Industry Briefing Paper

Transcription

1 Industry Briefing Paper Brokers and Agents in the Australian Grain Industry The Difference and the Implications Important Notice: This briefing paper is not in the nature of legal or financial advice and may not be construed as such. Readers should seek professional advice based on their individual circumstances regarding the accuracy and/or applicability of the contents of this paper. This paper was developed by Jeremy Rosenthal, Principal Solicitor at SBA Law for GTA. 1

2 1. Introduction Australian grain growers and other industry participants have a greater choice than ever before of service providers offering professional advice or assistance in grain marketing and trading. Those service providers play an important industry role. This paper seeks to examine how the legal typification of a service provider s role can materially affect the rights and obligations of the service provider and client as between themselves and in relation to third parties in grain transactions. A particular focus of this paper is to explain the distinction between those service providers which are brokers under the GTA Trade Rules 1 (Rules) and those which are not, regardless of what the service provider calls itself or how it markets its services. Before embarking on the legal analysis, it is firstly necessary to consider the roles performed by the relevant service providers: consultants, grower brokers, buyer agents and wholesale brokers. The schedule to this paper contains a table summarizing those roles. 2. Introductory Legal Concepts This section sets the introductory framework by defining the key legal terms. 2.1 Agency There is no single definition for the legal concept of agency but in all cases the central concept is that of a party (principal) acting through another (agent) being deemed to act in person as if the principal acted directly. Even the narrowest definition of the agency has at its centre a principal granting its agent the authority to create legal relations between the principal and third parties. The scope of the agency that is, the extent to which the agent may bind its principal - is framed by the authority granted by the principal, by the law and, in some cases specific rules which apply to the industry or circumstances in which the agency arises. 1 As amended in October

3 1.2 Broker A broker is a class of agent who does not have possession of the goods being bought and sold, and does not sell in his or her own name 2. Rather, the broker s client is the contracting party and the broker s role is confined to negotiating the contract for sale and purchase. Examples of brokers include real estate agents, insurance brokers and mortgage brokers. 1.3 Intermediary A third party whose role is to facilitate a transaction between buyer and seller is not necessarily an agent of either the buyer or seller, nor does a relationship of agency arise simply because a person is an introducer of business or the recipient of a commission for a service. Where the service provider does not have the authority to represent a party for the purpose of soliciting business and is not permitted or obliged to exercise any discretion, the service provider is an intermediary. 2. The GTA Trade Rules This section of the paper considers the meaning of the term Broker under the Rules and why the distinction between Brokers on the one hand, and other agents, advisors and the transaction parties on the other hand, is relevant under GTA contracts. 2.1 The definition of Broker under the Rules The Rules define a Broker, for the purpose of those rules, as being: An independent person, firm or electronic trading platform engaged or used by others, at least partially on a commission basis, to facilitate contracts under instructions from Buyers and Sellers, relative to goods to which it does not have actual or constructive possession. A person has constructive possession of goods where that person has the right to control possession of the goods without physically holding the goods. An example of a person having constructive possession of grain is 2 Agents which have physical possession of the goods are known as factors. 3

4 that person, in his or her own name, warehousing grain in a bulk handling facility operated by a third party. The definition of Broker under the Trade Rules further clarifies that the following persons are not Brokers: (a) a person who has possession and absolute control of goods supplied to him or her to sell and collect the price 3. The specific example is then given that a commission agent to whom a commodity is consigned for sale is not a Broker. a person who only acts for one principal to the exclusion of all others. Although the Trade Rules are not clear on this point, the author suggests that this should be interpreted to mean that the Broker does not act for either transaction party in relation to that particular transaction. In other words, the clarification is not so broad as to prevent the Broker from having any commercial relationship whatsoever with a transaction party. That said, it may not be in the other transaction party s interests to use the Broker where such a commercial relationship exists. 2.2 Applying the definition - who is and who is not a Broker under the Rules By applying the definition and having regard to the industry roles set out in the schedule: (a) a wholesale broker will in most cases be considered to be a Broker under the Rules; and a buyer agent, grower broker and consultant will not in most cases be considered to be a Broker under the Rules. To the extent that those service providers are involved in the negotiation or execution of a grain transaction, they are likely to do so as agent of either the buyer or the seller. 2.3 The Broker as an intermediary The definition of Broker together with the powers, duties and liability of the Broker in Rule 3.1 establishes that the Broker is an intermediary - and not an agent of either transaction party and in turn affords the 3 This clarification in effect repeats (and does no more than) the main part of the definition, which already provides that in order for a person to be a Broker under the Rules that person must not have actual or constructive possession of the relevant goods. The reason for this overlap is likely to be that, prior to amendment of the Rules in October 2012, the main part of the definition referred to actual or constructive custody of commodities or goods in which the person has no concern. 4

5 transaction parties and the Broker an added degree of certainty. Rule 3.1 provides that: (a) (c) (d) the Broker is not a party to the contract and does not represent or act as agent for either party 4 ; the Broker has the power to bind the buyer and seller (parties) only to the extent of their instructions and the parties are not liable for any acts of the Broker in excess of such instructions 5 ; a Broker who, in good faith or otherwise, exceeds its authority is liable for resulting damages 6 ; and a Broker who, in good faith, negotiates a contract which is in accordance with instructions from both parties, who, at the time of negotiations, advises each Party the name of the other, and who completes such negotiations in accordance with the rules and customs governing such transactions, thereby fulfils all obligations and has no further liability to either of the parties. A contract so negotiated is valid and binding between the parties as if it had been negotiated directly between them The Broker s Note is paramount Rule 3.1(1) provides that: A Broker s Note shall be prima facie evidence of the terms of the contract between the parties. To the extent of any inconsistency between a Broker s Note and a document generated by a party, the Broker s Note shall prevail. The Broker s Note, being the contract confirmation issued by the Broker, therefore holds special evidentiary weight in the event that there is a dispute between the parties as to the terms of the contact. The policy reason for this Rule is that the Broker is seen to be independent and not to have vested interest in documenting a transaction inaccurately or in a way which favours a particular party. The special evidentiary weight means that, on the face of it, the Broker s Note will be presumed to be correct unless there is strong evidence to the contrary. The Broker s Note may nevertheless be challenged: 4 Rule 3.1(1) 5 Rule 3.1(2) 6 Rule 3.1(3) 7 Rule 3.1(4) 5

6 (a) (c) (d) if it is amended or expanded upon in a way which is not inconsistent with the Broker's Note; 8 if it is manifestly wrong; where the parties agree orally to amend the contractual terms and there is good evidence to this effect; or where the parties implicitly amend the terms by their conduct in performing the contract and there is good evidence to this effect. Rule 3.1(1) does not prevent the parties from agreeing to amend the terms of the contract. However, given the special status of the Broker s Note, it is particularly important for the parties to ensure it is accurate. It is also strongly advisable to have the Broker document any amendment to a contract in which a Broker is involved. 2.5 What if there is no Broker? Where the buyer and seller are negotiating directly or with the involvement of a service provider (which is not a Broker under the Rules), the parties should all the more ensure that the transaction is documented by a contract confirmation which accurately reflects all relevant terms. Even though the confirmation will not constitute a Broker s Note for the purpose of the parties, the confirmation will nevertheless likely be the most important, and least rebuttable, piece of evidence as to the transaction terms. 9 Where a service provider such as a grower broker or buyer agent is involved in the negotiation and contract formation, there are additional considerations arising under the law of principal and agency to take into account. These are dealt with in the next section. 3. The General Law of Principal and Agency Having established that the wholesale broker acts likely as an intermediary of the buyer and seller (rather than an agent of either of them) whereas grower brokers and buyer agents likely act as agent for their respective clients, this 8 The Broker's Note is explicitly said to prevail over any other documents generated by a party to the transaction to the extent of inconsistency. 9 The October 2012 amendments to the Rules removed obligations on buyers and sellers regarding the preparation of contract confirmations and the process of accepting and amending contracts where a Broker is not involved. Fundamentally this means that the normal principles of contractual law regarding offer and acceptance, interpretation and variation apply without modification by the Rules. 6

7 section considers the key legal aspects of the relationship between principal and agent, and the relationship between each of them and third parties. 3.1 Fiduciary duties of the agent to the principal An agent has 2 fundamental fiduciary duties to its principal: (a) the duty to avoid a conflict between the agent s own interests, or those of another person for whom the agent acts, and the duty owed to the principal; and the duty to avoid profiting from the position as agent other than from the remuneration payable to the agent by the principal in connection with the relevant transaction. These duties can be modified but only with the knowledge and consent of the principal. While disclosure is important, and the logical starting point, actual consent is required. Before engaging an agent, the principal should ensure that the agent is not conflicted and does not have other commercial relationships which the principal might consider to be inconsistent with the agent performing the role for which it has been engaged with the best interests of the principal solely in mind. The principal should also be mindful that the agent may, under its standard terms and conditions, deem the agent to consent to arrangements which would otherwise constitute a breach of these fiduciary duties. 3.2 Agent s engagement and scope of authority The duties and powers of the agent are defined by the nature of the engagement and the scope of authority that the principal grants to the agent upon appointment. It is important that these matters are set out clearly in writing so that there is no ambiguity which might form the basis of dispute between principal and agent at a later point in time. In negotiating the terms of engagement and the scope of the agent s authority the principal should carefully consider requiring the agent to obtain the principal s written consent prior to taking important decisions such as agreeing the final commercial terms volume, price, grade, delivery period - of the sale or purchase of grain. 7

8 The principal should pay careful attention to the agent s terms and conditions, which may seek to limit the agent s liability to the principal, whether for the agent s unpermitted actions, other breach of terms or negligence. 3.3 Ostensible authority A principal may be liable under a contract effected by an agent who has no actual authority from the principal to effect the contract but to whom, in the eyes of the third party, the principal has given its authority. This is called "apparent" or "ostensible" authority. In order for ostensible authority to be sustained, the following must be established: (a) (c) the principal, by its words, conduct or current or past practice is deemed to represent to a third party that the agent is authorised to deal in a particular way; the third party relies upon the representation; and the third party suffers detriment as a result. Certain presumptions may be made about the actions of an agent who is an officer of a principal which is a corporation. 3.4 Acts outside the agent s authority Where an agent contracts outside of his or her actual or ostensible authority then, unless the principal ratifies the contract, the principal is not bound by the contract, the agent alone is liable on the contract and the agent will be liable to the principal for resulting damages. To ratify the agent s unauthorised act, the principal must do so by unequivocal language or conduct. Ratification may be express or implied Contractual rights and obligations: disclosed principal Where a properly authorised agent enters into a contract with a third party on behalf of a disclosed principal - that is, the contract identifies the principal by name and specifies that the agent contracts as agent for the named principal - the principal alone can sue, and be sued by, the 10 One should not rely on mere acquiescence or inactivity of the principal in seeking to assert ratification, although it may be sufficient in certain circumstances. 8

9 third party on that contract for breach. Here, a direct contractual relationship is created and the agent is not a contracting party. 3.6 Contractual rights and obligations: undisclosed principal Where a properly authorised agent enters into a contract with a third party on behalf of an undisclosed principal - that is, the contract specifies that the agent contracts as an agent but does not name the principal: (a) (c) (d) both the agent and the principal can sue on the contract but the right of the principal to enforce the prevails over that of the agent so that if the principal sues the third party then the agent cannot then sue the third party in respect of the same claim; the principal s rights are not lost if the third party pays money to or otherwise settles with the agent unless the principal has given its authority; the principal s right to intervene does not prejudice the right of the third party to sue the agent for specific performance, or damages for breach, of the contract; the third party may elect which of the principal or agent to pursue but may not pursue both. The benefit to the third party is that he or she may look to the financial substance of each. 3.7 Onus of Proof A third party bringing an action against a principal on a contract made by an agent must prove both the existence of an enforceable contract and the authority, actual or ostensible, of the agent to make it. If the principal seeks to enforce the contract, he or she must prove it to be legally enforceable and that either the agent made the contract within its actual authority or that the principal ratified the agent s act in contracting notwithstanding a lack of authority. 3.8 Payments by principal to agent Where a principal is required to make a payment to a third party pursuant to a contract effected by an agent within the agent s authority, payment to the agent coupled with the instruction that the money is to be given to the third party will not, as a general rule, discharge the principal in respect of the debt if the agent defaults. 9

10 Direct payment by the principal and the third party is therefore the best means of avoiding exposure to the solvency and fidelity of the agent. 3.9 Payments by third party to agent A payment by a third party to an agent in satisfaction of a contractual obligation, whether the principal is disclosed or undisclosed, is likely to be effective to discharge the third party s contractual liability. In these circumstances the third party is also entitled to set off any debts due to the third party from the agent personally that were incurred prior to the third party discovering the existence of the principal, and to set off the amount discharged against the debt owed to the principal. Principals should therefore, where possible, ensure that all payments are made directly by the third party to the principal. 3.9 Fraud and misleading and deceptive conduct of the agent 4. Conclusion A principal, however innocent, cannot retain property obtained through the fraud or false representation of its agent. Where in the negotiation of a contract by an agent on behalf of a principal, the agent is guilty of fraud, undue influence, unconscionable dealing, misrepresentation or concealment of essential facts that ought to be disclosed to the other contracting party, the contract is voidable and the other party may rescind it and recover any benefit that has passed under the contract to the principal. Further, in addition to remedies available to the third party under a contract, the principal and agent may be held jointly liable to the third party for damages under statute for the misleading and deceptive conduct of an agent acting on behalf of the principal. In these circumstances, the principal may have recourse against the agent, depending on whether the relevant actions were authorised, within the knowledge of the principal or within the agent s scope of authority. It should be clear from the above that the legal typification of a service provider s role can materially affect the rights and obligations of the service provider and client as between themselves and in relation to third parties in respect of grain transactions. 10

11 In order to mitigate the risks that may arise, which include the risks of dispute, exposure to the solvency of an agent or third party and potential liability for the acts or omissions of others, the following key actions should be considered. 4.1 All wholesale brokers and agents and contractual parties Ensure that the contract confirmation is correct and imports the Rules. 4.2 Contractual third parties dealing with an agent Satisfy yourself that you know who the principal is that you are dealing with as to identity, creditworthiness, capacity, authority and (if applicable) production or delivery capability. 4.3 Agents Ensure your role and scope of authority is clearly expressed and understood, preferably in writing. Be aware of, and comply with, your fiduciary duties to the principal. Always disclose the principal for whom you act in dealings and in the contract confirmation. If asked, be willing to facilitate due diligence between the principal and counterparty so that matters such as financial substance and performance capability can be established independently. Take contemporaneous notes of instructions from the principal. Make sure what you say in negotiation is true. Refer matters outside your direct knowledge to the principal. Consider whether you need to obtain professional indemnity insurance. 4.4 Persons appointing and using an agent Ensure that the agent is reputable and has appropriate market knowledge, expertise and financial substance. In respect of any potential transaction, check whether the agent has current or previous dealings with the proposed counterparty. Ensure the agent s role and scope of authority is clearly expressed and understood, preferably in writing. Ensure that you are disclosed as the principal in dealings and in the contract confirmation. Understand that you can use an agent without the agent being a contracting party. Payments under or in relation to the contract should be made directly between contracting parties, principal to principal. Take contemporaneous notes of your instructions to the agent and of any advice provided by the agent. 11

12 Industry Briefing Paper: Brokers and Agents in the Australian Grain Industry Schedule - Who Does What in the Grain Industry? Function Acts For Confirmation Other Features Remuneration Consultant Risk management strategy possibly including advice on derivatives, foreign exchange, cash contracting or other marketing decisions. Grower Consultant should produce contract confirmation. Consultant is not generally a contracting party. If dealing in financial products or giving financial advice the consultant should have an AFSL and relevant products should have a PDF or come under a relevant exemption under the Corporations Act. Grower should be aware of any alliances/arrangements between the consultant and third parties. Consulting fees on an hourly or fixed basis for advice but can also be on a $/tonne brokerage basis for executed sales/marketing decisions. Consultant should carry professional indemnity insurance. Grower Broker Cash contracting broker operating in the spot and forward market. Typically provides market information but does not advise on trading strategy. Grower Broker should produce contract confirmation. Broker may be a contracting party as agent for the grower. Grower should be aware of any alliances/arrangements between the broker/agent and third parties, particularly buyers. Grower should maintain own view of market trends and pricing and ensure that the broker or agent has appropriate market knowledge. Paid by grower on a $/tonne brokerage basis. Broker may carry professional indemnity insurance. GTA July 2012

13 Function Acts For Confirmation Other Considerations Remuneration Buyer Agent Cash contracting in the spot and forward market. May also offer derivatives if associated with a licensed buyer. Buyer Agent should produce contract confirmation. Agent may be a contracting party as agent for the buyer. If offering derivative products needs to hold or be an authorised representative of an AFSL holder. Paid by the buyer on a $/tonne commission or retainer plus commission. Wholesale Broker Wholesale broking cash contracts in the spot and forward market in the trade to trade and trade to consumer market. Independent Broker must produce contract confirmation, which holds special status under GTA Trade Rules. Paid by the seller on a $/tonne commission. Broker not a contracting party. 2