Canadian Real Estate Law Blog

March 2009

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Principal's Liability for Acts of Agents

There are some special rules governing the liability of a principal who has an agent acting on their behalf to sign contracts.  The rules are different depending upon whether the party dealing with the agent knows there is a principal behind that agent.  Where the principal is not known (an undisclosed principal) there are again differences in the rules depending upon whether the contract is one made under seal or deemed to be under seal by legislation.  The recent case of Vicdom Sand & Gravel (Ontario) Limited v. Oak Harbor I Management Limited et al [2008] O.J. No. 5357 (Ont. S.C.J.) is an example of the application of the sealed contract rule to an undisclosed principal.

Disclosed Principal

Where an agent enters into a contract on behalf of a principal who is named, and that agent has the authority to enter into that contract, the principal is liable for the performance of the contract.  That authority may be either actual authority granted to the agent or apparent authority where the principal has by its conduct given the indication that the agent has authority for such matters.

Where a disclosed agent acts outside of both its actual or apparent authority, the agent, and not the principal, will be bound.  However, the principal in that situation can ratify the act of its agent.  To constitute ratification, three conditions must be satisfied.  The agent must have purported to act for the principal, at the time the act was done the agent must have had a competent principal and at the time of the ratification the principal must be legally capable of doing the act itself (see John Ziner Lumber Ltd. v. Kotov, 2000 CanLII 16894 (Ont. C.A.)).

Undisclosed Principal

Where an agent acts on behalf of an undisclosed principal, the law has recognized that the third party thinks it is dealing with a person acting on its own behalf.  However, if that third party ultimately learns of the existence of the undisclosed principal, generally that third party may sue the principal so long as the agent has acted within the scope if its actual authority.  There is no concept here of apparent authority because the agency relationship was not known when the contract was made.

However, there is an important exception to that rule, which was relevant in the Vicdom Sand & Gravel case.  It has long been held that a contract made under seal cannot be enforced against the undisclosed principal.  This is inconsistent with the general principle that agents can bind third parties for whom they contract.  The rule has been criticized for that reason.  On the other hand, it seems to have survived on the basis that it is consistent with commercial reality.  The party dealing with the agent does not know there is an undisclosed principal behind the agent and therefore should not get the benefit of any other rights to sue.

The Vicdom Case

The Vicdom Sand & Gravel case involved an agreement of purchase and sale with a vendor take back mortgage.  The agreement of purchase and sale was assigned to Oak Harbor I Management Limited (“Oak Harbor”) and the mortgage back was given by that entity.  It later came out that Oak Harbor was the general partner of a limited partnership and therefore acting as agent for an undisclosed principal.

Vicdom Sand & Gravel, the mortgagee, attempted to collect from the undisclosed principal.  One basis for this was relying on the law that when a person acts as an agent, the transaction can be enforced directly against the principal.

However, the court applied the sealed contract rule.  By reason of the Land Registration Reform Act, in Ontario every registration document dealing with land is, by statute, to have the same effect as if executed under seal.  Accordingly, the mortgage back was considered a sealed contract.  As such, Vicdom Sand & Gravel could not proceed against the undisclosed principal.

Bill Rowlands


March 6, 2009 in Leasing | Permalink | Comments (5)