The recent Court of Appeal decision in Tigris International NC v China Southern Airlines Company Ltd and another  has reiterated that it is of paramount importance that businesses take care to use commercial agents that they know and trust.
If, as a result of failure to verify agents, a contract is terminated due to that agent's underhand dealings, businesses may find themselves held liable for any obligations incurred prior to termination.
Agents are subject to fiduciary duties in respect of the acts they carry out on behalf of their principals. This means that the agent has a legal obligation to act solely in the best interests of their principal.
The agents are obliged to act in their principal's best interests.
The key duties owed by an agent (A) to its principal (P) are:
- A must not profit from his position at the expense of P
- A must not place himself in a position where his own interests conflict with those of P or where there is a real possibility that this will happen
- A owes undivided loyalty to his beneficiary; and
- A must use or disclose information obtained in confidence from P for the benefit only of P
Accordingly, any underhand dealings between one principal and the agent of another will amount to a fraud against the other principal with the consequence that the other principal will be entitled to terminate the contract.
Previous case law on underhand dealings by agents has established that, when the behaviour complained of takes place prior to the formation of contract, the contract will be void from the outset. In one case (Panama and South Pacific Telegraph Co v India Gutta Percha Telephone Works Co  10 Ch App, 515), when the contract was only entered into as a result of a bribe offered by one contracting party to the agent, the contract was deemed void from that point, effectively from the outset.
However, the question of what would happen if the bribe had been given during the running of the contract remained unanswered.
The recent case of Tigris International NC v China Southern Airlines Company Ltd and another  EWCA Civ 1649 involved a dispute arising out of an agreement for the sale of six aircraft.
The buyer alleged that the seller had entered into surreptitious dealings with the buyer's agent with the intention of diverting the sale to another company that was connected with the agent. On the facts, it was held that there was no such secret deal between the seller and the agent.
Nonetheless, the Court of Appeal stated that, had the seller been guilty of surreptitious conduct, the buyer would only be entitled to accept a repudiation or rescission for the future; i.e. it would not be permitted to treat the contract as void from the outset. As a result, until the buyer chose either to end the contract or to affirm it or the buyer decided to set aside the contract and to be put back in the position they were in before the contract was made, the contract would continue to run. Importantly, the liability for any unlawful act carried out before this point would continue to rest with whichever party was liable for it.
Tigris is a useful case because it clarifies the consequences of an agent defrauding his principal.
Businesses should be aware that if a contract is terminated by a party because of surreptitious dealing between his agent and the counterparty which takes place during the contract, the business will remain liable for obligations which have already accrued. Therefore it is important that businesses use agents they know and trust.
Shoosmiths advise on all aspects of agency disputes including advice on effective termination of agency agreements. For more information, please contact Megan Holden on [email protected] or a member of the Dispute Resolution team.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.