International transactions: Agency Q&A Canada

Practical Law Country Q&A | Law stated as at 31-May-2018 | Canada

19 March 2019

Reproduced from Practical Law with the permission of the publishers. For further information, visit www.practicallaw.com or call +44(0)20 7542 6664.



Definition and authority

1. How is the relationship between agent and principal defined under national law?

The Canadian legal system is based on the common law tradition of the United Kingdom. In this respect, common law principles in Canada, such as those found in the law of contract are quite similar to those of the US and the UK. Quebec stands as an exception, as its legal system evolved from the French civil law system. In Quebec, as a general rule, the civil law system applies to private law matters, while the common law system applies to public law situations. Thus, to the extent Quebec is empowered by the Canadian Constitution to make laws, Quebec uses a civil code, the Civil Code of Quebec (Civil Code), to do so.

Under the common law applicable in all Canadian jurisdictions other than Quebec, agency is the relationship that exists between two persons when one, called the agent, is considered by law to represent the other, called the principal, in such a way as to be able to affect the principal's legal position through, for example, making contracts, incurring obligations, or acquiring or disposing of property. The agent must be authorised to create or otherwise affect legal relations between the principal and third parties.

Whether an agency relationship exists is a question of fact, based on the way the parties have conducted themselves and the language they have used. One important element in determining if an agency relationship exists is the degree of control exercised by the alleged principal over the agent.

In Quebec, the agency relationship is referred to as a contract of mandate. Under Article 2130 of the Civil Code, the principal (the mandator) confers on another person, the agent (the mandatary), the power to represent them in the performance of a juridical act with a third person, and the mandatary, by their acceptance, binds themselves to exercise the power. That power and, where applicable, the writing evidencing it are also called a "power of attorney". There is no prescribed form for a contract of mandate; a contract of mandate by which a principal appoints an agent can arise provided there is a clear intention of both parties to do so (Caisse populaire des deux Rives v Société mutuelle d'assurance contre l'incendie de la Vallée du Richelieu, [1990] 2 RCS 995).

2. What authority under national law does an agent have to bind the principal by its acts? How far can an agent bind its principal to third parties, when it does not have express authority from the principal to do so?

Generally speaking, an agent can be appointed to perform any function that the principal could legally perform. In Boma Manufacturing Limited v. Canadian Imperial Bank of Commerce, [1996] 3 SCR 727, the Supreme Court of Canada confirmed that the general rule of agency is that a principal is bound by the acts of an agent when the agent is acting within the scope of their actual or apparent authority.

Actual versus apparent authority

The scope of authority of an agent refers to the exact nature and extent of the power possessed by the agent, as authorised or consented to by the principal. When the agency relationship is contractual or by ratification, the agent has actual authority, whereas the agent has apparent authority if the agency was created by estoppel. The existence of actual or apparent authority of the agent to bind the principal must be proven by the party seeking to make the principal liable.

Actual authority

Actual authority may be expressly set out in the agency agreement (which may be written or oral), or it may be implied. Implied actual authority can be inferred from the terms of the agency agreement or from the implied agreement/consent that created the agency. There is also implied actual authority to do what is necessary or ordinarily incidental to carrying out any express authority and to do anything usually or customarily done by an agent within that trade, industry or market, unless otherwise indicated by the principal.

Apparent authority

Apparent authority is a legal relationship between the principal and the third party contractor created by a representation, made by the principal, intended to be and in fact acted on by a third party, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the "apparent" authority, so as to render the principal liable to perform any obligations imposed on them by such contract. Notice to the third party that the agent does not in fact have the authority they were represented to have precludes the third party from relying on that apparent authority and holding the principal liable for the contract or transaction.

Disclosed versus undisclosed principals

An agent can enter a contract or transaction on behalf of a principal, even if the third party is not aware that the principal exists. Principals can therefore be classified as either "disclosed" or "undisclosed", and the legal situation of all three parties involved in a transaction will differ depending on this classification.

Disclosed principals

Disclosed principals are those whose existence is known to the third party during their transaction with the agent, whether or not the third party knows the principal's actual identity. If an agent validly (that is, with authority) enters into a contract on behalf of a disclosed principal, a direct contractual relationship is created between the principal and the third party. An agent is not itself a party to such a contract "unless the agent expressly or by implication incurred or intended to incur personal responsibility under the contract." (Petrifond Midwest Ltd. v. Esso Resources Canada Ltd., [1996] A.J No. 766 at 9 (Alta. C.A.)).

Undisclosed principals

If the third party to a transaction is unaware that the agent is acting on behalf of a principal, and believes that it is contracting with the agent personally, the principal is "undisclosed". In such cases, the third party may become aware of the agency relationship after the contract is entered into, or it may never know of it at all. The agent of an undisclosed principal can only act within the scope of their actual authority, and cannot perform an unauthorised act and have it ratified and made valid, because ratification requires that the principal is identified to the third party.

The agent to an undisclosed principal contracts with the third party personally and as such the agent may sue and be sued under the contract. An undisclosed principal can also sue and, when discovered to exist, may be sued on a contract duly made on its behalf by an agent, provided there is privity of contract between the undisclosed principal and the third party. On discovering the existence of an undisclosed principal, the third party can elect to hold either the principal or the agent liable under the contract. If the principal sues the third party or prohibits the agent from suing or settling with the third party, the agent is precluded from initiating an action. Generally, the right of the principal prevails over that of the agent and the right of the agent to enforce a contract is destroyed by the intervention of the principal. Due to the undisclosed identity of the principal, there can be difficulties establishing that implied or apparent authority existed. An agent for an undisclosed principal likely must have express actual authority to bind the principal.

Quebec

Acts of an agent bind the principal and include acts that are implied by the mandate even if not expressly defined (Articles 2135-2137, Civil Code). A principal is liable for acts of the agent under Article 2160 of the Civil Code. A principal is therefore liable for any injury caused by the fault of the agent in the performance of their mandate unless the principal proves, where the agent was not their subordinate, that they could not have prevented the injury (Article 2164, Civil Code). In civil law, a subordinate is a person hired to perform duties for the principal (Article 1463, Civil Code).

A principal, after disclosing to a third person the mandate they have given, may take action directly against the third person for the performance of the third person's obligations, even though they were contracted with the agent acting in the principal's name. However, the third person may be able to plead that there is an inconsistency between the principal-agent mandate and the terms or nature of third person's contract with the agent. The third person could also raise defences based on the validity of the mandate (see Question 16 relating to causes of termination of the mandate).

If the agent appoints a substitute without the principal's authorisation, or where the principal's interest or the circumstances did not warrant the substitution, the agent can be held responsible for the damage suffered by the principal (Article 2161, Civil Code).

Regulation and legal formalities

3. Are agencies specifically regulated by national law? Is any legislation pending, which is likely to affect agency arrangements? Are there any formalities that a principal must comply with when appointing an agent, for example, any registration or disclosure requirements?

There are no federal laws or statutes that regulate the formation of an agency relationship in a commercial or trade context, nor any laws, statutes, acts or regulations that include any agency specific registration or disclosure requirements. We are not aware of any pending or proposed legislation which may affect agency arrangements.

Some provinces have however instituted legislation that regulate powers of attorney, specifically continuing powers of attorney for property and powers of attorney for personal care. Furthermore, the Crown Liability and Proceedings Act, RSC 1985, c C-50 does limit the liability of crown agents in certain situations.

Competition law

4. Are there any national laws or regulations that would affect the following business practices:

  • Grant of exclusive territory?
  • Tied selling?
  • Territorial restrictions?
  • Customer restrictions?
  • Resale price maintenance?
  • Refusal to deal?
  • Imposition of minimum and maximum prices?
  • Imposition of minimum sales targets?

The Competition Act, R.S.C., 1985, c. C-34 (Competition Act) is a federal law, applicable in all common law provinces and Quebec, governing most business conduct in Canada. It contains both criminal and civil provisions aimed at preventing restrictive trade practices that lessen competition in the Canadian marketplace.

Price maintenance, minimum advertised price policies, exclusive territories and market restrictions are commonplace in agency agreements and are not automatically prohibited under the Competition Act. However, such practices, as well as all of the other practices noted above, are subject to oversight by the competition authorities and third parties affected by such practices can be granted leave to bring a claim.

In order to be subject to orders from the Competition Tribunal to, for example, cease a specific practice or to compel a business to accept a given customer on reasonable trade terms, which may be accompanied by the imposition of fines or criminal sanctions, the conduct in question must have been found to substantially lessen competition in the relevant marketplace.

An example of substantial lessening of competition is where exclusive dealing or tied selling is likely to either impede entry into or expansion of a firm or product in a market.

Section 76(4) of the Competition Act does, however, provide that no order can be made under section 76(2) for price maintenance practices where the supplier and the customer are agent and principal.

5. Are there any laws or regulations relating to restrictive covenants or covenants not to compete during the agency agreement? To what extent is it possible to continue the restrictions after the agreement has expired? In particular, to what extent does the geographical extent and or the length of time of the restriction affect its enforceability?

An agent is generally considered to be a fiduciary of the principal, and as such the agent owes a duty of loyalty to the principal. This obligation of loyalty requires the agent to act with fidelity, in good faith and with honesty, and means that the agent must not let their own personal interest conflict with the obligation of loyalty owed to the principal. The agent cannot make use of any confidential information acquired in the course of the agency relationship for their own benefit, including to engage in competition with the principal. Whether an agent has breached their fiduciary duty will therefore be determined according to the facts of each case.

With regard to non-competition covenants included in the agency agreement, whether such covenant will be enforceable will depend on whether the restriction is reasonable based on the following three factors:

  • Geographic scope.
  • Duration of the restriction.
  • Scope of the prohibited activity.

Only legitimate proprietary rights of the principal will be protected, and blanket restrictions on the agent's freedom to compete are generally unenforceable. What will be reasonable will depend on the facts of each situation, and there is a risk that overbroad language or unreasonable terms may render the entire covenant unenforceable as there is a reticence by the Canadian courts to "blue pencil" non-competition clauses.

Quebec

An agent (mandatary) has a broad requirement to act with prudence and diligence in performing a mandate (Article 2138, Civil Code). The agent must also act honestly and faithfully in the best interests of the principal, and must avoid placing themselves in a position where their personal interest is in conflict with that of the principal.

Employment issues

6. Is there a risk that an agent may be treated as an employee of the principal?

The discussion that follows compares an employment contract to a contract for service/services agreement in Canada, under both the common law and the laws of Quebec. The analysis is also similarly applicable to contracts of mandate or agency agreements.

Article 2085 of the Civil Code defines the contract of employment as follows: "A contract of employment is a contract by which a person, the employee, undertakes for a limited period to do work for remuneration, according to the instructions and under the direction or control of another person, the employer."

Article 2098 of the Civil Code defines the services agreement as follows:

"A contract of enterprise or for services is a contract by which a person, the contractor or the provider of services, as the case may be, undertakes to carry out physical or intellectual work for another person, the client or to provide a service, for a price which the client binds himself to pay."

Therefore, the main distinction between the employment contract and the services agreement is the relationship of subordination, which is only present in the case of an employment contract. Various courts use different tests to determine when one is truly an independent contractor. The substance of the relationship trumps its form. Where workers are in long-term, exclusive arrangements serving the company's business interests and subject to its control, then they are more likely employees. Where they are operating their own business, using their own tools and pursuing their own profit, then they are more likely to be found to be independent contractors. The relevant tests apply on an individual basis, and different considerations apply depending on the legal system or statute under which the determination is made. For instance, an individual could be an independent contractor for taxation purposes, but deemed an employee according to employment laws. The analysis to determine the qualification of the relationship is made through the review of several criteria, with none of them really determinative. All criteria must be considered globally to determine the nature of the relationship. More specifically, the jurisprudence of the courts in Canada has established over the years several criteria to determine whether an individual is a consultant or an employee. The following criteria were recognised to identify an independent contractor:

  • The element of risk of profit or loss.
  • The duty of performance and/or production.
  • The impersonal nature of the services provided.
  • The terms of payment.
  • The absence of legal subordination, defined as the personal performance of an agreed work by an individual, under the direction of an employer and within the framework established by the latter. The main aspects of legal subordination are the respect of work, control of absences, mandatory attendance in the workplace, control of the quantity and quality of the work, imposition of means of implementation, power of sanctions related to the performance of the employee and ownership of tools.
  • The absence of economic subordination or need for exclusivity.
  • The ownership of tools and equipment.
  • The identification as being a contractor to another party/person.

Case law has recognised that the agreement signed by the parties is not determinative of the relationship between them. The courts also examine other criteria, among others:

  • Whether or not individuals are operating through a corporation.
  • Whether individuals are paid on the basis of an hourly rate or if they charge a flat fee to the client, or a per project fee.
  • The control over the hours and location of work.
  • The amount of independence and professional judgment the individual has in performing their work.
  • Whether or not individuals work exclusively for the person that engaged them, and may have done so for a significant period of time.
  • Payment of performance bonuses.
  • Ownership of intellectual property rights.
  • Vicarious liability for information technology workers' actions.
  • The imposition of confidentiality/non-competition covenants.

Tax

7. Will a foreign principal that appoints an agent directly in the national territory be regarded as carrying on business for tax purposes in that territory?

A non-resident will be deemed to be carrying on business in Canada for the purposes of the ITA if the non-resident solicits, orders or offers anything for sale in Canada through an agent or servant, whether the contract or transaction is to be completed inside or outside Canada or partly inside and partly outside Canada (section 253, Income Tax Act (Canada)).

8. Are any withholding or other taxes levied in the territory on remittance monies? When and by whom are they payable?

Where a non-resident is found to be carrying on business in Canada, the government of Canada has the right to tax the business income of that non-resident that was earned in Canada, subject to any applicable tax treaties. In addition to the taxes imposed, entities carrying on business in Canada may be required to maintain books and records with respect to Canadian operations at a Canadian place of business or otherwise make them available for audit.

Many of Canada's tax treaties with other countries provide relief where a business is not carried on through a "permanent establishment" in Canada. For example, the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital (Treaty) provides that the business income of a corporation resident in the US is only taxable in Canada if the business of the non-resident corporation is carried on through a permanent establishment in Canada and then, in that case, the business income may only be taxed to the extent that the income is attributable to the permanent establishment. However, according to section 5 of the Treaty, an agent of a non-resident will constitute a permanent establishment if the agent has, and habitually exercises, an authority to conclude contracts in the name of the non-resident.

9. Will there be any difficulties in a domestic agent making payment to a foreign principal, either in local currency or in the currency of the principal's country? Are there any exchange controls in operation?

A Canadian agent must withhold Part XIII tax on certain amounts payed or credited to non-resident principals. Part XIII of the Income Tax Act imposes a 25% withholding tax on certain amounts paid or credited by a person resident in Canada to a non-resident of Canada. These amounts generally include payments on account of management fees, interest, dividends, rent and royalties, however, some exemptions under the Income Tax Act may apply. The 25% rate can be reduced to a lower rate, or nil, under a provision in a bilateral tax treaty between Canada and another country.

The responsibility for withholding Part XIII is on:

  • The Canadian resident paying or crediting Part XIII amounts to a non-resident.
  • An agent or other person who, on behalf of the debtor, pays or credits such amounts to the non-resident.
  • An agent or other person who receives Part XIII amounts on behalf of a non-resident to the extent the tax was not previously withheld.
  • Any other payer (including a non-resident) who pays or credits amounts that are subject to Part XIII tax.

There are no specific exchange controls in effect that would impact a payment made by a domestic agent to foreign principal. However, effective 1 January 2015, Part XV.1 of the Income Tax Act was added to require certain financial entities to report to the Canada Revenue Agency (CRA) certain electronic transfers of funds of CAD10,000 or more into or out of Canada. These reports are intended to allow the CRA to better identify higher risk taxpayers and files and, in turn, more effectively identify taxpayers who participate in international aggressive tax avoidance and attempt to conceal income and assets offshore.

Duties of the agent

10. What duties does national law impose on an agent?

The agent has the duty of undivided loyalty toward their principal, which includes the following obligations:

  • To perform. The agent must act on the principal's behalf and perform their duties in accordance with the instructions and commands of the principal.
  • To obey. The agent must perform their duties within the scope of the authority delegated by the principal.
  • Not to delegate. A principle of the law of agency is that when the execution of the agency involves the exercise of judgment and discretion, the agent cannot delegate their authority, or appoint a subagent to do any act on behalf of the principal, except where permitted by the general law or by the express or implied authority of the principal. The law does allow a purely ministerial act (an act or a function that conforms to an instruction or a prescribed procedure) to be performed by someone other than the agent, as long as that act does not involve confidence or the exercise of discretion.
  • To use appropriate care and diligence. When performing duties on behalf of the principal, an agent is in a fiduciary relation to the principal, and must therefore act in the best interests of the principal and must exercise such skill, care and diligence in the performance of such duties as is usual or necessary in or for the proper or ordinary conduct of the business in which they are employed or as reasonably necessary for the proper performance of the duties undertaken by them.
  • To avoid conflict. An agent must avoid situations where the agent's interests conflict with their duty, or with the interest of the principal and the principal's business and affairs.
  • To account. An agent must account to the principal for all monies, goods or other property of the principal that come within the agent's possession or control. An agent must not make a profit out of their agency other than the amount payable to the agent by the principal. Therefore, an agent must account for profits made in respect of the agency relationship, even following the termination of the agency relationship.
  • To disclose. An agent must make a full and fair disclosure of all the circumstances material to the relationship (for example, incapacity to perform duties under the contract).

Quebec

The Civil Code sets out obligations of the agent to the principal (Articles 2138-2148, Civil Code). Besides the obligation to fulfil the mandate, the agent is also bound to act honestly and faithfully with regards to the principal and to act in the principal's best interests, among other things.

Articles 2157 to 2159 of the Civil Code set out obligations of the agent towards third parties. It is important to note that, whenever an agent binds themselves within the limits of their mandate on behalf or in the name of the principal, they are not personally liable to the third parties with whom they contract. In this case, the principal is liable.

Duties of the principal

11. What obligations does national law impose on a principal?

In an agency relationship, the principal owes the agent certain obligations, including the obligation to pay the agent remuneration (see Question 12 ), and to indemnify the agent.

The principal's duty to indemnify the agent against losses, liabilities and expenses incurred in the performance of the agent's duties may be expressly stated in the contract or implied. If there is no agreement, the scope of the principal's liability will depend on the nature of the authority granted to the agent and whether the agent acted inside their authority. The obligation to indemnify can be excluded by the agency agreement and in no event is there a duty to indemnify an agent who has acted unlawfully or negligently.

Quebec

The Civil Code sets out the obligations of the principal to the agent (Articles 2149-2156, Civil Code). Among other obligations, the principal must pay the agent the remuneration to which they are entitled and also must reimburse the agent for any reasonable expenses incurred, including interest (Articles 2150-2151, Civil Code).

Articles 2160 to 2165 of the Civil Code set out the obligations of the principal towards third parties. These include the principal's liability to third persons for acts performed by the agent in the performance of and within the limits of the mandate, even after its termination, if these acts were the necessary consequence of those already performed or could not be deferred without risk of loss, or if the third person was unaware of the termination of the mandate (Article 2162, Civil Code).

Remuneration

12. How does national law regulate the payment of remuneration to the agent? Does national law contain any compulsory provisions concerning the level of remuneration?

The obligation to pay remuneration (commission or otherwise) for services rendered only arises where it has been created by an express or implied contract between the principal and agent. It is a question of construction in each case whether it was the intention of the parties that the agent should be paid or not. If an express agreement is made related to compensation, the terms relating to such payment must be clear. If the agreement provides that payment is to be made at the principal's discretion, such discretion must be exercised honestly and in good faith. In the absence of an agreement, remuneration may be implied from the conduct of the parties, however the amount to be recovered by the agent must be reasonable in the circumstances. Even if the principal has expressly agreed to pay remuneration, the duty to make such payment only arises when the agent has earned it by doing what was specified in the contract.

Quebec

A mandate, in Quebec law, is not necessarily remunerated. A mandate is presumed to be either by "onerous title" (that is, for remuneration) or by "gratuitous title" (that is, without remuneration), depending on the context of the mandate (Articles 2133-2134, Civil Code). A mandate entered into between two natural persons is presumed to be by gratuitous title, whereas a professional mandate is presumed to be by onerous title. This presumption can be refuted where the two persons agree to make their mandate by onerous title. Also, if the mandate is remunerated, the remuneration is determined by the contract, usage or law, or on the basis of the value of the services rendered.

13. How does local law regulate corrupt gifts and secret commissions?

Under section 426(1) of the Criminal Code (Canada), which applies throughout Canada including Quebec, every person commits an offence who directly or indirectly, corruptly gives, offers or agrees to give or offer to an agent or to anyone for the benefit of the agent - or, being an agent, directly or indirectly, corruptly demands, accepts or offers or agrees to accept from any person, for themselves or another person - any reward, advantage or benefit of any kind as consideration for doing or not doing, or for having done or not done, any act relating to the affairs or business of the agent's principal, or for showing or not showing favour or disfavour to any person with relation to the affairs or business of the agent's principal. The word "corruptly" in section 426(1) adds an additional element to the actus reus of the offence. This word, in the context of secret commissions, means that the agent has failed to make adequate and timely disclosure of the source, amount and nature of the benefit.

The purpose and intent of section 426 is to criminalise an agent's or employee's act of accepting "secret commissions" for showing favour or disfavour to any person with relation to the affairs or business of their principal (R. v. Morris (1988), 64 Sask. R. 98). The criminalisation of such acts was meant to protect the agency relationship, to preserve its integrity and to protect the principal. It confirms that an agent should not be placed in a position which is in conflict with that of the principal and recognises that a benefit taken by an agent from a third party will place that agent in a conflict of interest position with the principal, unless the benefit is promptly and adequately disclosed. The secret benefit renders the advice and services of an agent so suspect that they cannot be accepted. (R. v. Kelly, [1992] 2 SCR 170, 1992 CanLII 62 (SCC).)

Quebec

In Quebec, in the case of construction contracts, public private partnerships and service contracts with Quebec public bodies, the Act respecting contracting by public bodies prohibits corruption and imposes other requirements on contracting parties to combat corruption.

Duration

14. What term is commonly agreed for an agency? Does national law regulate the length of notice periods to terminate an agency agreement?

There is no standard term for an agency agreement. The agency relationship normally terminates when the undertaking or transaction entrusted to the agent has been performed or at the expiration of the period for which the relationship was created. Such period can be expressly provided in the agency agreement or implied in the relationship.

Please see Question 16 regarding notice periods for termination.

Rights of ownership

15. Where the agent holds stock or money or other property belonging to the principal:

  • Can the principal assert its rights of ownership against third parties, in the event of insolvency of the agent and in the event that the agent has dishonestly disposed of them to third parties?
  • To what extent do these rights extend to enable the principal to take the proceeds of sale of that property disposed of by the agent, where the sale was authorised by the principal and where the sale was not authorised by the principal?
  • Where the agreement states that the agent shall not become the owner of any goods supplied by the principal, are there any local laws which might override this provision?

In the event of insolvency of the agent, while the property remains in the hands of the agent or the agent's trustee in bankruptcy, the principal can recover it in an action for account, or for tort, breach of contract (where there is a contract with the agent), or restitution for unjust enrichment (if there is no contract).

In Quebec, the Civil Code provides that a mandate is terminated by bankruptcy, except in the case of a protection mandate where the mandate is by "gratuitous title" (that is, without remuneration) (Article 2175(2), Civil Code). On termination, and subject to bankruptcy laws, the agent is bound to render an account to the principal and hand over to the principal everything the agent has received in the performance of their duties, even if what was received was not due to the principal (Article 2184, Civil Code). Failure to do so entitles the principal to charge the agent interest on the sums due.

The right of a principal to recover goods from a third party who acquired the principal's property from the agent while acting beyond the agent's authority depends on whether the property is still identifiable as being that originally belonging to the principal. Tracing is an identification process, and whether the asset or sum of money can be traced, either in accordance with the common law doctrine or the equitable doctrine of tracing, will depend on the facts of each case. The common law rule is that the claimant must demonstrate that the assets being sought in the hands of the recipient are either the very assets in which the claimant asserts a proprietary right or a substitute for them. (B.M.P. Global Distribution Inc. v. Bank of Nova Scotia, 2009 SCC 15 at 75).

In Quebec, the Civil Code provides that an agent must act honestly and faithfully in the best interests of the principal, and must avoid placing themselves in a position where their personal interest is in conflict with that of the principal (Article 2138(2), Civil Code). The principal will be able to recover the property based on the rules for unjust enrichment (Article 1493, Civil Code).

A disposal of goods by an agent acting within their authority will preclude the principal's recovery of such goods from the third party purchaser. However, whether or not the sale was authorised by the principal, the principal is entitled to recover the value of such goods in the hands of the agent.

An agent cannot deny the title of the principal to goods, money or land possessed by the agent on behalf of the principal. In other words, the agent does not have any rights in the goods, money or land (other than the claim for lien discussed below).

However, under the common law, an agent may retain the goods, documents and even monies of the principal for payment of their fees and charges. This is a particular lien, in that it may be exercised only against those goods and documents involved in the services and in the agent's possession, for which the particular fees and charges were earned. There may be, however, a general lien on any goods and documents possessed by the agent, whether or not in respect of the fee or charge claimed, if there is an agreement to that effect.

In Quebec, while the concept of acquisitive prescription (Article 2910, Civil Code) applies in Quebec as a means of acquiring a right of ownership, or one of its dismemberments, through the effect of possession after a period of time, it will not, all else being equal, take precedence over contractual terms.

Termination

16. What events will be regarded in law as justifying termination of the agency agreement? Do any statutory obligations arise on termination? What provision is usually made in the agreement for termination?

An agency agreement will terminate on the occurrence of one of the following circumstances:

  • If the purpose of the agency agreement is frustrated (for example, the good to be sold by agent is destroyed).
  • If the agent's intended undertaking becomes illegal or is otherwise impossible or useless to perform.
  • The death or mental incapacity of the principal or the agent (except certain powers of attorney specifically dealing with the right of the agent to manage the principal's affairs if the principal is invalid). The revocation of the mandate by the principal. Renunciation by the agent. Extinction of the power conferred on the agent or by the death of either of the parties.

Generally, a principal can also unilaterally revoke their original agreement to the agency relationship. The right of the principal to revoke the agreement can however be prohibited by an express or implied term of the agency agreement or by a statute that governs the particular situation. A principal is also not free to terminate the agreement at will if the agency is "irrevocable" (that is, when authority is conferred as protection of the agent's interest) unless the agent has committed a fundamental breach of the contract or has performed unsatisfactorily. If the principal is empowered to revoke the agency agreement, the common law provides that the principal must provide the agent with reasonable notice. What constitutes reasonable notice will depend on the facts of each situation. An agent may also unilaterally repudiate the agency relationship, but at common law, such repudiation will be ineffective unless it is accepted by the principal.

Quebec

In addition to the causes of termination common to all obligations, the following events are regarded as justifying

the end of the mandate:

  • The revocation of the mandate by the principal.
  • Renunciation by the agent.
  • Extinction of the power conferred on the agent or by the death of either of the parties.

The mandate is also terminated by bankruptcy, except in the case of a protection mandate given by gratuitous title. Finally, the mandate may also be terminated, in certain cases, by the institution of protective supervision for either of the parties (Article 2175, Civil Code). Protective supervision is a regime that applies to an individual who has become incapacitated and incapable of caring for themselves. A tutor is appointed to ensure the protection of the person, the administration of their patrimony and, generally, the exercise of their civil rights.

Articles 2175 to 2185 of the Civil Code set out obligations arising on termination. These include, among other things, that a principal who revokes a mandate remains bound to perform their obligations towards the agent; they are also bound to make reparation for damage caused to the agent as a result of a revocation made without a serious reason and at an inopportune moment. On termination of the mandate by the agent, the agent is bound to do everything that is necessary to prevent the occurrence of a loss to the principal as a result of the termination

17. What rights does the agent have to compensation or indemnity upon termination of the agency agreement or discontinuation of supply of the products? How is compensation or indemnity for termination / discontinuation of supply calculated? Are there any formalities which must be complied with for lodging a claim for compensation or indemnity?

The general duty of a principal is to compensate the agent as agreed between them for authorised actions by the agent on behalf of the principal, and to indemnify the agent against all claims, liabilities, costs and expenses the agent incurs in the due performance of their duties.

The revocation of an agency agreement by a principal will not affect any of the agent's claims against the principal for an indemnity with respect of liabilities incurred on behalf of the principal and for commission earned by the agent before the revocation. The agency agreement can also provide for the right of the agent to claim commissions which the agent would have been entitled to, had the agreement not been terminated. If such right is not expressly provided under the agreement, common law jurisprudence is divided on whether an agent has any right to such a claim, and a court's decision may depend on the agent's ability to demonstrate that such a term should be implied into the agreement based on the parties' intentions.

Ultimately, the agent's rights must be ascertained by reference to the express or implied terms of the agency contract and to the circumstances surrounding the formation of that agency contract and its performance. This will be determined on a case-by-case basis.

Quebec

The Civil Code states that a principal who revokes a mandate remains bound to perform their obligations towards the agent; they are also bound to make reparation for injury caused to the agent as a result of a revocation made without a serious reason and at an inopportune moment (Article 2181, Civil Code). Damages are calculated under the Civil Code to compensate for the amount of the loss the agent has sustained and the profit of which the agent has been deprived (Article 1611, Civil Code). Future damage which is certain and assessable is also taken into account.

On termination of the mandate, irrespective of the cause, the agent is bound to render an account and hand over to the principal everything the agent has received in the performance of their duties, even if what the agent has received was not due to the principal. If unpaid, the agent owes interest on sums received that constitute the balance of the account. However, the agent is entitled to deduct what the principal owes them by reason of the mandate from the sums they are required to remit. The agent may also retain what was entrusted to them by the principal for the performance of the mandate until payment of the sums due (Articles 2184-2185, Civil Code).

The agency agreement

18. Are any particular formalities required in relation to agency agreements?

There are no statutory formalities with regards to commercial agency agreements. While a power of attorney is not required for an agency agreement, certain provincial statutes do contain formal requirements for powers of attorney to be enforceable, such as the requirement that two people witness the signature of the individual making the power of attorney and limiting who can be witness.

Quebec

In Quebec, in general, there are no formalities. However, for particular purposes certain governmental agencies, such as fiscal authorities, require a power of attorney form to be executed.

19. Where the agent is required by the principal to enter into a guarantee of the debts to the principal of customers that it finds for the principal (del credere guarantee) or that it concludes contracts with on behalf of the principal, what formalities and documentation are required to ensure that the guarantee is legally binding? Is any special set of words required for such a guarantee?

Under common law, a contract of del credere agency is not a contract of guarantee but a contract of indemnity. As such, it does not come within the requirement of, for example, the Ontario Statute of Frauds, RSO 1990, c S.19, which provides that a guarantee should be evidenced by a note or written instrument. Therefore, since writing is not necessary, such agency can be implied from the conduct of the parties (Shaw v. Woodcock (1827), 7 B. & C. 73).

In Quebec, a guarantee is referred to as a suretyship which is a contract by which a person, the surety, binds themselves towards the creditor, gratuitously or for remuneration, to perform the obligation of the debtor if the debtor fails to fulfil it (Article 2333, Civil Code). Suretyship is only valid if express (Article 2335, Civil Code). Therefore, specific wording is required in the mandate to state that the agent guarantees the obligations of the customers specifying the dollar amount and any other conditions and limitations.

20. What are the parties called in your jurisdiction?

In the common law provinces, the terms "agent" and "principal" are used.

In Quebec, the principal is called the "mandator" and the agent is called the "mandatary".

21. In your jurisdiction, would it be standard practice for an agent to be obliged to:

  • Store the principal's products and, if so, to store them separately from other goods at the agent's own cost?
  • Insure the principal's property at the agent's own cost?
  • Give the principal access to the agent's premises to carry out inspections of the agent's books and records or for inspecting or taking stock of the principal's property?
  • Contract with customers on the principal's standard terms and conditions? Would the agent receive protection under local law allowing it to deviate from any such requirement?
  • Stock adequate volumes of products and to deliver the products to the customer?

Yes. The terms of such condition would depend on the industry practice and context of the mandate/agency relationship.

Quebec

According to the Civil Code, no agent may mingle the administered property with their own property (Article 1313,

Civil Code).

Yes. The terms of such condition would depend on the industry practice and context of the mandate/agency relationship.

Quebec

The Civil Code provides that an agent is not bound to take out insurance or even to make an inventory of property managed, or to furnish other security to guarantee the performance of their obligations, unless required to do so by law or by any applicable contract, or by the court on the application of the principal or any interested person (Article 1324, Civil Code).

Such conditions would depend on the industry practice and context of the mandate/agency relationship, but this would be fairly typical or standard in the situation where the agent is in possession of the principal's goods.

Where the agent is a distributor of the principal's goods, it would be standard for the principal to stipulate certain conditions of sale, subject to such terms and conditions being in compliance with applicable laws, including the Competition Act.

Such conditions would depend on the industry practice and context of the mandate/agency relationship, but this would be fairly typical or standard in the situation where the agent is in possession of the principal's goods.

22. Are there any obligatory statutory requirements in relation to commission payments to agents in your jurisdiction or the time limits when the commission payments must be made to agents by the principal?

There are no statutory requirements relating to commission payments and payment terms. Any such terms would be provided for in the agency agreement.

Quebec

In Quebec, this would depend on the industry in which the agent is acting. Certain industries regulate commission payments to agents, including, for example, real estate agents, agents or representatives who distribute financial products and services (such as financial planners), and securities intermediaries.

For real estate agents, the Organisme d'autoréglementation du courtage immobilier du Quebec (OACIQ) prescribes a mandatory form to be completed for the execution of an exclusive brokerage contract. This form includes mandatory requirements for commission payments. For example, to be entitled to its commission, the agent must have concluded an exclusive brokerage contract with the principal (Article 20, Real Estate Brokerage Act). Clause 7.1 of the exclusive brokerage contract provides the four situations in which the principal will have to pay the commission, including situations where, if certain conditions are met, a principal could be required to pay a commission even if the contract has expired (Article 27, Real Estate Brokerage Act).

For agents or representatives who distribute financial products and services, such as financial planners, there are different rules for the payment and the sharing of commissions, which are provided for in the Act respecting the distribution of financial products and services. For example, in order to receive a commission, the agent or the representative must have a certificate issued by the Autorité des marchés financiers (AMF). If the representative is attached to a firm, they must disclose this information in order to receive their commission (Article 15, Act respecting the distribution of financial products and services). With respect to sharing of commissions, there are limitations concerning the persons with whom this commission can be shared (Article 100, Act respecting the distribution of financial products and services). In addition, shared commissions must be kept in a register (Article 143, Act respecting the distribution of financial products and services).

In the securities field, a "registered firm" (defined as a registered dealer, a registered adviser, or a registered investment fund manager) must provide its clients with a report on charges and other compensation for each 12-month period. This report must include the amount of any commissions charged to the client by the firm, as well as any commissions received by the firm that are not charged directly to the client, that is the report must state that the firm has received commissions in respect of securities owned by the client, regardless of who pays such commissions (Article 14.17, Regulation 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations). In addition, before purchasing securities for a client, the firm must indicate whether or not it will receive a commission (Article 14.2.1, Regulation 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations).

23. Would it be possible in your jurisdiction to include a clause which:

  • Makes commissions only payable by the principal to the agent in respect of contracts concluded during the term of the agreement only?
  • Provides for a different (lower) rate of commission to be payable to the agent where the principal makes a direct sale to certain customers in the agent's territory?
  • Excludes payment of commissions for product sales made by previous agents but which are concluded after the current agent's appointment?
  • Provides for the principal to send a statement of the commission due to the agent in a specific period? If so, please confirm what the period must be under any applicable legislation.
  • Provides a right for the agent to retain commission out of the sale proceeds?
  • Provides for each party to keep accounts and records of all transactions and allow the other party to inspect such accounts and records and take copies of them?
  • Provides that all records held by either party referred to in previous bullet point belong to the principal?
  • Standard document, Agency agreement: Cross-border: clause 6.1 (commissions only payable by the principal to the agent in respect of contracts concluded during the term of the agreement only).

The Supreme Court of Canada held in Grover v Stirling Bonding Co, [1935] 3 DLR 481 (SCC) that an agent may be able to claim commissions for things done after the end of the agency, or for sums which the principal's revocation of the agency has prevented the agent from earning, if the contract of agency expressly provides for this. If the intention is for the commission to only be payable for contracts concluded during the term of the agreement, this can and should be made expressly clear in the agency agreement.

Quebec

The parties are not prohibited by the Civil Code from providing for this in their mandate. Such conditions will depend on industry practice.

Yes, subject to industry practices.

Yes, subject to industry practices.

Yes. Such conditions would depend on industry practice and regulations for that specific industry.

Such conditions would depend on industry practice and regulations for that industry but a general right of set off exists in Quebec (Article 1672, Civil Code) and under the common law.

Yes. Such conditions would depend on industry practice and regulations for that specific industry.

Yes, subject to industry practice and regulations for that industry.

24. In your jurisdiction, would it be permissible to mandate that any dispute on the amount of commission payable must be referred to the principal's auditor for settlement (to the exclusion of the agent having access to the courts)? If so, does the principal's auditor need to be registered in the agent's home jurisdiction?

The parties to the agency agreement are free to include a dispute resolution clause or mechanism that is binding on both parties involved in the dispute. Under common law, no formalities are required as to the appointment of an expert, including any registration requirements.

In Quebec, there is a principle that a stipulation that places one party in a privileged position with respect to the designation of the arbitrators is null (Article 2641, Civil Code).

Therefore, we suggest the following for Standard document, Agency agreement: Cross-border: clause 6.9 :

"6.9If any dispute arises as to the amount of commission payable by the Principal to the Agent, the same shall be referred to the auditors chosen by both parties for settlement and their certificate shall be final and binding on both parties."

25. Does the trust concept and the role of "trustee" exist in your jurisdiction? If not, how should the practical matter of separate bank accounts be reflected in clause wording?

The concept of trust and the role of "trustee" does exist under common law. The courts have found that withholding funds that have been collected and held pursuant to a trust relationship is a breach of trust and that personal liability extends to trustees who take a knowingly wrongful risk resulting in prejudice to the beneficiary. (Commercial Union Life Assurance Co of Canada v John Ingle Insurance Group Inc., 2002 CanLII 45028 (Ont CA) at paras 71-72). Since an agent is not necessarily obligated to set up a separate trust account, this requirement should be provided for in the terms of the agency agreement.

Quebec

In Quebec, a trust relationship is contractual (Articles 1260 and following, Civil Code). It is created by a written contract and with a transfer of property. It can also be established by a judgment pursuant to a law. The concept of breach of trust will not be operable unless there are specific provisions describing the consequences for a breach in this case in the mandate.

26. In your jurisdiction, are there competition / anti-trust law implications of an agent agreeing to spend its own money on advertising the principal's products?

There are restrictions under the Competition Act with regards to how a product is advertised (for example, bait and switch advertising) but the Act does not include any restrictions on the agent using or being required to use its own funds to advertise the principal's products.

27. Is it common practice in your jurisdiction for the principal to provide the agent with an indemnity in respect of any product liability claim? Does "damage" to property in any indemnity include harm to intangible property such as profits and reputation?

Generally, the principal would indemnify the agent for any loss that may be incurred arising out of any claim of product liability or any similar claim relating to the quality of the products or an alleged defect or deficiency of the products, to the extent that the claim relates directly or indirectly to any matter within the control of the principal.

The scope of the indemnity and the definition of the "losses" which will be indemnified can be negotiated between the parties, but principals would generally look to include language to the effect that the principal would not be responsible for any loss of profits, indirect damages or consequential damages suffered by the agent.

Quebec

According to the Civil Code, the manufacturer is liable for injury caused to a third person by reason of a safety defect in the product, even if it is incorporated with or placed in a fixed asset (fixed assets are referred to in Quebec as "immovables") for the service or operation of the asset (Article 1468, Civil Code). This also applies to a person who distributes the product under their name or as their own, and to any supplier of the thing. As a result, an informed agent will seek an indemnity from the principal to mitigate this liability.

Lost profits can be included in damages under Article 1611 of the Civil Code. Moral damages, which include damage to reputation and character, are also subject to indemnification.

28. What limitations and exclusions of liability might be appropriate?

The principal would generally want to include a provision whereby the agent waives, releases and disclaims, all undertakings representations, warranties (express or implied), obligations and liabilities not expressly included in the agreement and all other remedies, rights and claims against the principal, arising by law, statute or otherwise, including any implied warranty of merchantability or fitness for a particular purpose, any warranty arising from course of performance, course of dealing or usage of trade, and any obligation, liability, right, remedy or claim in

tort, despite any fault, negligence, omission or strict liability of the principal. A cap on the principal's total liability would also be enforceable.

Under the common law, exclusion of liability clauses will be enforceable against an agent unless such clauses are unconscionable at the time the contact was made, as might arise from situations of unequal bargaining power, or if they are contrary to an overriding public policy (Tercon Contractors Ltd. v. British Columbia (Ministry of Transportation and Highways), (2010) 315 DLR (4th) 385 (SCC)).

Quebec

In Quebec, the Civil Code sets out the rules governing limitations and exclusions of liability (Article 1474, Civil Code). A person may not exclude or limit their liability for material injury caused to another through an intentional or gross fault. A gross fault is a fault which shows gross recklessness, gross carelessness or gross negligence. Also, a person may not in any way exclude or limit their liability for bodily or moral injury caused to another.

29. Is the term "exclusive" agency agreement recognised in your jurisdiction? Does local law provide for automatic exclusivity?

Yes, the term is recognised under the common law and in Quebec and is understood to mean that the principal agrees not to appoint other agents in a specified territory, and that the principal will not directly market or sell to customers in that specified territory. Exclusivity is however not automatic, and therefore has to be explicitly set-out in the contractual terms.

30. Is the term "sole" agency agreement recognised in your jurisdiction?

Yes, the term is recognised under the common law and in Quebec and is understood to mean that the principal agrees not to appoint other agents in a specified territory, but the principal reserves the right to directly market or sell to customers in that specified territory.

31. Is the term "non-exclusive" agency agreement recognised in your jurisdiction?

Yes, the term is recognised under the common law and in Quebec and is understood to mean that the principal can appoint other agents in a specified territory and the principal can sell to customers directly in that territory.

32. Will any customs duties be payable under the agreement for any products that are received by an agent in your jurisdiction?

Unless covered by a free trade agreement, most goods imported into Canada are subject to customs duties (imposed under the Customs Tariff, SC 1997, c 36). A goods and services tax (GST) of 5% is also payable on most goods at the time of importation under Part IX, Division III of the Excise Tax Act, RSC 1985, c E-15. Both of these are collected by the Canada Border Services Agency at the time of importation, and levied on the landed value of the goods. The agency agreement should expressly state which party will be responsible for the payment of such customs duties and taxes.

33. Are there any compliance obligations on either party under your local laws?

Beyond laws of general applicability, including provincial business corporations statutes, business name acts, federal and provincial tax statutes and privacy legislations, there are no specific compliance obligations created or solely related to the agency relationship.

Depending on the nature of the agency and the activities to be performed by the agent, it would be recommended to include a representation and warranty of the agent that it shall be in compliance with all applicable laws, including:

  • The Corruption of Foreign Public Officials Act.
  • Customs Act (Canada).
  • The Customs Tariff (Canada).
  • Export Act (Canada).
  • The Export and Import Permits Act (Canada).
  • The United Nations Act (Canada).
  • The Special Economic Measures Act (Canada).
  • The Special Import Measures Act (Canada).
  • The Criminal Code (Canada) provisions relating to exports and economic sanctions, and all of the regulations thereunder.
  • The Defence Production Act (Canada).
  • The Controlled Goods Regulations.

34. In your jurisdiction, to what extent can an agent incur personal liability to a customer?

An agent who in their own name enters into a written contract on behalf of a principal will be personally liable on such contract unless they indicate to the third party that they are in fact acting only as agent for the principal. The onus is on the agent to indicate that they are contracting as an agent, either expressly or by qualifying their signature on the contract by some words that show the agency relationship. However, businesses acting as agents in Canada would typically have comprehensive third party liability insurance which would provide coverage against such personal liability.

Quebec

An agent can incur personal liability if acting in their own name (Article 2157(2), Civil Code) or if they exceed their

mandate (Article 2158, Civil Code).

35. Does the law in your jurisdiction dictate which governing law and jurisdiction will apply to the agency agreement?

Under conflict of laws rules, the parties to an agency agreement are entitled to select the governing law and the courts will generally give effect to their selection. It must, however, be a selection made in good faith, be reasonable and not be contrary to public policy. An exclusive "submission to jurisdiction" section purports to oust the jurisdiction of all courts other than those of the chosen jurisdiction. Despite any express agreement to the contrary, courts retain inherent jurisdiction to decide whether to hear an action.

36. Does the agreement need to be in a language other than English to be valid and enforceable?

No, the agreement can be in English only.

Quebec

If the agent is an individual, they have a right to contract in French. The failure to do so could result in the nullity of the mandate. The parties to a business-to-business mandate could agree to contract in a language other than French, in which case it is customary to include a language clause.

37. How does this agreement need to be executed to ensure that it is valid and enforceable? Does it need to be registered with any authority in your jurisdiction?

Execution formalities

The Government of Canada is not party to The Hague Apostille Convention. Foreign documents for use in Canada

must be authenticated and legalised by the appropriate Canadian authority before they will be accepted.

Registration formalities

None.

38. Are there any clauses in the agency agreement that would not be legally enforceable or not standard practice in your jurisdiction?

Standard document, Agency agreement: Cross-border: clause 6.9 would not be legally enforceable in Quebec, because a clause which places one party in a privileged position with respect to the designation of the arbitrators is null.

Also, a power of attorney may not be irrevocable, therefore we would not typically see a clause providing for the irrevocability of the mandate.

39. Are there any other clauses that would be usual to see in an agency agreement and/or that are standard practice in your jurisdiction?

Since the agent and the principal may not be available at the same time or place, the agency agreement could provide for the execution of the agreement in counterparts and the delivery of each signed counterpart by email, fax or other electronic means of transmission:

"This agreement may be executed and delivered by the parties in one or more counterparts, each of which will be an original, and each of which may be delivered by facsimile, e-mail or other functionally equivalent electronic means of transmission, and those counterparts will together constitute one and the same instrument."

Brexit

40. From the point of view of your jurisdiction, what points do you anticipate might arise in relation to an agency agreement which either:

  • contains an express choice of English law as the governing law; or
  • has a UK-incorporated principal or agent as a party and is governed by the laws of your jurisdiction, if, during the life of the agreement, the UK were to cease to be a member of the European Union?

The impact of Brexit on agency contracts is currently unknown. However, depending on the nature of the contract, there are some issues that we can anticipate and can be specifically contemplated in contracts now:

  • If the agency contract is particularly sensitive to exchange rate volatility, the impact of Brexit could be significant.
  • Many agency contracts rely on territorial jurisdictions. If the territory in the agency contract is the EU, there may be uncertainty as to whether it will continue to include the UK.
  • If there is a significant regulatory component to the contract, consider how the obligation to comply with "applicable laws" may be affected, including the cost of potentially complying with parallel regulatory regimes.
  • Does the contract require the free movement of personnel between the UK and the rest of Europe? If so, Brexit may have significant consequences with regard to staffing availability and cost.

41. In relation to any points identified in Question 40 , would you recommend that any adjustment should be made now to the standard document if it were to be used as an agreement governed by the law of your jurisdiction, in order to address those points in advance

Given the current uncertainties, contracting parties may want to include a specific Brexit clause in the agreement, which would allow them to renegotiate or terminate a contract that becomes more onerous to perform as a result of Brexit.

This could be a specific clause or an amendment to the standard force majeure clause, where Brexit is identified as a specific force majeure event (or perhaps in some cases confirming that Brexit will not be an event of force majeure).


NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.