In this article our aim is to provide a brief overview of the recent court judgment concerning the approval by the principal of authority of the contracts concluded by an agent on behalf of a principal without the authorization of the latter.
Person “A” entered into a Tourist Services Agreement with Individual Entrepreneur “B” (Agent) acting on behalf of Company “C” (Principal) on the basis of the Agency Agreement.
According to the Tourist Services Agreement, the Agent agreed to provide Person “A” with a package of tourist services such as reservation of accommodation, insurance, transfer etc. (the Services). Before the Services were provided, the Person “A” made all necessary payments to the Agent as envisaged in the Tourist Services Agreement. The indicated payment was immediately transferred by the Agent at the Principal’s account.
The Principal did not render the Services. The Person “A” requested the Agent to indemnify the damages for infringement of the Tourist Services Agreement. However, the Agent refused to do so relying on the fact that he was acting on behalf and for the benefit of the Principal under the Agency Agreement, and, thus, the latter was obliged to provide the Services and indemnify all damages (if any).
In the end, the Person “A” initiated the proceedings for breach of the Tourist Services Agreement against the Agent and brought a claim for compensation of damages.
The Court of the First Instance held that the Agent and the Principal were jointly and severally liable for non-provision of the Services and thus, obliged them to compensate all damages to the Person “A”.
However, the Court of Appeals took a different view based on the following reasoning.
First, according to Article 295 (2) of the Commercial Code of Ukraine, a commercial agent shall be a business entity (citizen or legal entity) engaged in commercial mediation in accordance with its competence based on the agency agreement.
The Court of Appeals established that at the date of conclusion of the Agency Agreement, the Agent did not have a status of business entity according to the law of Ukraine i.e. the Agent was registered as entrepreneur eight months after the Agency Agreement was executed. Thus, the Court of Appeals found the Agency Agreement invalid and held that the Agent did not have an authority to conclude contracts on behalf of the Principal.
Second, pursuant to Article 297 of the Commercial Code of Ukraine, the agency relationships in Ukraine shall arise (1) on the basis of the agency agreement; or (2) when a commercial agent enters into the agreement for the benefit of the business entity being not entitled thereto or exceeding authorities provided with further approval of the said entity.
According to Article 298 (2) of the Commercial Code, agreements, concluded by the agent without authorization of the principal or in excess of authorities, shall be deemed to be approved by the principal unless the actions of the commercial agent are directly rejected by the principal with notification of the third party. This implies that if the principal does not reject the actions of the agent before the third party, he shall be found bounded by the contract concluded between the agent and the third party.
However, according to the interpretation of the Court of Appeals, only subsequent direct approval of the agreement by the principal shall bring this agreement into legal effect. Particularly, the Court of Appeals believed that the mere fact that the Agent has transferred money at the account of the Principal for the Services to be rendered and the absence of any further objections of the Principal shall not be regarded as an approval of the agreement concluded by the agent with the Person “A”.
Subsequently, taking into account that (1) the actions of the Agent were not approved by the Principal before the Person “A”; (2) the Agent did not refer to the Principal for refund of the payments made by the Person “A”, the Court of Appeals obliged only the Agent to compensate the damages for breach of the Tourist Services Agreement.
Anzhela Makhinova, IDI franchising country expert for Ukraine