Legl 210 Part 6

Agency Relationship

exists when one person (the agent) is authorized to act on behalf of another person (the principal) in dealing with third parties.

The principal gives authority.

The agent performs the service and acts for the principal.

The principal is legally bound by the agent’s actions, as if the principal did it themselves.

Some employees act as agents for their employers, but not all employees are agents. When an employee is an agent, they owe special duties beyond their employment obligations

How are agencies regulated?

regulated by special statutes and professional bodies. This includes real estate agencies, law firms, and accounting firms. The boards and commissions governing these businesses and professions provide licences, training, insurance, and other services to their members. They also hear complaints and provide discipline when misconduct occurs.

Power of Attorney

formal written document that gives someone authority to act as your agent. It is another way to create an agency relationship, but one that is written and often used for important or sensitive matters.

Types of POA

1. General (full authority)

2. Specific Power (limited tasks)

3. Enduring Power of Attorney (EPA)

Continues even if you lose mental capacity.

Common for long-term planning.

Why do we need POA’s

is used when you want someone to legally act for you, especially when a third party (bank, land registry, government office) requires proof of the agent’s authority.

Common situations include: Personal matters, Managing your bank accounts, Paying bills, Handling property or real estate transactions

Business: Signing contracts when you’re absent, Running a business temporarily, Selling assets or dealing with investments, Estate planning

Relationship between Agency and POA

All powers of attorney create an agency relationship…but not all agency relationships require a power of attorney.

Agency is the broad legal concept.

POA is a specific legal instrument used to grant agency authority in writing.

POA is often used when the law requires written authorization or when the task is high-risk or involves property.

How is an Agency relationship created?

when one person (the agent) is given the authority to act on behalf of another (the principal). This authority can arise in several ways: through contract, estoppel, ratification, or necessity. The central idea is that the principal gives the agent the power to act for them.

1. Formation of Contract (Express or implied) 2.

The most common way to create an agency relationship is through a contract between the principal and the agent. This agency agreement can be written or oral and may be part of an employment contract or a separate agreement. It will usually specify:

what the agent is allowed to do,

what duties they must perform, and

how they will be paid.

it requires consensus, consideration, legality, intention to be bound, and capacity.

2. Formation of Estoppel (Apparent Authority)

A principal may unintentionally create an agency relationship through their words or conduct, even if no actual authority was given. This is called apparent authority.

If a principal leads a third party to reasonably believe that the agent has authority, the principal is estopped (prevented) from later denying it

3. Formation by Ratification

Even if an agent acts without authority, the principal can later choose to ratify (approve) the action. Once ratified, the contract becomes binding as if the agent had authority from the start

Limits of Ratification

It must occur within a reasonable time.

The agent must have been acting for a disclosed, specific principal.

The principal must have had capacity at the time of the agent’s act.

The contract must still be capable of being performed.

The contract cannot say “subject to ratification,” or else it is not binding.

4. Formation by Necessity

Agency by necessity arises only in emergencies, where it is necessary to protect the principal’s property and communication is impossible. This is rare today because rapid communication usually allows the principal to be contacted.

Risk Reduction

clearly defining and limiting an agent’s authority in writing,

informing customers of these limits,

notifying third parties immediately if an agent’s authority ends, and

choosing agents carefully.

The Agent’s Duties: Contractual Duties

1. Follow the Agency Agreement

The agent must act within the actual authority given in the contract.If the agent acts outside the agreement, even if they still have apparent authority, the principal can sue the agent for losses.

2. Duty of Reasonable Care

The agent must use the skill and expertise they claim to have and perform with reasonable care.Example: If an agent buys land zoned incorrectly due to careless investigation, they must compensate the principal.

3. Duty to Follow Instructions

Even if the agent thinks a different decision would be better, they must follow the principal’s clear instructions.

4. No Delegation Without Permission

The agent must perform duties personally, unless delegation is:

expressly allowed,

implied by industry custom, or

done through subagents in large organizations (e.g., law firms, banks).The main agent remains responsible for performance.

Fiduciary Duties

Because principals rely heavily on agents, agents owe fiduciary duties, the highest standard of loyalty and good faith.

1. Duty of Loyalty

Because principals rely heavily on agents, agents owe fiduciary duties—the highest standard of loyalty and good faith.

2. Turn Over All Money/Benefits

Any money or property received through the agency must be given to the principal, not kept secretly. The agent must also keep accurate records.

3. Full Disclosure

The agent must disclose all relevant information to the principal.Example: Not passing on verbal offers in a real estate deal is a breach.

4. No Conflict of Interest / No Acting for Both Parties

An agent cannot act for both sides without full consent from both. Undisclosed “double agency” or accepting secret payments is a breach.

5. No Secret Profits / No Competition

The agent cannot:

secretly profit from the agency,

run a competing business,

take opportunities meant for the principal.

6. Confidentiality

Agents must keep information obtained in the role strictly confidential.

When can an agent be sued by a third party?

1. Unauthorized Acts (Contract)

If the agent claims to have authority but does not, the third party can sue them for breach of warranty of authority.

2. Deceit (Tort)

If the agent knowingly lies about having authority → tort of deceit.

3. Negligence (Tort)

If the agent carelessly exceeds their authority → negligence.

Ambiguous Authority

Interpreted broadly.

If the agency agreement is unclear about what authority the agent has, courts usually give the agent the widest reasonable power to do the job.

Example: If a purchasing agent is given “all necessary authority,” they can buy large quantities of goods if needed.

No Payment Unless Contract Conditions Are Met

If payment is only owed on completion, the principal does not have to pay for partial work.

Example: A real estate agent only earns commission if the house is sold. If no sale happens, there is no commission, even if the agent worked hard.

But NOT for Borrowing Money

Authority to borrow money is treated very narrowly.Courts will not assume the agent can borrow unless the principal clearly approved it.

Ways a principle can be liable: 1. Direct Liability

If the principal provides wrong information and the agent passes it on, the principal is liable.

Example: Principal tells the agent a motel makes $100,000 profit. Agent repeats it in good faith.Buyer suffers a loss → principal is liable, not the agent.

2. Vicarious Liability

A principal is responsible for torts committed by an employee, if done in the course of employment.

Applies mostly to employees, not usually to independent contractors.

BUT courts sometimes broaden the idea of “employee.”

Even an independent contractor may be treated as an “employee” for vicarious liability if the principal created the appearance of employment.

When is an independent agent treated like an employee>

Agent works out of the principal’s office

Uses principal’s forms or branding

Principal “holds out” the agent as their representative

No clear notice of limitations

Ways to terminate an Agency Relationship

1. By Notification: The principal can end the agent’s authority simply by telling the agent.

2. Expiry of Time or Completion of Project: If the authority was for a specific time period or project, it ends when the time/project ends.

3. Frustration: Agency ends when: the task becomes impossible, or

circumstances change so much that the job becomes essentially different from what was intended

4. Illegality: Agency ends automatically if the task becomes illegal.

5. Death, Mental Incompetence, or Bankruptcy of the Principal:

These events automatically end both:

actual authority, and apparent authority (although mental incompetence can be unclear).

Importance of notifying Third Parties

f the principal ends the agent’s authority but does NOT notify customers, the principal may still be liable under apparent authority.

Therefore, principals must notify:

existing customers, potential customers, anyone who may deal with the agent.

Types of Business Organizations

1. Sole Proprietorship

2. Partnership

3. Corporations

Sole Proprietorship

Owned and operated by a single individual who makes all decisions and receives all profits.

The owner is fully responsible for all debts, losses, and liabilities; personal and business assets are not separate.

Can hire employees or act through agents, but remains liable for their actions.

Subject to government regulations, licensing, taxation, zoning, and professional organization rules (for lawyers, accountants, etc.).

Has minimal disclosure requirements and outside interference but cannot raise funds by selling shares.

Owner has unlimited liability for the debts and obligations of the business

Unlimited liability is a major risk, though insurance can help mitigate it.

Partnership

A business in which two or more people carrying on business together (in common) with a view to profits, they share ownership, responsibilities, profits, and losses. Each partner acts as an agent for the others and owes fiduciary duties to fellow partners.

Controlled by partnership legislation and by specific agreement of the partners.

A partnership agreement should deal with all important matters.

Unlike a corporation, a partnership is not a separate legal entity, though it can function as one for convenience-owning property, entering contracts, employing staff, and suing or being sued in the firm’s name. Collectively, partners are referred to as a firm.

Legislation sets out presumptions regarding existence of partnership

Can employ staff and operate through agents.

Creation of a partnership

Not always created by a formal agreement between the partners. The Partnerships Act provides that a partnership is created when two or more people carry on business in common with a view toward profits

Factors:

Two or more people

Carry on a business

In common

With a view toward profits

Consider:

Joint ownership of property

Sharing gross returns

Receiving a share of the profits

Loan payments varying with profit

Price of business goodwill depends on profit

Creation of a partnership by Inadvertance

A partnership can exist even without a formal agreement if two or more people carry on a business together with a view to profit.

Sharing net profits, not just gross returns, is a key indicator of a partnership.

Example: Prince Albert Co-operative Association v. Rybka: a couple was deemed in partnership due to joint management, shared losses, and intention to share profits.

Non-profit organizations can inadvertently form partnerships if they share business activities and profits

Creation of a partnership by Contract

Best practice is to create a written partnership agreement detailing:

Duties and contributions of each partner

Sharing of profits, capital, and responsibilities

Management, dispute resolution, and dissolution procedures

Courts can find a partnership exists even if parties say otherwise in their agreement.

Creation of a partnership by Estoppel

A partnership relationship can arise because of estoppel. If one of the parties represents to a third party, either by words or by conduct, that another person is a partner, and that representation is relied on, the existence of a partnership cannot be denied, even if it can be clearly demonstrated that the two were not carrying on a business together. The principle of estoppel applies to partnership just as it does to agency.

Registration

Most provinces require partnerships to be registered, especially if engaged in trading, manufacturing, or contracting.

Failure to register can result in fines, loss of certain legal rights, and increased liability.

Statutory and Contractual Rules

Partnerships are governed by the Partnerships Act, which codifies partner rights and obligations.

Statutory rules cannot override the rights of outsiders; contracts between partners can modify internal arrangements but not affect third-party claims.

Risks

Partners are jointly and severally liable for debts and obligations, including actions by other partners.

Sophisticated businesspeople must take care to avoid inadvertently forming a partnership or being held out as a partner.

Partnership agreement and Partnership Act

Partnership rights and duties come from the Partnerships Act, unless changed by agreement.

Key Default Rules

Profits and losses shared equally, unless the agreement says otherwise.

Partners are reimbursed for expenses and loans (with interest).

All partners may participate in management, though agreements often modify this.

Partners are not employees and receive no salary - only their share of profits.

Major changes (e.g., admitting a partner, changing the business) require unanimous consent.

Ordinary decisions require only a majority vote.

A partner cannot transfer partnership status without consent (only economic benefits may be assigned).

Partners have access to partnership records.

Fiduciary Duty

Partners owe each other:

Loyalty, good faith, and full disclosure.

duty to account for profits made using partnership property, opportunities, or information.(If a partner uses anything that belongs to the partnership, such as its money, equipment, business opportunities, or inside information, and that partner makes a personal profit from it, they must report it and give that profit back to the partnership.)

A duty not to compete with the partnership without consent (profits must be turned over; losses are personal).

Advantages of Partnerships

1. Insurance reduces risk: Many concerns about partnership liability can be managed with proper insurance coverage.

2. Unanimous consent protects partners: Major decisions require agreement from all partners. This prevents a majority from overruling an individual partner—unlike in corporations where minority shareholders can be outvoted.

3. Access to information: Every partner has the right to inspect all business records, offering more transparency than minority shareholders typically receive in a corporation.

4. Lower cost and fewer formalities: Partnerships are cheaper to set up and operate. They have fewer reporting requirements than corporations, which must maintain specific records and file annual reports.

5. Tax advantages for start-ups: Small, low-risk businesses may benefit from beginning as a partnership, allowing partners to personally claim business losses for tax purposes.

6. Protection against majority control: Each partner has an equal voice, and unanimity is required on significant matters, reducing the risk of unfair control.

7. Partnership remains a viable option: With proper insurance and careful planning, the disadvantages of a partnership can be managed, making it a strong alternative to incorporation for many businesses.

How to dissolve a partnership: Dissolution by Notice

Usually, a partnership is easy to dissolve, requiring only notice to that effect by one of the partners (Partnerships Act).

In most cases, a partner can dissolve the partnership simply by giving notice, sometimes even implied notice (e.g., a partner stops participating).

This can harm the remaining partners because it may require selling all partnership assets.

Partnership agreements often include clauses allowing one partner to leave without dissolving the whole partnership.

Dissolution by death, bankruptcy, insolvency

Unless modified by agreement, the partnership ends if any partner dies, becomes bankrupt, or becomes insolvent.(Partnerships Act)

Professionals usually include clauses to prevent automatic dissolution, allowing the partner’s share to transfer to heirs or creditors.

Some provinces differ:

Alberta: dissolved by death or bankruptcy. In Alberta, for example, a partnership is dissolved by the death or bankruptcy of a partner or by an assignment of a partner’s property in trust for the benefit of his creditors.

Other forms of dissolution

A partnership ends when:

A fixed term expires.

A single venture finishes.

The business becomes illegal.

A court orders dissolution because:

A partner is mentally incapable.

A partner’s conduct harms the partnership or breaches the agreement.

The business can only continue at a loss.

It is “just and equitable” to dissolve.

effect of dissolution

Partnership ends; business must be wound up.

Partners must:

Sell assets,

Pay creditors,

Distribute remaining funds.

Public notice of dissolution is essential to avoid ongoing liability.

Partners still have authority to act only to wind up the business.

Distribution of Assets on Dissolution

Unless the partnership agreement says otherwise:

Pay debts from profits.

If insufficient, use capital contributions.

If still insufficient, creditors can claim against partners personally, in proportion to their profit-sharing ratios.

Remaining assets go:

First to repay partner advances,

Then return capital contributions,

Finally divide remaining funds based on profit-sharing.

Limited Partnerships

Additions to the legislation governing partnership in every province provide for the creation of limited partnerships (These additions vary from province to province. In Alberta, see the Partnership Act)

Formation

Must file a declaration with the government.

Must disclose contributions and profit-sharing terms.

Cannot be formed with only limited partners.

The general partner can be a corporation, even a shell corporation.

Limited Partner vs General Partner

Limited partner: only loses what they invested.

- General partners: fully liable for all debts and losses.

Losing limited Partner Status

A limited partner becomes a general partner (losing liability protection) if they:

Allow their surname to appear in the firm name.

Provide services to the partnership.

Participate in control of the business.

Are held out as a general partner.

Fail to comply with LP legislation.

Liability in LLP’s

A partner is not personally liable for:

Another partner’s negligence.

Negligence of employees supervised by others.

- A partner is personally liable for:

Their own negligence.

Negligence of those they supervise.

Who Can Use LLPs

Professionals such as lawyers, accountants, dentists, physicians, optometrists, chiropractors, etc.

Must:

Have a written agreement.

Carry minimum professional liability insurance.

Include “LLP” in the name.

Be registered as an LLP.

Joint Ventures

Often two or more individuals or corporations wish to cooperate in completing a project together.

What They Are

A temporary business relationship for a specific project.

Formed either by:

Creating a corporation, or

Entering a partnership-style joint venture agreement.

Legal Treatment

Even if the parties call it a “contract,” if they are carrying on business in common with a view to profit, partnership law usually applies.

Corporations

A corporation is a separate legal person from its shareholders.This means:

The company owns its own assets.

Shareholders own shares, not the company’s property.

The company continues even if shareholders change.

This structure makes it easier to raise money and run large businesses.

Lifting the corporate veil

when a court decides not to treat the corporation as a separate legal person and instead holds the individuals behind the corporation, such as shareholders or directors, personally responsible.

When do courts lift the corporate veil?

Courts usually respect the corporation’s separate status, but may “lift the corporate veil” when:

The corporation is used to commit fraud

Someone uses a company to avoid legal obligations - avoid law

The company is just a sham or alter ego of the owner (The company is not real—it's just the owner pretending the business is separate.)

There is abuse of the corporate form

Advantages of Corporations

1. Limited Liability – Shareholders are generally not personally responsible for corporate debts; they can lose only what they invested. Exceptions exist if personal guarantees are given or in cases of fraud.

2. Tax Benefits – Corporations can defer taxes and may access provincial or federal tax advantages, though expert advice is needed.

3. Continuity – A corporation continues to exist even if shareholders die; shares form part of the estate and can be transferred.

4. Share Transferability – Shares can generally be sold without affecting the corporation.

5. Management Separation – Shareholders elect directors who manage the business; shareholders need not run daily operations.

6. Versatility – Corporations can hold shares in other companies, form joint ventures, license IP, or operate franchises.

Disadvantages of Corporations

1. Cost – Incorporation and ongoing compliance are more expensive than sole proprietorships or partnerships.

2. Minority Shareholder Weakness – Minority shareholders may have little influence and cannot easily force changes.

3. Limited Transferability in Closely Held Corporations – Share transfers may require approval or be restricted by agreements.

4. Complexity – Altering corporate structure or documents is more complicated than changing a partnership agreement.

5. Limited Liability Can Be Lost – Giving personal guarantees or committing fraud can expose shareholders to personal liability.

Funding of a corporation

Funding may be derived from the selling of shares (which may be common shares or preferred shares with special rights and restrictions), or through borrowing (which can involve bonds or debentures, secured or unsecured)

Shareholders are participants in the corporation, while lenders are creditors

Broadly held corporations (many shareholders) have more stringent government controls and greater reporting requirements than closely held corporations (few shareholders)

Role of corporate directors and officers

Directors are elected by shareholders to manage the corporation

Directors owe a fiduciary duty and a duty of care to the corporation

Directors may be personally liable for decisions they make

Directors, officers, employees, and the corporation itself may incur criminal liability

Officers run the affairs of the corporation and owe it a fiduciary duty and a duty of care

Promoters may be personally liable for pre-incorporation contracts

Role of corporate shareholders

Shareholders owe very few duties to the corporation or other shareholders unless they have sufficient shares to be classed as insiders

Shareholders have significant rights and remedies

Shareholders do not have a right to sue the directors when they act carelessly or wrongfully in carrying out their duties, as the duty of the directors is owed to the corporation, not to the shareholder

Shareholders can bring a derivative or representative action against the directors on behalf of the corporation, commence an oppression action, or apply for a dissent and appraisal remedy

Shareholders do not have a right to demand dividends

Shareholders can enter into shareholder agreements or even unanimous shareholder agreements

Methods of incorporation

Registration

Letters Patent

Articles of Incorporation (most common federally and in most provinces)

Registration

incorporation through registration recognizes the contractual relationship between its members and grants them corporate status. Nova Scotia is the only jurisdiction in Canada still using the registration system of incorporation.

The process involves registering a “memorandum of association” and “articles of association” with the appropriate government agency and paying the required fee.

Letters Patent

Based on the monarch granting a royal charter.

The applicant petitions the government, which grants letters patent if qualifications are met.

Today, only Prince Edward Island uses this method.

Letters patent act as the company’s constitution: they set the company’s name, purpose, share structure, and rules for shares.

Day-to-day operations are governed by bylaws.

Companies have the same legal powers as a natural person.

Articles of Incorporation

Common federally and in most provinces; government issues a certificate of incorporation. Used by most Canadian provinces and the federal government, based on the U.S. system.

Incorporation happens by filing articles of incorporation and paying a fee, which grants a certificate of incorporation.

Articles act like a constitution, setting the company’s name, purpose, share structure, and rules.

Bylaws control daily operations and do not need to be filed.

Government cannot refuse incorporation if legal requirements are met.

In BC, incorporation is done via a “notice of articles”, with separate bylaws kept internally.

Federal vs Provincial incorporation

Federal – Allows business across Canada; may require extra-provincial registration in each province.

Provincial – Suitable for local business; simpler and cheaper if business is limited to one province.

Choice depends on business scope, cost, and statutory advantages.

Termination of a corporation

1. Voluntary dissolution – Directors or shareholders follow the legal winding-up process.

2. Involuntary dissolution – Court orders it (e.g., minority shareholder unfairly treated) or creditors force it through bankruptcy.

3. Neglecting annual filings – Failure to file annual returns can lead to automatic dissolution.

Legal effects:

• Selling shares – Corporation continues with new owners; debts and contracts remain.

• Selling assets – Purchaser is not liable for old debts unless assets are encumbered; corporation can then be wound up.