2022 ZB Question 2

Dakota has recently acquired a café from Arjun. Previously, Arjun was both owner and
manager, he has continued to act as manager after the sale of the café. Dakota wants the
café to become more profitable by reducing its costs. Dakota has asked Arjun to negotiate
with suppliers to reduce costs, setting a target of a 10 per cent reduction in their prices.

Dakota has returned from holiday to find Arjun has done the following:

a) achieved a saving of 12 percent on a contract for the supply of almond milk but also
agreed that the café will accept deliveries weekly instead of daily and buy an agreed
minimum per week with the result that the weekly bill will in fact be higher, although it could
mean each drink will be more profitable. Arjun owns shares in the supplier;

b) purchased a new refrigerator to store fresh milk and fresh salads after the old refrigerator
broke down. The new refrigerator cost £500. Arjun tried to have the old one repaired, but the
repair company refused to help after hearing that he had asked all suppliers to reduce their
prices. Quickly buying a new refrigerator, however, meant that food worth £300 did not have
to the thrown away; and

c) terminated a contract with a waste handling company to collect waste once per week and
entered into a new contract with another company, who he had worked with years before.
Under the new contract, waste will be collected daily but the cost will increase by just 25
percent. The manager of the new waste handling company was not sure why the coffee
shop needed the collections but was reassured when Arjun told her ‘Don’t worry, I know the
business, after all it’s been my café for many years’.

Advise Dakota.

Answer:

Here, Dakota (D) should be made aware of the possible new contracts she has gotten into
because of Arjun (A). Whichever contract A gets into, he must aim to reduce the costs by 10
per cent. The three contracts to be discussed are with the milk supplier, the procurement of
the £500 new refrigerator, and the contract with the new waste collection company. A, was
acting by the authority entrusted to him where he acted as an ‘agent’ on behalf of D, the
principal as per the definition in Queen v Kane. Thus, this question touches on the subject of
agency. Dakota, as the principal, is well within her rights to exercise them (Montgomerie v
United Kingdom Mutual Steamship Association). To determine whether D would be liable for
these contracts, it is necessary to understand the laws of an authority of an agent.

Part A

The first issue belongs to actual authority. The authority of the agent will be reflected in the
agency agreement if the principal and agent agree to its formation. The principal is only
obligated and the agent is only entitled to indemnification from the principal for any costs
spent if the agent acts within the scope of actual power. Agents who go beyond their actual
scope of authority may be held accountable to third parties. Only actions that are under the
agent's ambit of authority are liable to the principal (Morris v Jacobs).
More specifically, this issue is pertaining to express actual authority. Express actual authority
refers to the authority which the principal expressly gives to the agent.

Now, A was instructed by D negotiate a reduction in costs by 10 per cent with the suppliers.
Assuming that this transfer of authority was correctly and clearly given, A by right shall follow
them. As per SMC Electronics Ltd v Akhter Computers Ltd, this authority may be contained
in documents and/or conversations between the parties.

It is found that the weekly expenses will be increased and that would seem like he went
against his authority given by D. However, the drinks will be profitable and he did achieve
the goal of reducing the costs by an extra 2 per cent, overall saving 12 per cent. In fact, A
has made it more profitable which was D’s goal all along.

Toulson J in Cooper v National Westminster Bank plc said that the critical question is not
limited to whether the agent’s interpretation was reasonable; it is whether the agent acted
reasonably in acting upon that interpretation. Hence, it is proven that , A had interpreted D’s
instruction and had behaved reasonably which is to ultimately reduce the costs, agency by
express actual authority was in fact created and D is liable to this contract.

Part B

Moving on, this section will examine agency by necessity. Generally, the courts are hesitant
to hold the principal liable on the ground of necessity. Courts typically do not allow a claim
brought by someone with whom the principal has no existing agency relationship. An
agency of necessity argument may be raised in several circumstances.

Here, A went against his authority as an agent and bought a new refrigerator. The new
refrigerator had cost £500. In Sachs v Miklos, where A is unable to obtain instructions from
the owner an emergency threatens the property.

In Hawtayne v Bourn, it was decided that the only true agency of necessity is the master of a
ship who acts to save the ship or its cargo in an emergency. It could be said that saving the
supplies was very much important and detrimental to the business if he had not done so.

Hence, it was reasonable that A had behaved as such. This is as per the case of Prafer v
Blatspiel and Stampand Heacock Ltd where the agents behaves in good faith and the
behaviour is commercially responsible. So, agency by way of necessity is established and D
is bound by this contract.

Part C
A needed to reduce cost, but cost was instead increased because of the waste collection.
Apparent authority

Finally, apparent authority by estoppel. In Freeman & Lockyer v Buckhurst Park Properties
(Mangal) Ltd, third parties would not know of a relationship between a principal and an
agent, hence it is reasonsble that they wouldn’t be deduce the extent of this relationship and
the agent’s authority. The principal would therefore be unable to deny the existence of such
an agency, such as seen in Hely-Hutchinson v. Brayhead Ltd. As a result, the third party
would depend on the representation made to him of the agent's authority by the principal,
creating an agency by estoppel.

On the facts, terminated a contract with the present waste handling company and entered
into a new contract with a previous company he had worked with prior. Now, agency by way
of apparent authority did occur. D would also have no way of refuting it’s creation. However,
it seems as though he has falsely represented to the waste handling company, claiming that
‘Don’t worry, I know the business, after all it’s been my café for many years’.

Moreover, the stipulations in the new contract had costed D wherein the cost increased by
25 per cent, against her wishes of reducing them. Thus, A was in not in the capacity to
actually behave like so and is potentially liable. D may not be bound by this contract.