TERMINATING AGENCY RELATIONSHIPS WRITTEN BY TRACEY M. COHEN AND SAMANTHA CHANG, ARTICLED STUDENT

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1 Trial Lawyers Association of BC Ending Commercial Relationships February 21, 2014 TERMINATING AGENCY RELATIONSHIPS WRITTEN BY TRACEY M. COHEN AND SAMANTHA CHANG, ARTICLED STUDENT Agency relationships take many forms. Some give rise to legal obligations between the principal and third parties while others do not. Regardless of the title given to the relationship, the nature of the relationship and the intention of the parties will determine whether the person or entity is truly an agent with authority to bind its principal, creating legal obligations to third parties. Not only can legal agents create binding legal obligations but their actions can also give rise to other forms of civil liability against their principals. Given the extent to which agents can cause economic consequences to their principals, the ability to terminate the relationship is an important consideration to be taken into account when engaging an agent. This is a term that should be negotiated as part of a written agreement. Where it is not, there are circumstances in which the right to terminate will not be implied, and circumstances where, when it is implied, it will be required to be done with reasonable notice. This paper will focus on jurisprudence considering the right to terminate agency relationships, and, where the courts have found a right to terminate only on reasonable notice, the factors the courts have considered in determining what length of notice is reasonable. Agency Relationships The term agent is used quite liberally to describe various commercial arrangements. However, whether a person will be found to be an agent in the legal sense, will depend upon the actual nature of the relationship. In Gallop v. Abdoulah, 2004 SKQB 405, the Court noted: While much of the case law concentrates on situations of agency that create contractual relations, Halsbury s Laws of England, vol. 1, 3rd ed. (London: Butterworths, 1952) at 147) explains that the concept of agency is much broader in scope: The word agent in addition to meaning a person employed to create contractual relations between two parties is used in at least two other senses. Thus it is often used in business in a non-legal sense to refer to a distributor, as in the case of a sole selling agent, exclusive agent, or

2 - 2 - authorized agent. The relation so established between the appointor and appointee is usually that of vendor and purchaser and no contractual relationship is established between the appointor of the agent and third parties by the sale of goods by the so-called agent to those third parties. The word agent is also frequently used to describe the position of a person who is employed by another to perform duties often of a technical or professional nature which he discharges as that other s alter ego and not merely as a conduit pipe between the principal and the third party. Thus a solicitor is his client s agent for the purpose of instituting or continuing legal proceedings on his behalf. Similarly where a person (not being a servant) is permitted by the owner of a vehicle to drive it, whilst the owner retains possession thereof, the driver is the owner s agent for the purpose of rendering the owner civilly liable for driver s negligence or breach of duty in driving. Generally, wherever one person lawfully delegates to another his common law or statutory duties, that other person is in law his agent for the purpose of rendering the principal civilly liable for the defaults of the agent. Thus a person who carries out an extra-hazardous operation for another is his agent for that purpose, as is a contractor employed by a local authority to perform any of the functions which it may properly so delegate. This passage was cited with approval by Southin J.A. for the British Columbia Court of Appeal in Penderfill Apts. Development Partnership v. Cressey Development Corp. (1990) 43 B.C.L.R. (2d) 57, 39 C.P.C. (2d) 18. It is a well-settled proposition that using the term agent or agency in an agreement does not necessarily give rise to a finding of an agency relationship, as there is no magic in the words agent or agency. In B&M Readers Service Ltd. v. Anglo Canadian Publishers Ltd 1., Aylesworth J.A. noted: In order to ascertain whether the relation of agency exists, the true nature of the agreement or the exact circumstances of the relationship between the alleged principal and agent will be regarded, and if it be found that such agreement in substance contemplates the alleged agent acting on his own behalf, and not on behalf of a principal, then, though the alleged agent may be described as an agent in the agreement the relation of agency will not have arisen. Thus, the question is whether, on the evidence, the true nature of the agreement is such that one party can legally be considered a representative of the other party that is, has one party been authorized by another party (the principal ) to affect its legal rights and obligations in dealing with third parties? In Glengarry Bingo Assn. v. R., 2 the Federal Court of Appeal noted that the three essential requirements to establish agency are: CanLII 96 (ON CA). 2 [1999] F.C.J. No. 316

3 Both the principal and the agent consent to the agency relationship; 2. The principal grants authority to the agent to affect the principal s legal rights and obligations; and 3. The principal exercises some control over the agent s actions. The Court went on to note, at para. 33, The most common example of how an agent might affect the legal position of its principal is by entering a contract on the principal's behalf. Creation of Agency Relationships Agency relationships may arise in several ways. Professor F.M.B. Reynolds notes in his text Bowstead and Reynolds on Agency 3 : (1) The relationship of principal and agent may be constituted (a) by agreement, whether contractual or not, between principal and agent, which may be express, or implied from the conduct or situation of the parties; (b) retrospectively, by subsequent ratification by the principal of acts done on his behalf. The key to creating an agency relationship is the principal s consent for the agent to be able to affect the principal s legal obligations and rights. As a corollary, a party cannot unilaterally appoint itself as agent. 4 A principal may grant actual, apparent, or customary authority to the agent to act on his or her behalf. Actual authority is typically granted through an agreement between the principal and the agent, whether the agreement is express or implied through the conduct of the parties. Apparent authority, also referred to as ostensible authority, arises when a third party reasonably believes that the principal has authorized the agent to perform the act in question on his or her behalf. Customary authority arises where an agent in a particular trade or industry would be expected to possess such authority. As noted above, it is an essential requirement of agency that the principal has some degree of control over the agent s actions. In Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, [1996] 3 SCR 727, Justice LaForest noted in his dissent: 3 17 th ed. (London: Sweet & Maxwell, 2001) at p See: William B. Sweet & Associates Ltd. v. Copper Beach Estates Ltd. (1993), 108 D.L.R (4th) 85 (BCCA).

4 - 4 - [101] The general rule of agency is that a principal is bound by the acts of an agent when that agent is acting within the scope of his or her ordinary or apparent authority. The agent does not cease to bind the principal when he or she acts fraudulently in furtherance of his or her own purposes. That this is the law in Canada was acknowledged in Canadian Laboratory Supplies Ltd. v. Engelhard Industries of Canada Ltd., [1979] 2 S.C.R. 787, where Laskin C.J., speaking for the Court on this point, stated at p. 797: There is, of course, no doubt in my mind that if an agent, in the exercise of an admitted authority in him in respect of his ordinary duties acts for his own benefit, his principal cannot deny liability for contracts he purports to make on behalf of the principal. It is only in such circumstances or where there is a representation from the principal that puts the agent in a position to act beyond the authority reposed in him that the principal can be bound. Thus, a principal will be generally be bound to a third party for those acts which the agent is authorized to carry out or has the apparent or ostensible authority to carry out. Further, even where an agent acts beyond the scope of his authorization, a principal may ratify the act and, therefore, be bound by it. Terminating Agency Relationships Agency relationships may be terminated in a number of ways. Professor Fridman identifies six causes of termination of agency: completion, impossibility, death, insanity, revocation by the principal, or renunciation by the agent. 5 Typically, an agency relationship terminates when the agent fully performs the transaction he has undertaken, or the agreed upon duration of the agency relationship has expired, thus bringing the agent s authority to an end. Besides these instances of normal termination, an agency relationship terminates where performance becomes impossible, such as where the subjectmatter of the agency ceases to exist; where the principal or agent becomes incompetent or incapacitated; or, where the principal or agent dies. Where no Contractual Term As noted above, the parties may choose to make an express provision in the agency agreement for termination. As a matter of contract the parties can provide for the unilateral right of termination, including for termination without notice. Addressing this issue up front with an express agreement is the prudent course of action to ensure certainty with respect to terminating the agency relationship. 5 G.H.L. Fridman, Canadian Agency Law, 2d ed., (Toronto: LexisNexis, 2012), chapter 5.

5 - 5 - However, where there is no express provision in the agency agreement, the question that often arises is whether a principal has the right to terminate the agreement and, if so, whether it is a right to terminate without notice. Right to Terminate A number of authorities have considered whether in a contract of indefinite duration, a term should be implied to allow for unilateral termination of the arrangement. There is a line of authority that suggests that if a method of termination was not stipulated, then the contract is presumed to be perpetual or indefinite subject to very limited exceptions (Llanelly Railway & Dock Co. v. London & North Western Railway Co. (1873), 8 Ch. App 942 (C.A.), aff d (1875), H.L. 550; Cook v. CKOY Limited, [1963] O.J. No. 719 (H.C.J.); Rapatax (1987) Inc. v. Cantax Corp., [1997] A.J. No. 313 (C.A.), leave to appeal to S.C.C. refused). This presumption is rebuttable, however, if the party alleging an entitlement to terminate is able to show from the wording of the agreement or its nature that the presumption should be set aside. Another line of authority suggests that the issue is to be determined on the basis of contract interpretation principles without a presumption in favour of perpetual contracts (Martin-Baker Aircraft Co. Ltd. v. Canadian Flight Equipment Ltd., [1955] 2 All E.R. 722 (Q.B.); Inter-Rail Auto Handling Inc. (c.o.b. Inter-Rail Canada) v. Canadian Pacific Ltd., [2000] B.C.J. No (S.C.); Hendry v. Graycrest Resort Ltd., 2000 BCSC 1955). These two conflicting lines of authority were reconciled by the Manitoba Court of Appeal in Shaw Cablesystems (Manitoba) Ltd. v. Canadian Legion Memorial Housing Foundations (Manitoba), [1997] M.J. No. 65 (C.A.), where the Court held that the essence of the cases is simply that each of the decisions turns on the particular agreement under consideration and the circumstances surrounding it (at para.15). Indeed, in practice, whether the presumption is operative or not, courts will in any event look at the relationship between the parties and the nature and terms of the contract to determine if termination should be implied. The key, as with the implication of contractual terms generally, is the common intention of the parties at the time that they entered into the contract. Under the law of contract, the court will examine: whether an officious bystander, having regard to all the circumstances existing between the parties at the time of the formation of the contract, would find that a term providing for termination was so obvious that it would go without saying; and whether an implied term is necessary for business efficacy. 6 6 Pine Valley Mining Corp. (re), 2008 BCSC 297, leave to appeal dismissed, 2008 BCCA 263; See also: Athwal v. Black top Cabs Ltd., 2012 BCCA 107, where the Court provided: There is a presumption against adding an unexpressed term to a contract by implication unless: (i) it is necessary to do so in order to give the contract business efficacy (this does not include a test of reasonableness for the contract); (ii) to correct an obvious oversight for which there is no dispute that the parties intended to include such a term in the contract (i.e. the implied term goes

6 - 6 - The presence of an express termination clause that expressly permits for unilateral termination by one party only will generally indicate that a clause allowing the opposite party to terminate unilaterally should not be implied. Agreements that include express provisions dealing with circumstances in which the parties are permitted to terminate will not necessarily preclude the implication of a term allowing a party to unilaterally terminate without cause. (Pine Valley Mining Corp. (re), 2008 BCSC 297, leave to appeal dismissed, 2008 BCCA 263; Treen Gloves & Safety Products Ltd. v. Degil Safety Products (1989) Inc., [1990] B.C.J. No (S.C.); Bernard-Norman Specialities Co. v. S.C. Time Inc., [1989] O.J. No (H.C.J.)) Reasonable Notice In circumstances where a right to terminate is implied, it is often implied as a right to terminate on reasonable notice. Some case law suggests that the origin of implying a reasonable notice termination clause in commercial agency contracts is found in the branch of law that seeks to characterize the relationship as either one of employment or one of independent contractor. Only the employment relationship historically required reasonable notice, whereas an independent contractor relationship could be terminated without notice, absent an express contractual term to the contrary. The alternative basis upon which an implied term of reasonable notice to terminate has been found is that of general contract interpretation principles. Agency Contracts and the Employment Model In BC, at least in the distributorship context, the Courts have applied the approach based upon the degree to which the relationship has the hallmarks of an employee/employer relationship. An example of this is found in Marbry Distributors Ltd. v. Avrecan International Inc., 1999 BCCA 172 ( Marbry ). In that case, the Court of Appeal considered whether a sales agent who provided services to the defendant through a personal corporation was entitled to reasonable notice of termination. In considering the nature of the relationship, Braidwood J.A. commented at para. 9: At the heart of the court s inquiry is the true nature of the relationship between the parties. All relationships in the workplace setting can perhaps be thought of as existing on a continuum. At one end of the continuum lies the employer/employee relationship where reasonable notice is required to terminate. At the other extremity is independent contracting or strict agency relationships where notice is without saying ); (iii) the term can be clearly and precisely formulated; and (iv) the term will not conflict or be inconsistent with an express term of the contract. However, a term of a contract may only be implied where it is necessary to give legal effect to the parties presumed intention, as expressed in the contract, and to give business efficacy to the contract. The onus is on the party seeking to establish an implied term of a contract.

7 - 7 - not required. The difficulty obviously lies in determining where upon that continuum one is located. Does the relationship bear more resemblance to the employer/employee or the independent contractor status? Braidwood J.A. suggested at para. 38 that, in determining where along the continuum a particular agency relationship falls, the court should look at: (i) Duration/Permanency of the Relationship. The longer the duration of the relationship or the more permanent it is militates in favour of a reasonable notice requirement. Amongst other evidence, the purchase and maintenance of inventory, which contains a permanency aspect, should be considered; (ii) Degree of Reliance/Closeness of the Relationship. As these two interrelated sub-factors are increased the more likely it is that the relationship falls on the employer/employee side of the continuum. Included in this factor is whether the sale of the defendant s products amounted to a significant percentage of the plaintiff s revenues; and (iii) Degree of Exclusivity. An exclusive relationship favours the master/servant classification. None of these factors are by themselves conclusive and not every factor need be present in order to classify a relationship as one requiring notice to terminate. In Marbry, the court held that the relationship between the parties was closer to that of an employer-employee relationship, and found that the agent was entitled to reasonable notice of nine months. It is noted that McEachern, CJBC (as he then was), in dissent, questioned the propriety of implying a term that created or deemed an employment relationship between commercial parties when the parties themselves had not chosen that relationship. The B.C. Court of Appeal in Zupan v. Vancouver (City) 2005 BCCA 9 (CanLII) again assessed whether there was a right of termination by considering where the relationship between the parties fit on the continuum between master/servant at one end of the spectrum and independent contractors at the other. The Court considered whether the particular circumstances before the Court placed the relationship into the intermediate category where reasonable notice must be given when services are terminated. The Court concluded that there was no employer/employeelike relationship and, therefore, the principal could terminate the relationship without notice. Similarly, in McKee v. Reid s Homes Ltd., 2009 ONCA 916, the Ontario Court of Appeal noted that there is an intermediate category of dependant contractors who do not fall within the scope of a master-servant relationship, but ought to be given reasonable notice due to the agent s economic dependency on the principal, particularly where there is a high degree of exclusivity in the relationship.

8 - 8 - Agency Relationships as Commercial Bargains The alternative basis, upon which the courts have determined whether or not a right to terminate is only upon reasonable notice, arises as a result of the recognition that agency relationships are typically commercial bargains. Some commentators, including Professor Fridman, have criticized the approach based upon employment law principles as conflating the principal-agent relationship with the master-servant relationship. Professor Fridman notes that: Neither employees nor independent contractors are empowered to bind their employer by a contract made with a third party, unless the employee or independent contractor has been expressly or ostensibly authorized to enter into a contract on behalf of the employer. Furthermore, an agent, except in certain circumstances, can be dismissed at any time, whereas at common law a servant must always be given notice, or must be dismissed for some lawful justification. 7 In Ontario Inc. v. Boa Franc Inc., 2005 CanLII (ON CA), ( Boa Franc ) the manufacturer terminated an exclusive distributorship contract, alleging that it had just cause to do so. The Ontario Court of Appeal questioned whether it was appropriate to apply employment law concepts to a distributorship agreement, which is typically considered an agency relationship. The Ontario Court of Appeal determined that a distributorship agreement ought to be interpreted using the ordinary rules of contract: The issue that arises from this background is, to what extent it is appropriate or necessary to apply employment law concepts to a commercial distributorship agreement. I share the concern of McEachern C.J.B.C. in Marbry that even if it may in some ways resemble an employment relationship, a distributorship agreement is a commercial contract negotiated by business entities, each with its own interests to protect. Because it is a business relationship governed by contract, there is no reason why the ordinary rules of contract, including the rules for implying a term and for determining the consequences of a breach of contract ought not to apply. The incorporation of the concepts of termination on reasonable notice or for cause appear to have arisen in one line of cases from an analogy to employment law. However, in the other line, adopted in the Hillis Oil case, the concept of termination on notice comes from the interpretation of the contract itself and not from an analytical comparison of the particular contractual relationship with that of employee or independent contractor. I conclude that at this stage in the development and application of the law, there is no need, nor is it appropriate in a commercial law context, to import employment law concepts to govern distributorship agreements. [Emphasis added.] 7 Fridman, Canadian Agency Law at p. 23.

9 - 9 - Thus, there is still some support for the notion that because an agency relationship arises out of a purely commercial bargain general contract principles should apply in assessing the implication of terms. As a result of that analysis the Court in that case also concluded that a commercial distributorship agreement could not be terminated for cause, without notice, unless the cause relied upon constituted a fundamental breach of the agreement. It is true that some of the same considerations are taken into account in both approaches (which considerations will be addressed further below), however, the preliminary hurdles of the officious bystander test and business efficacy in contract law would likely narrow the instances in which a reasonable notice requirement would be found. Determining Reasonable Notice The question of what length of notice would be reasonable in an agency relationship is a fact specific determination. In Carter v. Bell & Sons, [1936] 2 D.L.R. 438 (ON CA) Middleton, J.A. noted at pages : In the case of master and servant there is implied in the contract of hiring an obligation to give reasonable notice of an intention to terminate the arrangement. This notice in a case of indefinite hiring is generally 6 months, but the length of notice is always a matter for inquiry and determination, and in special circumstances may be less. This is a peculiar incident of the relationship of master and servant based largely upon custom. The master and the servant when nothing is said are presumed to contract with reference to this usage and so stipulation as to notice is implied. Where a contract is made falling outside of the technical relationship of master and servant there is not necessarily this implication and the terms of the contract must be looked at to ascertain the intention of the parties.... When the employer exercises no immediate control over the agent but leaves him to be his own master, in such cases it has always been held that the relationship of master and servant does not exist and the contract may be terminated by either party at will. There are many cases of an intermediate nature where the relationship of master and servant does not exist but where an agreement to terminate the arrangement upon reasonable notice may be implied. This is I think such a case. The mode of remuneration points to a mercantile agency pure and simple, but the duties to be performed indicate a relationship of a more permanent character. The choice of sub-agents and their training, the recommendation of them to the company for appointment, the supervision of these men when appointed, all point to this more permanent relationship. In Marbry, the court found that the parties had been engaged in a 10 year, exclusive distributorship relationship which accounted for 90% of the agent s business. Following the

10 termination, the plaintiff was unable to find a substitute line of products to sell. The Court held that reasonable notice in those circumstances was nine months. In Boa Franc, the agent had served as the exclusive distributor of the principal for ten and a half months, but had been in a business relationship for four and a half years in total. By the time of termination, the distributorship accounted for 83.47% of the agent s sales. The court took into consideration the evidence that the principal continued to ship products to the agent in order for the agent to complete orders undertaken prior to the termination, that the agent had difficulty finding a replacement product line, and that the agent had incurred substantial amounts of overhead to ensure they were able to meet the principal s expectations of product sales. The court held that reasonable notice in those circumstances was 6 months. The factors that the courts typically consider in assessing whether reasonable notice is appropriate and the amount of notice required include: The degree of control exercised by the principal over the agent; The length or duration of the relationship between the parties; The nature of the relationship between the parties; The degree of exclusivity and reliance or dependency between the agent and the principal; The importance of the agency agreement to the agent; The amount of expenses incurred or investments made by the agent to provide services to the principal, including the size of the sales force employed by the agent; The amount of inventory held by the agent; The commercial climate for the product being sold; The ability or inability of the agent to mitigate its loss by finding a different agency agreement, or replacement line of products to re-establish a viable business. 8 It is clear from these factors that the court will be more likely to imply a term requiring reasonable notice of termination where the agent appears vulnerable, particularly where it was highly dependent on the principal, where it incurred costs in reliance on the agency agreement, and where the principal has a higher degree of control over the agent. 8 See: Martin-Baker Aircraft Co., v. Canadian Flight Equipment Ltd., [1955] 2 QB 556; Paper Sales Corporation Ltd. v. Miller Bros. Co. (1962) Ltd., (1975), 55 DLR (3d) 492 (ON CA); Yamaha Canada Music Ltd. v. McDonald and Oryall Ltd. (1990), 46 BCLR (2d) 363 (BCCA); Hillis Oil & Sales Ltd. v. Wynn s Canada Ltd., [1986] 1 SCR 57; Smith v. Mosher Limestone Co., [1986] NSJ No 185 (NSCA); DeWinter v. Consolidated food Brands Inc., [1998] BCJ No 1100 (BCSC); Keshen v. S. Lipsky Co., [1956] OJ No 622 (Ont. HCJ).

11 Implications for Terminating Agency Relationships In summary, courts have traditionally viewed agency agreements as enforceable commercial bargains, arrived at by two parties who negotiated terms in their own interests. At the heart of the inquiry into whether a right of termination should be implied is the true nature of the relationship between the parties. If implying such a term, where the evidence suggests that the agent is highly dependent on the principal, courts will more often imply a term requiring the principal to give reasonable notice of such termination. Having regard to these considerations, the simplest way to avoid such pitfalls is to have a clearly drafted termination clause in an agency agreement which sets out the bases upon which such a relationship may be terminated. About the Author Tracey Cohen is a partner and a member of the Commercial Litigation and Dispute Resolution Group. She joined the firm in 1992 after clerking for the British Columbia Court of Appeal. Tracey has an impressive depth of knowledge and experience in resolving business disputes using the most effective means possible - litigation, negotiation, mediation, and arbitration. Tracey has appeared before all levels of Court in British Columbia and as counsel in numerous arbitrations and mediations, Tracey has attained a BV rating ("high to very high legal ability") by the Martindale-Hubbell legal rating service, indicating the high level of respect which she has earned from her peers and senior members of the bar. She is known for her pragmatic approach and ability and dedication in attempting to truly understand her clients' business and developing a strategy that reflects it. Tracey M. Cohen Partner Vancouver Direct Line: Facsimile: [email protected]