Sue appoints Ian as her agent to buy furniture and to sell it to her trade customers. She informs her suppliers and customers of Ian’s appointment. Sue tells Ian that he is not to buy any red sofas as she doesn’t think they are good sellers. Unbeknown to Sue, Ian is a thief and has recently served a term of imprisonment for dishonesty. Ian visits Sofas Ltd, one of Sue’s main suppliers and, purporting to act for Sue, agrees to purchase 20 red sofas for £15,000. In fact, Ian knows that he can sell these sofas to his friend Bob for £20,000 and keep the profit for himself. The following day, Ian enters into an agreement with Bob to sell the sofas for £20,000 without telling Bob that he is Sue’s agent. Shortly afterwards, Sofas Ltd find out what Ian was up to and tells Sue that they will not honour the agreement to sell the red sofas. Fearing a loss of business, Sue then purports to ratify the purchase with Sofas Ltd as well as the sale to Bob.

Advise the parties.

Answer

This question examines your understanding of a number of issues that commonly arise in questions on agency: authority, agent’s duties to the principal and ratification.

There was an express term in the agency agreement that Ian is not to buy any red sofas. Therefore, when Ian agreed to purchase 20 red sofas from Sofas Ltd, he was clearly acting outside of his actual authority. Sofas Ltd were unaware of this prohibition and you should therefore consider whether Ian had apparent authority which could bind Sue.

The requirements for apparent authority were explained by Slade J in Rama Corporation Ltd v Proved Tin and General Investments Ltd [1952] 2 QB 147:

• The principal, or someone authorised by him, must have represented to the third party that the agent had authority to act on behalf of the principal. This representation, which may be of fact or law, may be made by words or conduct or may be implied by previous dealings between the parties or from the principal’s conduct. In Armagas Ltd v Mundogas SA [1986] AC 717, the House of Lords confirmed that the representation must come from the principal and not the agent. In this case, the necessary representation was satisfied when Sue notified her suppliers of Ian’s appointment.
• The third party must have relied on the representation. It appears that Sofa’s Ltd relied on this representation when agreeing to sell the sofas.
• The third party must have altered his position although not necessarily to his detriment. This third requirement appears nowadays to be satisfied simply by the third party entering into the contract itself (see, for example, the judgment of Diplock LJ in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd).

It appears from the above, therefore, that Ian did have apparent authority when agreeing to purchase the red sofas from Sofas Ltd. Therefore, Sofas Ltd could have demanded payment from Sue when the contract was made.

You should then consider the position of Ian’s agreement to sell these sofas to Bob. There is no evidence that Sue notified Bob (who was Ian’s friend) of his appointment and therefore no question of apparent authority would arise. In any event, Ian purported to contract with Bob in his own name and not as agent.

Ian has clearly breached his duty to Sue. First, he disobeyed a contractual duty owed to Sue to obey her lawful instructions when placing an order for red sofas from Sofas Ltd and he will be liable to Sue for any losses flowing from this breach. Second, by Ian agreeing to sell the sofas to Bob, he would be in breach of his fiduciary duty not to make a secret profit from his relationship as Sue’s agent. In this case, however, it appears that Ian did not make any profit for himself.

When advising Sue, you will need to consider whether she can ratify Ian’s acts in respect of both transactions. Whether she can do so will depend on the limitations on ratification:

• Only the person on whose behalf the agent has acted may ratify. An undisclosed principal cannot ratify. (Keighley, Maxted & Co v Durant [1901] AC 240). Sue will be able to ratify the transaction with Sofas Ltd, because they were aware that Ian was acting as agent. Therefore, Sofas Ltd will be obliged to sell the red sofas to her. However, she will not be able to ratify the contract with Bob because Ian did not tell Bob that he was acting as agent for any principal but instead was selling the sofas on his own account. This leaves Sue in a most unenviable position in that she has ratified the contract to buy the red sofas from Sofas Ltd but cannot ratify the contract to sell them to Bob. Her only remedy will be to pursue Ian for his breach of duty.
• The principal must have been in existence at the time the contract was made. This requirement clearly relates to agents who are acting on behalf of companies. It means that if an agent acts for a “company” before it has been incorporated then the company once incorporated cannot then ratify the transaction (Kelner v Baxter (1866–67) LR 2 CP 174). This presents no difficulties because Sue was in existence throughout.
• The principal must himself have been competent to perform the act at the time the agent acted on his behalf. This rule demonstrates that ratification relates to the time that the agent purported to act for the principal. Therefore, the principal must himself have had the capacity to have performed the act at that time (Boston Deep Sea Fishing and Ice Co Ltd v Farnham [1957] 1 WLR 1051). Again, this presents no difficulties for Sue.
• The principal must also be competent to perform the act at the time of ratification (Grover & Grover Ltd v Mathews [1910] 2 KB 401). Again, no difficulties here for Sue.
• The principal must ratify within a reasonable time of the agent’s act. There does not appear from the question to have been any delay in Sue attempting to ratify the contracts.

As Ian will not be able to fulfil his contract to sell the red sofas to Bob, he is in breach of that contract and faces a claim from Bob for breach of contact.