Agents and Civil Liability

Learn about legal proceedings between principals, agents and third parties

Everyone has heard of a type of professional called an ‘agent,’ whether it be a real-estate agent, insurance agent, broker, auctioneer, mercantile agent, del credere agent or otherwise. What they share in common – the meaning of the word agent – is that they are parties to a legal relationship with an individual called a principal, such that they have the authority to change the principal’s legal position – for example, by the making of contracts between a third party and the principal or by disposing of the principal’s property.

1. How does an agency relationship come into existence?

An agency relationship may arise in the following ways:

• By consent of the parties – by writing, by parol (i.e. oral communication) or by the mere employment of the agent by the principal
• Impliedly created by the conduct of the principal and agent
• Ratification, whereby the agent first acts without authority but the principal later adopts and ratifies the agent’s act(s)
• Agency by estoppel, whereby the principal acts so as to represent to the world that the purported agent is an agent on their behalf and a third party relies on that representation in dealing with the purported agent to the third party’s detriment
• Agency by operation of law, whereby an agency relationship is imposed by law between parties (e.g. an agency of necessity may allow a shipmaster to hypothecate items on their ship if to do so is necessary for the safety of the ship’s crew)

2. What is an agent’s authority?

An agent can derive authority in three main ways:

• Actual authority – Through the agency agreement, a principal can grant an agent actual authority to perform certain acts on its behalf; there are two subtypes:
  • Express authority, which is what is expressly stated in the agency agreement, which can take the form of a deed, otherwise in writing or by parol; or
  • Implied authority, which is what is inferred from the agency agreement, which can take the form of usual authority or customary authority
• Apparent or ostensible authority is authority that exists by virtue of an agency by estoppel
• Presumed authority is authority that exists by virtue of an agency by operation of law

3. What are the basic rights and obligations of principals and agents?

The principal’s basic duty includes:

• To remunerate the agent (a sum of money usually referred to as a commission)

The agent’s basic duties include:

• To perform the acts authorized;
• To obey the principal’s instructions;
• To not delegate the acts unless authorized;
• To perform the acts with care and skill;
• To respect the principal’s title to property;
• To account (for all profits earned in the agency relationship); and
• To act as a fiduciary (including loyalty, candor and material disclosure)

Remedies available to a principal may include, but are not limited to,

• Damages for negligence committed by the agent in breach of its duties
• Damages for breach of fiduciary duty
• Disgorgement of secret profits made in breach of duties of loyalty and good faith

Remedies available to an agent may include, but are not limited to,

• Recovery of commission (however, the agent must prove that they earned the commission)
• Pursuant to an express or implied agreement, indemnity for losses and expenses incurred in performance of the acts
• Using the commission as a setoff against an action by the principal or exercising a lien on the principal’s property in the agent’s possession

4. How can an agency relationship be terminated?

An agency relationship can be brought to an end in the following ways:

• Completion – If the agent completes all of the acts entrusted to it, the agency relationship is normally terminated (except that the principal should clarify with third parties with whom the agent was dealing that the agency relationship has ended or the third parties may continue to believe that the agent still acts on behalf of the principal and apparent or ostensible authority may apply)
• Impossibility – If it becomes impossible or useless for the agent to perform the act entrusted to it, the agency relationship will be terminated and one should look to the applicable legislation to determine liabilities (note, that, if the impossibility arises because the principal disposed of the property in question, the agent may have a cause of action against the principal for loss of opportunity to earn a commission)
• Death – Unless the agency relationship is an irrevocable one, if either the principal or agent dies before the performance of the act entrusted to the agent, the agency relationship will be terminated (except that the principal’s executors are allowed to ratify acts by an agent performed after the principal’s death)
• Bankruptcy – Unless the agency relationship is an irrevocable one, the bankruptcy of either the principal or agent will terminate the agency relationship
• Mental incompetency or infirmity – Unless the agency relationship is an irrevocable one, the mental incompetency or infirmity of a principal or agent after the agency relationship was created will bring it to an end because, by common law, a person who is mentally incompetent or infirm cannot be a principal or act as an agent (an exception is that in Ontario, the Substitute Decisions Act allows for POAs for personal care and property – which can be ended by court order)
• Revocation by the principal – Unless the agency relationship is an irrevocable one, if the agent has not yet performed the act entrusted to it or has committed some act that justifies immediate dismissal, the principal can revoke the agency.

5. What are the principal and agent’s liabilities to third parties?

• Contracts

For contractual matters, a major factor in the nature of this liability is whether the principal was a disclosed or undisclosed principal.

• Property

In cases where an agent disposes of the principal’s property, issues of whether the agent transferred valid title to the third-party recipient of the property can arise; the topic of the extent of the agent’s authority is highly material to these issues.

• Torts

A principal may also bear civil liability to third parties if the agent committed a tort against them.[1]

6. Examples

• Insurance context

Example #1 – In Fine Flowers v. General Accident Insurance[2], the Plaintiff, who operated an extensive horticultural business, asked the insurance agent to acquire “full coverage.” The agent obtained a complex policy that covered a number of risks, but not damage to plants by freezing caused by a damaged water pump. The Plaintiff successfully sued the agent for breach of contract and breach of duty for not informing the Plaintiff of the gap in coverage.

• Real-Estate context

Example #2 – In Bango v. Holt[3], a potential purchaser asked his agent to find “a revenue producing property.” The agent found a property that was listed by the vendor’s agent as being capable of renting units; however, the city no longer allowed this. Neither agent investigated this. The purchaser sued the vendor and agents. The Defendants were found negligent.

References

Fridman, G. H. L. Canadian Agency Law, 3^rd ed. Toronto, ON: LexisNexis, May 2017.

Quinn, Peter D.; Donahue, Donald J.; Grandilli, Danny C. Real Estate Practice in Ontario, 8^th

2016. Toronto, ON: LexisNexis, January 1 2016.

[1] G. H. L. Fridman, Canadian Agency Law, 3^rd ed. (Toronto, ON: LexisNexis, May 2017).

[2] 1977 CanLII 1182 (ON CA).

[3] 1971 CanLII 988 (BC SC).