The Ties that Bind – An Agent’s Role in the Formation of a Contract

September 13, 2022 Firm News

An Armstrong Teasdale (AT) team led by London Partner, Robin Pickworth, and supported by Of Counsel, Molly Ahmed, and Senior Associate Solicitor, Emma Shaw, acted for Purple Surgical Manufacturing Limited (Purple Surgical) in its successful defence of a claim made by RSW International Ltd (RSW) for damages in the sum of $10,958,750.

AT instructed Tom Ogden and William Harman of 4 New Square, two exceptionally talented counsel.

The case concerned an alleged contract for the sale and purchase of personal protective equipment (PPE), said to have been formed via negotiations between the two parties which were carried out via a single broker (or intermediary). The judgment in the claim is noteworthy as it addresses the legal issues arising from negotiations conducted via an intermediary. The claim also addresses the status of a pro forma invoice.

Background - The COVID-19 Pandemic

Purple Surgical is part of a group of companies which has been manufacturing and supplying surgical instruments and medical devices for over 100 years. In the spring of 2020, the COVID-19 pandemic led to a surge in the global demand for PPE.

RSW alleged that, via negotiations conducted through a single intermediary, Purple Surgical had contractually offered to purchase $43,725,000 worth of PPE. RSW alleged that it had accepted this contractual offer (and thereby entered into a binding contract) by providing a pro forma invoice.

Purple Surgical did not pay the pro forma invoice and denied that it had entered any binding contract with RSW.

Agency and “Pure Intermediaries”

Agents

An agent owes fiduciary obligations to its principal. The principal will expressly or impliedly manifest assent that the agent acts on its behalf, so as to affect the principal’s relations with third parties.

The scope of an agent’s authority (or power) is ascertained on a case-by-case basis. Sometimes an agent will have authority to enter into a contract on behalf of its principal. Sometimes an agent will have a lesser scope of authority – such as the authority to negotiate a third-party contract on the principal’s behalf, but not to enter into a binding contract on the principal’s behalf.

Sometimes the agent might have even lesser (but still important) authority. The agent may be the main go-between in negotiations on behalf of one of the parties and may be trusted by that party (the principal) to pursue that party’s interests. In doing so, such agents will usually have authority to receive and communicate information on their principal’s behalf.

Sometimes the agent might be an agent for both parties; the agent might have two principals. Such agents are known as “dual agents”. Such agents owe fiduciary duties to both principals.

Imputation of an agent’s knowledge to its principal

A principal is generally imputed with knowledge relating to the subject matter of the agency which an agent acquired while acting for the principal.

Where an agent is the main go-between in negotiations, and where the agent has authority to receive and communicate information on their principal’s behalf, then the principal may be deemed to “know” about those communications (even if those communications were not in fact passed on to the principal). Where such an agent is a dual agent, then both principals may be deemed to “know” about those communications (because the agent’s knowledge is imputed to both of them).

Pure intermediaries

Pure intermediaries are independent intermediaries between two or more parties who do not enter into an agency relationship with either or any of the parties. A pure intermediary is not an agent and has no principal; instead, they simply owe a duty to communicate messages honestly.

Pure intermediaries’ knowledge will not ordinarily be imputed – since they have no principal to whom to impute it.

Negotiation of Contracts through Agents and Pure Intermediaries

In ascertaining whether a contract has come into existence, where the alleged contract has been negotiated directly between parties, the court will apply the familiar test of “offer and acceptance”. In deciding whether the parties have reached agreement, the court’s task is to identify the intentions of the parties, objectively ascertained. However, if a recipient (offeree) knows that, in spite of the objective appearance, the offeror does not have the requisite intention to contract, the offeror is not bound and there will be no contract.

By contrast, when analysing a contract which is negotiated through a pure intermediary, the court will not apply the traditional offer/acceptance analysis, but instead will consider whether there is a point in time when the pure intermediary has obtained the agreement of both parties to the same terms.

Purple Surgical’s position was that this approach (rather than the offer/acceptance approach) should be followed where a contract is negotiated through either a pure intermediary or an agent.

Alternatively, Purple Surgical’s position was that applying the offer/acceptance approach, no contract had been entered into.

Pro Forma Invoices

Pro forma invoices are often analysed as either (i) an offer to supply goods or services that is conditional upon receipt of payment; or (ii) an acceptance of such an offer that is conditional on receipt of payment.

Consistent with this analysis, suppliers often use pro forma invoices to offer goods or services to potential customers on the basis neither party is under a contractual commitment unless the customer elects to make a payment.

It is conceivable – but unlikely – that there could also be circumstances in which a contractual offer is accepted through the delivery of a pro forma invoice.

In other words, it is unlikely that the delivery of a pro forma invoice will (by itself) conclude the formation of a binding supply contract so as to oblige the parties to pay and deliver, if the pro forma invoice is not paid.

The Court’s Findings

The court found that the intermediary in this case was a dual agent for both RSW and Purple Surgical, with authority to receive and communicate information and negotiate on behalf of each of them. However, the dual agent did not have authority to conclude a binding contract on behalf of either party without first obtaining their express agreement.

Given that he was an agent, the intermediary’s knowledge was imputed to both parties. He knew that Purple Surgical did not intend to enter into a binding contract with RSW; and RSW was imputed with the same knowledge.

Moreover, it was obvious to RSW that Purple Surgical did not have the requisite intention to enter into a binding contract.

Further still, RSW did not intend to enter into a binding a contract. The court held that RSW’s act of sending the pro forma invoice was simply an act to progress the negotiations, and there was no basis to find that by sending the pro forma invoice that RSW thought that it might somehow have entered into a binding contract to sell the PPE to Purple in advance of payment.

In the circumstances, there was never a point where both parties intended to enter into a binding contract, nor was there a point where they had agreed to the same terms for a binding contract. Thus, there was no binding contract, whether the offer/acceptance approach was applied, or whether the “pure intermediary” approach was applied.

The parties did not intend to, and did not, enter into a binding agreement. Consequently, the court upheld Purple Surgical’s defence and dismissed RSW’s claim.

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