An Agency Law IRAC Example

Steve hires Nicole as an agent to sell a piece of property owned by Steve. Steve states that the price to be obtained must be at least $30,000. Nicole discovers that because a shopping mall is planned for the area of Steve’s property, the fair market value of the property was at least $45,000 or higher. Nicole forms a real estate partnership, Nichan Realty, with her cousin Johan and enters into a contract on Steve’s behalf to sell the property to Nichan Realty for $32,000. Nicole does not declare her interest in Nichan Realty. Nichan Realty later sells the property to an investor for $55,000. Discuss what action (if any) Steve could take against Nicole. ANSWER ISSUE :

Has Nicole, the Agent, breached her duties to Steve, the Principal, in relation to the sale of Steve’s property to Nichan Realty, the third party, and if so, what remedies are available to Steve?

LAW :

The general duties owed by an Agent to a Principal are:  Follow the Principal’s instructions. Failure to follow instructions might make the agent liable for damages to the principal. (Latimer 2014, 8-150, page 639)  Use reasonable care diligence and skill. Standard is that which a reasonable person would expect an agent of the type in question to exercise in the circumstances. (Latimer 2014, 8-160, page 639)  To act in person. Usually an agent has to act in person as the principal has contracted for the personal qualities of the agent unless there is an express or implied authority to delegate to another person. (Latimer 2014, 8-170, page 639) In addition to these duties, An agent owes what are referred to as Fiduciary duties to the principal.  Duty to act in the Principal’s interest. (Latimer 2014, 8-180, page 640)

Principal’s interest must be given priority over the agent’s own interest and there must be no conflict of interest, as principal has placed his/her trust and confidence in the agent. In Mcpherson v Watt (1877) 3 App Cas 254, two ladies appointed an agent to sell their property. The agent wanted to own it for himself, but was unwilling to do so openly. He therefore bought the property using his brother’s name. When this was discovered by the principals, specific performance of the contract was not allowed by the courts because of the undisclosed conflict of interest. Duty not to make secret profits (Latimer 2014, 8-180, page 641) In these kinds of circumstances, the agent is obliged to make full disclosure to the principal and the onus of proof rests with the agent to show that the price obtained is a fair and adequate one. They must also show that the principal was fully aware of all the facts of the transaction and had given consent to it. Regier v Campbell-Stuart [1939] All ER 235 Mrs Regier, a prospective buyer of property (PRINCIPAL), instructed Campbell-Stuart, a real estate agent (AGENT) to find her a property in London suitable for conversion into apartments, one of which her son and his family would live in. In due course, the agent found a suitable property which had been on the market for some time, with an asking price of £2,000. The agent proceeded to buy the property at that price. The agent bought the property in the name of his brother-in-law, who at trial stated that he did not pay the price and did not own the property. A fictitious transfer of the property then took place to put the property in the agent’s name for £4,500. As the new owner of the property, the agent then offered the property to Regier for £5,000. The agent declared to the principal his ownership in the property. The principal accepted the offer of sale of the property. Some 8 months later the true facts came to the attention of the principal. The defendant, having concealed the true nature of the transaction from the plaintiff by fraud, had acted in breach of his duty as agent and was liable to account to the plaintiff for all profits obtained by him without her knowledge and consent in his capacity as agent for her. See also Lunghi v Sinclair [1966] WAR 172 where Lungi had a block of land he wished to sell. He employed Sinclair as a real estate agent to sell it on his behalf. Lunghi eventually sold the land to Sinclair’s wife who it eventually was discovered was a partner in Sinclair’s real estate firm. Lungi sold to Mrs Sinclair for $400, and she sold it soon after for $1,300.

It was held that Sinclair had a direct or indirect interest in the transaction and should have made full disclosure of this to Lunghi. In addition, it was held that Sinclair was under a duty to disclose the true value of the property and the profit made by Mrs Sinclair was in fact a secret profit that should go to the principal, Lunghi. APPLY TO THE FACTS : It appears from the facts that there is no question as to the existence of an agency relationship. Steve has expressly entered into an agreement with Nicole to sell, on his behalf, a piece of property. She had Express Actual Authority and Implied Actual Authority to carry out that instruction. There is no doubt that the property has in fact been sold. The facts of the question do not raise any issues relating to the agent exceeding the limits of her authority. The main question to be resolved here is whether or not Nicole has breached any of her duties to Steve in the process of carrying out those instructions and exercising her Actual Authority. Nicole did follow the principal’s instructions (sell the property for at least $30,000) and she appears to have acted in person. However, Nicole (the agent) has a duty to act in the best interests of Steve (the principal). There should be no conflict of her (the agent’s) interests with the principal’s interests. As in MacPherson v Watt, where the agent was found to have an undisclosed conflict of interest, this undisclosed conflict of interest meant that the contract for sale of land was not binding. In applying the MacPherson case, by Nicole not disclosing her direct interest in Nichan Realty (the third party buyer), it could result in the contract for the sale of Steve’s property being set aside and not binding on the parties. In addition, as in Regier v Campbell-Stuart, facts of which are similar in many respects to this situation, the secret profit made had to be accounted to, given to the principal. The profit would not have been made but for the agent’s breach of duty. Nicole, the agent, must show that Steve, the principal, was fully aware of all the facts of the transaction in relation to the sale of the property to Nichan Realty and had given consent to it. The case of Lunghi v Sinclair also has application to this matter. As agent Nicole was under a duty to make full disclosure to Steve because of her direct interest in the transaction and to inform him of the true value of the land. In addition, the profit made by Nichan Realty on the resale of the land should go to the principal Steve.

CONCLUSION : Nicole as agent for Steve has breached her duties to act in good faith, to have no conflict of interest, and not to make a secret profit. The remedy that is probably available to Steve, since the party that bought the property from Nichan Realty was not involved in the agency relationship, is that Nicole has to give to him the profit made on Nichan Realty’s sale of the property, ie. $23,000.

Reference list; Latimer, Paul. 2014. “Essential Australian Business Law”. 2nd edition. CCH Australia MacPherson v Watt (1877) 3 App Cas 254 Regier v Campbell-Stuart [1939] All ER 235 Lunghi v Sinclair [1966] WAR 172