By: Martin K. I. Rumack, Barrister and Solicitor
Few people realize that the concept of “agency” is actually a well-defined legal concept. In fact, there are several different types of agency, and each with its own characteristics. In the plainest terms, an ‘agent’ is someone who has the authority to act on behalf of someone else as their representative.
As a very simple example: “A” has been authorized by “P” to purchase a sports car. A will go to the dealership, will negotiate the deal, and will sign the contract on P’s behalf. In the end, the sports car belongs to P, and P has the obligation to pay for it. A was merely exercising the authority she had been given by P, to conclude P’s deal with the car dealership for him.
In this scenario, A is known as the “agent’, while P is the ‘principal”. A relationship of “agency” has been established. Moreover, from the legal standpoint, the contract for the sale of the car will be between P and the dealership, rather than between A and the dealership. A merely acted as P’s representative.
The authority that A has to negotiate and conclude P’s deal can come in many different forms, and the law recognizes different nuances between them. Whether or not an agent has the authority from his or her principal can be a very important issue – it can determine whether the contract made on the principal’s behalf is a valid one.
“RATIFICATION” & “UNDISCLOSED PRINCIPAL”
It’s important to point out that even if A bought P a motorcycle (instead of a sports car) without his permission, there is a concept known as “ratification” that might save the day. Despite the fact that A failed to adhere to the scope of her authority (i.e. the purchase of a sports tor), P may decide that the motorcycle actually suits him better, and may decide to confirm the contract A entered into with the dealership, after-the-fact. In this situation, P’s ratification makes the contract with the dealership as good as if A had been authorized to buy a motorcycle in the first place.
The concept of ‘undisclosed principal’ can also be important particularly in real estate transactions where the identity of the parties to the deal might matter. Let’s say that C owns two condominium units side-by-side, and lives in one of them but decides to put the other one up for sale. Whoever purchases the unit from C will also become his neighbour, so C is Roping to-find someone who shares his fondness for peace and quiet. D, who looks like the quiet type, approaches C with an offer. D leads C to believe that he is interested in the condominium personally, i.e. that D is the potential buyer.
Unbeknownst to C however, the offer put forth by D is actually from H, who is a determined (but hopelessly untalented) novice trombone player. In this situation, D is H’s agent, and H is what is known as an “undisclosed principal”.
If C accepts the offer to purchase, mistakenly believing that it comes from D, is C out of luck. Generally speaking, there is nothing to prevent an agent from entering into a valid contract on behalf of on undisclosed principal. There is an exception, though, if the true identity of the buyer of the condominium is important to C as seller, or if D the agent exceeded his authority from H somehow. In these instances, there will be no valid contract between C and H at all.
WHY YOU NEED TO KNOW
Buyers and sellers of condominiums should become aware of the concept of agency, as a means of protecting themselves from potentially costly legal misunderstandings. True, in most typical real estate transactions there is no confusion as to who a particular real estate agent acts for, usually because the agency arises through the signing of a contract (i.e., the seller signs an agreement with the listing agent).
But an agency relationship can arise without a written contract being signed – either through the consent between the agent and the seller, or by their mere conduct. This means that two people might be in a principal-agent relationship without necessarily being fully aware of it – or of its potential consequences!
Martin K. I. Rumack is a Toronto based Barrister and Solicitor and is a regular contributor to the Muddy York Blog. Contact Information: 202 – 2 St. Clair Avenue East, Toronto, Ontario, M4T 2T5, Tel: (416) 961-3441 (Ext. 26)
