then the partiesto the contract are the third party and the agent (who has not revealedthat it is an agent)

b.       If the principal revealsthe agency relationship to the third party:

(i)            The third party may either treat the agent with whom he contracted as the principal, or accept the true principal, in which case the agent is relieved of its obligation to the thirdparty; and

(ii)            The principal may enforce the contract made on his behalf

CASE

HOLDING

Sui Yin Kwan v Eastern Insurance Company Limited [1994]  

(i)             An undisclosed principal may sue and be sued on a contract made by an agent on his behalf, acting within the scope of his actual authority;

(ii)             In entering into the contract, the agent must intend to act on the principal’s behalf,

(iii)             The agent of an undisclosed principal may also sue and be sued on the contract;

(iv)            Any defence which the third party may have against the agent is available against his principal;

(v)             The terms of the contract may, expressly or by implication, exclude the principal’s

right to sue, and his liability to be sued.

However. Each situation will depend on its own facts, e.g. if a third party has made it clear that it did not wish to contract with anyone other than the agent.

·       The logic here appearsto be that the third part shouldnot be at a disadvantage where the agent has not revealed that he