Agency Agreements – getting it right, the first time: further tips and hints

In an earlier Bartier Perry article (Agency Agreements – getting it right, the first time), we wrote about the importance of correctly documenting commercial agreements the first time and making sure that the bargain struck between the parties is properly recorded.

In this second part of our consideration of agency agreements, we will make some further comments about agreement formalities and also consider rectification, the last line of defence to an agreement that was incorrectly or poorly recorded, as well as misleading or deceptive conduct and some tips to minimise the risk of falling foul of the Australian Consumer Law.

Formal and complete agreements

In our previous article, we discussed the use of pro forma documents to record agency arrangements and the merit of tailoring legal documents to the circumstances of each new engagement to avoid a myriad of issues that may arise.

We are increasingly seeing agency arrangements that are documented by a binding pro forma agreement and then purported to be varied by email threads between the parties, essentially seeking to negotiate terms after the agreement has been formed.

Conducting transactions in this manner puts the parties at risk of disagreement about what the terms of the agreement actually are and might lead to complex disputes that cost a lot of time and money to resolve.

This is why it is very important to make sure that you negotiate and properly document the correct terms of your agreement before performing it, and only seek to vary an agreement after the agreement is struck in writing signed by both parties and in circumstances where a variation is vital to performance of the agreement.

What is equally important is making sure that the agreement is entered into by a person with the authority within an organisation to do so. Agency agreements are the sort of engagements that are sometimes agreed and entered quickly in reliance on what the person who has contacted the agent is saying. What needs to be considered is whether the person who is liaising with the agent has the necessary authority to engage the agent on behalf of a company.

The High Court of Australia has considered this issue in the past, and the position in Australia is that it is the board of directors, as the ultimate governing body of the company, that has the actual authority within a company to enter into a binding contract of this nature.

It is essential to fully investigate the corporate structure of any company before you engage to ensure that the person you are dealing with has the actual authority to enter into the agreement on behalf of the company. The authority can be given effect by someone else in the organisation, but there should be a board resolution authorising the engagement which can be requested.

A protection here is to use an execution clause under section 127 of the Corporations Act that requires signatures by two directors (or one director and the secretary if there are not two), and a presumption will arise that the agreement is binding on the company. It is also prudent to order a recent company search of the records kept by ASIC to verify that the people who have signed the agreement are actually directors of the company.

Rectification

Rectification is available when an agreement has been made between parties that, through a mistake, does not accurately reflect the intended bargain.

There are three elements to rectification that must be proved by the party attempting to have an agreement rectified. These are intention, mistake and that the rectification will correct the mistake.

The party seeking rectification must be able to prove that:

1. the parties held a common intention which continued until the time the document was executed at least. If it is the case that the parties had a common intention at some point but that common intention was not held at the time of executing the agreement, then rectification will not be granted.

2. the document executed does not accord with the common intention by mistake. The mistake must be common to both parties (though there is an exception to this discussed below). If one party knew that the document contained the mistake and took no steps to correct the mistake, rectification will not be granted.

3. if the court was to order rectification in the manner requested, the mistake would be corrected, and the document would accord with the parties’ common intention.

While rectification was previously only granted in circumstances where both (or all) parties to an agreement made a mistake, there have been occasions when the courts have granted rectification due to the mistake by one party only if the following thresholds can be met:

• the plaintiff had a mistaken belief that the document contained or did not contain a particular term;

• the defendant knew or ought to have known of the plaintiff's mistaken belief;

• the defendant said nothing to correct the plaintiff's mistaken belief; and

• the mistake provides an advantage to the defendant or a detriment to the plaintiff.

It is important to note that proving an entitlement to rectification is not easy, and the onus on the party seeking it is high. These cases rely heavily on what the parties knew and intended, and the courts are generally reluctant to depart from the written terms of an agreement particularly in a commercial context where parties are experienced in business and have the benefit of legal advice.

Hence, it is preferable to get an agreement right, the first time, and only seek to fall back on rectification as a remedy in extreme circumstances.

Misleading or deceptive conduct

In our practice, we are seeing an increased number of claims under section 18 of the Australia Consumer Law (ACL) where parties are trying to assert some misleading or deceptive conduct on the part of the agent to avoid their obligation to pay commission after a transaction has been completed.

As the ACL is legislation that was drafted with consumer protection in mind, section 18 is very broad and says that ‘a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive’.

Any person who is acting in an agency role, or as a conduit between two (or more) parties in a transaction, needs to be aware of their obligations under the ACL so as not to unknowingly fall foul of section 18.

An important thing to remember when you are acting in any capacity is clear, regular communication with all parties. If party A tells you something that is relevant to performance of the transaction, or might be in the future, it is necessary as an agent for party A that you communicate that alteration to party B. This will ensure that, should there be a claim between party B and party A in the future, in which party B claims that party A did not make them aware of something relevant, party A cannot then turn around and say to you, well you should have told party B, and therefore you have misled party B, not us.

As long as you are at all times acting on and within your instructions from the party you are the agent for, or the party that has given you authority to speak on their behalf (and you can prove it), you will generally be in a position to defend assertions that you engaged in conduct that was misleading or deceptive or likely to mislead or deceive. You will be able to argue that you were effectively only a conduit for information from and to your principal.

It is therefore vital that you record your communications in writing. The best approach is to communicate via written means and to the extent that this is not practical, a telephone conversation followed by written confirmation of the key points of the conversation or a detailed file note might be the difference between being able to prove, and not being able to prove, that conduct was not misleading or deceptive.

Another thing to remember is that parties often argue that they only entered into an agreement because of some form of pre-agreement representation. This is done to either avoid the agreement entirely, or to claim damages that are otherwise excluded under the agreement. Whilst agreements seek to prevent these arguments in different ways, as it is not possible to contract out of the misleading or deceptive conduct legislation, it is important to be mindful of this issue. Hence, what you say to other parties to induce them to enter into an agreement needs to be carefully articulated to avoid any allegations of misleading or deceptive conduct, and if an agreement is reached, careful drafting of the agreement is required to provide protection against this type of argument.

For more information on misleading or deceptive conduct, read our article on - Recent trends in misleading or deceptive conduct and contracts

Key takeaways

In this article we have considered the importance of actual authority when entering into agreements, the less commonly encountered remedy of rectification together with misleading or deceptive conduct and how to minimise the risk of falling foul of section 18 of the ACL.

The key takeaways are:

1. Try to make sure that all the terms of an agreement are properly recorded in the document that forms the agreement. Try and avoid relying on quick changes to a pro forma document and amending/finalising agreements by email correspondence only.

2. Always investigate who has actual authority to bind a company before signing an agreement and try to use an execution clause under section 127 of the Corporations Act.

3. If an agreement does not properly reflect the common intention of the parties, in some limited circumstances you can seek to have the court rectify this mistake.

4. To minimise the risk of falling foul of section 18 of the ACL, it is important to communicate with relevant parties regularly and clearly, and ensure those communications are recorded in writing (to the extent they can be).

5. Be careful how you articulate pre-agreement representations and inducements to enter into any agreement.

If you have found yourself in one of the above scenarios, contact the commercial disputes team at Bartier Perry who are always available to assist.

Authors: Gavin Stuart & Emma Boyce