Capacity To Act As Principal And Agent Flashcards
(13 cards)
The general rule
is that both principal and agent must be capable of acting as such. In this regard, the ordinary rules of contract apply to the contract of agency
It follows therefore that:
(i)The third party must have capacity to contract in order that the contract which the agent makes with him on behalf of the principal may be enforceable.
(ii) Generally, the agent must have capacity to contract if his contract with the principal is to be enforceable; otherwise the agent and principal may not be able to enforce the rights and duties arising under the contract of agency.
However a person does not require contractual capacity merely to act as an agent.
Why is the capacity of the principal important?
The capacity to contract or to do any other act by means of an agent is co-extensive with the
capacity of the principal himself to make the contract or to do the act which the agent is
authorized to make or do.
What is the general rule pertaining to capacity of the principal?
Anyone may appoint an agent to do any act which he has capacity to do himself.
If the principal is under some disability, the powers of the agent are accordingly limited to the extent of the disability.
For example, a principal who
lacks capacity either through infancy, insanity or some other disability cannot make a valid
contract even by employing an agent who has full contractual capacity
A mentally incompetent person can only appoint an agent during a lucid interval
Drew v Nunn
The supervening mental incapacity of a principal has the effect of terminating the actual authority of his agent: ‘The actual authority of an agent whether conferred by deed or not and whether expressed to be irrevocable or not, is determined by the death or supervening mental incapacity of either the principal or the agent’.
However, he may have continuing ostensible authority to bind the principal.
AKA
The Court ruled that the agent’s actual authority (the power to act on behalf of the principal) ended when the principal became incapacitated.
However the court also noted that the agent may still have ostensible authority (appearance of authority to the 3rd party) to bind the principal until 3rd parties are informed of this incapacity
there may be cases where a mentally incompetent person (or
a drunkard) can be treated as a principal; for instance, if the 3rd party contracts in ignorance of
his condition and without taking advantage of it
Moulton v Camroux
A person of unsound mind bought an annuity from a life assurance society.
The society granted the annuities in the ordinary course of its business. (The society didn’t know about the person’s mental condition and treated the transaction as they would with any other customer.)
The contracts were challenged.
- The court decided that the contract was valid because the society didn’t know about the person’s mental condition and didn’t take advantage of it.
- They ruled that the annuity couldn’t be canceled just because the buyer was mentally unsound, especially since the society acted in good faith and the contract was completed.
What is the other rule on insanity?
Furthermore, there is also the rule in Imperial Loan Co v Stone, to the effect
that where a party to a contract is of unsound mind, the contract is nevertheless binding on him unless he can prove that he was so insane as not to know what he was doing and that this fact
was known to the other party.
Imperial Loan Co v Stone
- The defendant, Stone, signed a promissory note as a surety (a person who guarantees to pay someone else’s debt) while he was mentally unsound⁽¹⁾.
- The Imperial Loan Co. Ltd. brought a lawsuit against Stone to recover the debt⁽¹⁾.
- Stone claimed that his insanity was known to the plaintiffs at the time of the contract
- The court ruled that a contract made by a person who lacks the capacity to understand it is not automatically void but can be voidable at the option of the incapacitated person⁽¹⁾.
- The court emphasized that for the defense of insanity to be successful, it must be proven that the other party (the plaintiff) knew about the defendant’s mental incapacity at the time of the contract⁽¹⁾.
- The case was sent back for a new trial to determine whether the plaintiffs knew about Stone’s insanity⁽¹⁾.
What’s the Common Law position about capacity regarding corporations?
As regards corporations the common law position is that a company must have the power to appoint an agent by virtue of its memorandum of association.
In other words, the memorandum must specify the appointment of an agent as one of its objects; and where such is not the case any such appointment would be ultra vires the corporation.
This position seems to have now been affected by recent legislation on companies. The Companies and Allied Matters Act, s. 38, now gives a company all the powers of a natural person of full capacity for the
furtherance of its authorized business or objects unless its memorandum or any other enactment otherwise provides; section 39 abolishes the harsh effects of the doctrine of ultra vires as so that the ultra vires acts of a company are not now ipso facto void.
The capacity of an infant?
As for an infant, he can only appoint an agent in circumstances in which he himself has the
power to act.
This restricts an infant’s capacity to appoint an agent only to the kinds of valid
contracts which he himself can make. So while an infant may appoint an agent to contract on his behalf in respect of those contracts which are enforceable by and against him, he cannot do so in respect of those contracts which are void against him.
In other words, a minor or person of unsound mind is bound by a contract made on his behalf by his authorized agent where the circumstances are such that he would be bound if he had made the contract himself (Per Lord
Denning in G v G)
Capacity To Act As an agent
As noted earlier, a person does not require contractual capacity merely to act as an agent.
All persons of sound mind, including infants and other persons with limited or no capacity to contract on their own behalf are competent to act or contract as agents.
The rationale is that the agent is a mere instrument or link between his principal and 3rd party; an agent is only an intermediary in bringing the contracting parties together, so, anyone may be an agent even though he is incapable of contracting validly himself
In the case of an infant however, the infant must have sufficient
understanding to consent to the agency and do the required act.
It is therefore, irrelevant to his capacity to act as an agent, that because of his infancy he may not be liable to the 3rd party on the contract, where an adult agent would have been personally liable.
What is the general rule of formalities
The general rule is that there is no particular form required for the appointment of an agent. As
expressed by Lord Cranworth in an early case:
“No one can become on the agent of another person except by the will of that other
person. His will may be manifested in writing or orally or simply by placing another in a
situation in which according to the ordinary usage of mankind that other is understood to
represent and act for the person who has so placed him.” Pole v. Leask
What is the form required for the appointment of an agent?
There is therefore no particular form required for the appointment of an agent, though in order to make the agency binding upon the principal and the agent the ordinary rules of contract are
applicable.
A great number of agencies are created orally, and very often without any express arrangements at all. This is so even if the agent is appointed to make a contract which is required by law to be evidenced in writing or to be evidenced by a note or memorandum in writing signed by the party to be charged or his lawfully authorized agent.
However, writing is always advisable even where it is not required. Care must be taken, however, to include in the document all the terms of the agency on the ground that parol evidence cannot be given to vary a contract evidenced by writing.
The general rule is however subject to some qualification in that there are few cases where an agent’s appointment must be by deed and a few cases where it must be in writing.
