COURT OF APPEAL FOR ONTARIO
OSBORNE A.C.J.O., WEILER and CHARRON JJ.A.
BETWEEN:
JOHN ZINER LUMBER LTD. And ) Steven Kruck, for the plaintiffs
1017333 ONTARIO LIMITED ) (respondents)
Plaintiffs )
(Respondents) )
– and – )
ALEX KOTOV ) Scott Turton, for the defendant
) (appellant)
Defendant )
(Appellant) )
) Heard: May 23, 2000
On appeal from the judgment of The Honourable Madam Justice Gloria R. Klowak dated February 5, 1999.
OVERVIEW
1The issue on this appeal is whether Alex Kotov, a homeowner in Richmond Hill, is liable to pay for the lumber that John Ziner Lumber Ltd. (“Ziner”) says it delivered to his lot when his home was being constructed. At trial, Ziner’s claim for a construction lien was dismissed but judgment for the unpaid balance of Ziner’s invoices was given against Kotov in the amount of $45,969.07 plus pre-judgment interest and costs.
2On appeal, Kotov alleges that the evidence does not establish that he or his agent ordered the lumber from Ziner for which he was billed nor that the quantity for lumber for which he was billed was delivered. Alternatively, Kotov says that he, as an undisclosed principal, is not responsible for the acts of an agent who acted outside the scope of his authority. Ziner’s position is that its invoices for lumber were either authorized by Kotov through his agent or subsequently ratified by him.
3The first issue is a factual one. Bearing in mind the deference due to a trial judge’s findings of fact I would not disturb the trial judge’s conclusion that Kotov’s agents ordered the lumber from Ziner and that the lumber was delivered. The second issue turns on the law respecting an undisclosed principal and a disclosed but unnamed principal. Although the trial judge did not specifically deal with this issue in her reasons, I am of the opinion that her conclusion, that Kotov is liable to pay for the lumber, is correct.
AGENTS AND PRINCIPALS
4When an agent acts on behalf of an undisclosed principal, the third party thinks that it is dealing with a person acting on his or her own behalf. In such a situation, if the third party learns of the existence of the undisclosed principal, the third party may sue the
principal so long as the agent has acted within the scope of his or her actual authority.1 Harvey, Agency Law Primer, 2nd ed. (1999) at 81-82 and 84; Fridman, The Law of Agency, 7th ed. (1996) at 253 and 264; Reynolds, Bowstead & Reynolds on Agency, 16th ed. (1996) at 408- 409; Hal H. Paradise Ltd. v. Apostolic Trustees of the Friars Minor (1996), 1966 CanLII 363 (SK QB), 55 D.L.R. (2d) 671 (Sask. Q.B.). If the agent of an undisclosed principal lacked actual authority, the third party, on learning the identity of the principal cannot enforce the contract on the basis that the agent acted with apparent authority: Sign-O-Lite Plastics Ltd. v. Metropolitan Life Insurance Co. (1991), 1990 CanLII 870 (BC CA), 73 D.L.R. (4th) 541 (B.C.C.A.); leave to appeal to the Supreme Court of Canada refused (1991), 79 D.L.R. (4th) vii (S.C.C.).
5The doctrine of ratification allows a party to come in after the fact and give antecedent authority to a contract that has already been made. In order for the third party to enforce the contract against an undisclosed principal, upon learning of the undisclosed principal’s identity, the formerly undisclosed principal would have to be able to ratify the agent’s act. This, the undisclosed principal cannot do: Harvey, supra, at 84, Fridman, supra, at 265. 2
6By contrast, a contract made with a person acting as an agent on behalf of a disclosed principal may be ratified by the principal: Fridman, supra, at 87; Harvey, supra, at 32. A disclosed principal may be named or unnamed. The identity of the principal need not be ascertained at the time the contract is made. All that is required is that the third party knows it is dealing with an agent. Consequently, if the third party knows it is dealing with an agent, and the agent acts without the actual authority of his or her disclosed principal, the principal can subsequently ratify the agent’s contract. The disclosed principal’s subsequent ratification is equivalent to antecedent authority. The result is an enforceable transaction between the third party and the principal: Harvey, supra, at 30. This legal distinction is of significance in this case.
THE FACTS
7Kotov, who graduated with a degree as a construction engineer in Russia, entered into a contract with Jonah Turk on May 25, 1995 to construct a new home on a lot he owned in Richmond Hill. In the contract, Kotov is described as the “owner”, and Turk, as the “project manager”. The entity “Elizabethan Development Corporation” (“Elizabethan”), a company owned by Turk that had been dissolved prior to the date of the contract, is also named as a party to the contract.3 Paragraphs 3 and 4 of the contract, which are relevant to this appeal, provide as follows:
THE PROJECT MANAGER SHALL SUPPLY THE OWNER WITH ALL BID SUMMARIES AND UPON SIGNED AUTHORIZATION FROM OWNER, SHALL ORDER ALL MATERIALS AND TAKE OUT ALL SUB-CONTRACTS IN THE NAME OF THE OWNER AND ENDEAVOUR TO OBTAIN ALL DISCOUNTS, THE SAVING TO BE PASSED ON TO THE OWNER.
THE OWNER SHALL PAY ALL TRADES AND ACCOUNTS OF SUB-CONTRACTORS AND ACCOUNTS FOR ALL MATERIALS WHEN SUCH ACCOUNTS ARE DUE…
8Turk obtained a quotation from Ziner for the lumber required to construct the house. The quotation, which is dated May 7, 1995, names “Elizabethan Dev” as the customer, and Jonah Turk as the contact. The project is described as “custom home” and
the address where the home was being built, 20 Moodie Drive, Richmond Hill, is also included. The total amount of the quote with applicable taxes was for $83,194.40. There is no dispute that Kotov approved the quote from Ziner.
9Rose Ziner, the secretary treasurer of the lumber company, testified that this quotation is like a price list for the lumber required to construct a building, but the actual amount ordered will depend on the carpenters working on the project. The quotation is arrived at by means of a review of the architect’s and engineer’s drawings. The prices quoted are subject to change after 60 days.
10Ziner issued one invoice in May, 1995 for $68.66 to “Elizabethan Dev. Corp” for lumber shipped to “20 Moodie Drive, N of Hwy 7 & E of Bathurst”. Beginning November 6, 1995 through to and including December 6, 1995 further invoices for lumber were sent to “Elizabethan Dev. Corp.” Between December 7, 1995 and February 27, 1996, Ziner invoiced “Tradeoil Management Inc. c/o Jonah Turk” (“Tradeoil”). The delivery address indicated on all the invoices for the lumber was 20 Moodie Drive, Kotov’s property in Richmond Hill. The invoices were all addressed to 77 Franmore Circle, Thornhill, an address that Kotov testified had nothing to do with him.
11Tradeoil was a company owned by Kotov. Its business was oil; it was not involved in the construction business. In answer to the question why Ziner invoiced Elizabethan and then someone else for the materials, Rose Ziner testified that there was some difficulty respecting Elizabethan’s credit. She replied:
“… it’s not an unusual thing that if the architect is involved or the builder who is building for the customer, it goes on his name and it’s accepted.”
At this stage, Ziner was clearly aware that Turk was not building for himself but for a customer and Ziner was intending to bill the customer.
12In January 1996, Kotov fired Turk. One of the reasons for which Turk was fired had to do with alleged fraudulent invoices he presented to Kotov. Kotov testified that, after firing Turk, Lansing Lumber began providing lumber for the construction of his house. Kotov also testified that he did not receive the February invoices to Tradeoil totalling $5,262.59. He acknowledged that he did not advise Ziner that Turk had been terminated. Kotov also testified that he went to the construction site almost every day.
13On February 27, 1996, Rose Ziner, the secretary and treasurer of Ziner, sent a fax to Victor Guitberg, the architect on the “20 Moodie Drive” project, in response to a letter received from him concerning the prices charged for the lumber. The fax indicated that Guitberg was following a July price list. Because the “20 Moodie Drive” project started in November, a November 3, 1995 price list was enclosed. Kotov admitted in his testimony that Guitberg was the architect who designed his house.
14On March 28, 1996, Ziner received a letter on Tradeoil Management Inc. stationery that was signed “Alex Kotov, President, Tradeoil Management Inc.” The letter begins, “I will pay you $21,028.57….” respecting certain invoice numbers. These are the invoices dating from December 7, 1995 to January 31, 1996 to Tradeoil. The letter went on to say that, in exchange for payment, Ziner must sign a full release because, “we do not have any direct agreement with you and we did not opened [sic] account with you. We have never agreed the prices and quantity of lumber with you either.” Paragraph 2 of the letter states:
With reference to your facsimile dated March 25, 1996 [not in evidence] we propose you for the sake of good order to invoice Elizabethan Development Corporation for the sum shown in your facsimile. Their account is outstanding for this amount, not the account of Tradeoil Management Inc. For the sake of good order let Elizabethan Development Corporation invoice us for this amount. [emphasis added].
15The letter also invited Ziner to pick up “…unused lumber ordered from you and stowed at 20 Moodie Drive. Its value to be credited to our account.” The same day, Ziner picked up the lumber from 20 Moodie Drive. Kotov testified that he was present at the time. He testified:
When I was at the construction site at 20 Moodie Drive, there came a truck in order to pick up some materials and the driver showed me a document which stated that the company, Ziner Lumber, wished to pick up these materials. As a matter of principle, this was an agreement between myself and Ziner Lumber that I would return these materials to them, but there was a strange detail about this. It said that they wished to pick up materials which at the time, belonged to the company Trade Oil as far as I could understand, but on the paper itself, the name was Elizabethan Development Corporation. Since I was at the site, I crossed out the name Elizabethan and wrote in the name Trade Oil Management, and then I made the driver sign the paper and I put my signature on it and we returned these materials to the company Ziner Lumber.
…Q. You saw this lumber, you were there?
A. Moreover, everything was counted. The actual figures were put on the paper and the materials were returned. The amount of the credit note was $4,724.14.
16John Ziner met with Kotov but did not accept Kotov’s proposal to pay $21,028.57 in full satisfaction of the debt. Ziner sued Kotov for the balance outstanding on the invoices billed to both Elizabethan and Tradeoil. John Ziner died before trial. At trial, Kotov agreed that either he or Elizabethan paid Ziner approximately $61,000 on account of lumber shipped. The balance outstanding on the Ziner invoices was agreed to be $45,969.07 after taking into account the credit note to Tradeoil for the return of lumber. The court does not appear to have been provided with a breakdown of this balance as between Elizabethan and Tradeoil, however, the actual invoices were filed with the court and more will be said on this later.
17The letter of March 28, 1996 acknowledged $21,028.57 billed to Tradeoil. This figure did not include the February invoice of $5,262.59, for a total of $26,291.16, billed to Tradeoil. From this figure, the credit note of $4,724.14 must be subtracted, leaving a balance of $21,567.02 billed to Tradeoil. Using the agreed figure of $45,969.07 and subtracting the $21,567 billed to Tradeoil, it appears that there was $24,402 outstanding on amounts billed to Elizabethan.
18Kotov testified that he was invoiced for a greater amount of lumber than was required to build his home. He testified:
I took the invoices from John Ziner Lumber and I took the quotation from John Ziner Lumber, and I compared them, and it turned out I found that for example, sheets of plywood or referred to technical sheeting, four by eight. There was 170 sheets delivered more than was required for the construction…
19Kotov acknowledged in cross-examination, however, that he had no knowledge of whether the materials for which he was invoiced were delivered. He simply testified that he made no changes to his house and that based on his calculations the lumber had not been incorporated into his house.
20Rose Ziner testified that the two bundles of invoices filed at trial as exhibits two (invoices to Elizabethan) and three (invoices to Tradeoil) had a delivery slip attached to each invoice and that all of the delivery slips were signed although the signatures were illegible. She also testified as to the business practice of Ziner respecting delivery:
The procedure is that the order comes in, either personally or on the phone, a person takes it whose in charge, or the next in the line on the telephone, and they take the order. Then it goes to the shipper. The shipper sends out one copy to the lumberyard and gives it in front of the foreman and that foreman will prepare the order.
Q. They pick the lumber, assemble it for delivery?
A. They put together, yes. And then they put it on the truck, it goes back again to the shipper, and the shipper approves it, sends it to the gate where somebody is checking, and then the driver delivers the goods.
Q. Now can you tell us on any of these slips, who signed for delivery?
A. No.
Q. You don’t know?
A. No. Very very few people sign with proper name….And the driver- I don’t think that the driver really wants to see the name and the I.D. card and whatnot. As long as somebody on the premises receives the goods, his conscience is clear, the right people at the right place.
21The trial judge found that Ziner delivered the lumber for which it had invoiced Kotov. Although Kotov had testified that there were no changes to the building from the plans the trial judge rejected his evidence. She observed that the final building cost was $1,700,000 up $400,000 from the original budget and therefore, “something obviously changed.”
22She commented:
If this (the supply of more lumber than was in the quote) was due to some skulduggery by Turk, seems to be bleakly suggested, but if so, that is a matter that should be sorted out between the defendant and Turk themselves.
ANALYSIS
23There is some evidence to support the trial judge’s finding of fact that the lumber for which Ziner sent invoices was delivered and her inferential finding that delivery resulted from orders placed by an agent of Kotov. The contract signed by Kotov, the evidence of Ziner’s business practice and Kotov’s letter of March 28 referring to the return of unused lumber ordered from Ziner’s all support these findings. Bearing in mind the deference owed to a trial judge’s finding of fact I would not interfere with these findings. Accordingly, I would dismiss the first ground of appeal.
24I now turn to Kotov’s second submission that he was an undisclosed principal whose agent exceeded the scope of his authority.4
25The appellant submits that Ziner treated Elizabethan or Turk as its customer or principal. Consequently, Kotov was an undisclosed principal. Because Kotov was an undisclosed principal, the appellant submits that Kotov is only liable to the extent of Elizabethan’s actual authority. I am prepared to accept the appellant’s submission with respect to the first group of invoices billed to Elizabethan, that is, those up to December 6, 1995. There appears to be no evidence up to that point that any agency relationship was disclosed to Ziner.
26The contract between Elizabethan, Turk and Kotov is evidence that Kotov appointed Turk and Elizabethan as his agents. Kotov’s approval of the Ziner quote is evidence of the extent of the agent’s actual authority, namely, $83,194.40. Although the contract with Elizabethan/Turk called for Kotov to be a disclosed principal because
subcontracts were to be in his name, it is clear that, at this stage, he was content to be undisclosed because he approved the quote even though it was not in his name. Further, according to Kotov, Turk periodically presented him with bundles of invoices addressed to Elizabethan for payment and these were paid by him.
27As an undisclosed principal, Kotov is liable for invoices from Ziner billed to Elizabethan to the extent of his agent’s actual authority or $83,194.40. When the sum of $65,859.05 that was actually paid is subtracted there is a balance of $17,335.35 for which Kotov would clearly be liable. The $65,859.05 paid was not, however, all paid on account of Elizabethan as opposed to Tradeoil. Based on the actual exhibits filed at trial, it appears that the amount outstanding respecting the accounts sent to Elizabethan was $19, 677.91. Bearing in mind that the prices for the lumber listed in the quote changed because the quote was obtained several months before the delivery of lumber began in earnest in November and by that time the prices for the lumber had gone up, it would appear that this amount was within the agent’s actual authority and, consequently, payable by Kotov.
28After December 6, 1995, Ziner did not invoice Elizabethan, but rather, Tradeoil. Therefore, Ziner could not have contracted with Elizabethan as the principal as contended by the appellant. The invoices to Tradeoil, c/o Turk, are some evidence that, after December, Ziner knew it was supplying lumber for someone other than the person it was contracting with. Rose Ziner’s evidence as to the reason for the change in the billing name also supports the inference that at least as of that point in time Ziner was aware Turk was building for someone else. At this stage, Ziner was therefore dealing with Turk, as agent, and billing Tradeoil as its customer. While the agency relationship was now disclosed, Kotov, as principal, remained unnamed. As I have indicated, a contract with a disclosed principal is capable of ratification whether the principal has been named or not.
29Before there can be ratification, several requirements must be met. Both Fridman, supra, 86, and Harvey, supra, at 31, cite the three conditions set out in Firth v. Staines (1897), 2 Q.B. 70 at p. 75 by Lord Wright:
To constitute a valid ratification three conditions must be satisfied: first, the agent whose act is sought to be ratified must have purported to act for the principal; secondly, at the time the act was done the agent must have had a competent principal; and thirdly, at the time of the ratification the principal must be legally capable of doing the act himself.
30After December 7, 1995, Turk purported to act for a principal, that principal was competent in the sense of being a legal entity and was capable of contracting with Ziner. The three preconditions set out in Firth v. Staines, supra, were fulfilled.
31Ratification can be express or implied: Fridman, supra, at 104-107; Harvey, supra, at 47. However, before ratification will be implied, conduct by the principal amounting to ratification must be clear and unequivocal. An example of implied ratification is Winnipeg Piano Co. v. Wawryshyn, 1935 CanLII 381 (MB CA), [1935] 2 W.W.R. 220 (Man. C.A.), a case in which the principal took delivery of the goods and made several payments. This is what happened here. The lumber was delivered to 20 Moodie Drive and several invoices sent to Tradeoil were paid, the last one being January 16,1996. In his letter of March 28, 1996, Kotov offered to pay the outstanding invoices billed to Tradeoil to the end of January, 1996, albeit he disputed any direct contractual liability for them. The reference to the specific invoice numbers in the letter is evidence that Kotov received the invoices mentioned therein. More importantly, Kotov agreed in his testimony that he had received copies of invoices from Turk, the last one being January 31, 1996.
32Harvey states at 48:
Ratification will be inferred from the principal’s act of standing by; in other words, if a principal knows of an agent’s unauthorized act, the principal has an obligation to repudiate forthwith the unauthorized act.
33Cases which support this statement include: Edmonton Steam Shovellers v. Gunn & Sons (1913), 1913 CanLII 344 (AB SCTD), 14 D.L.R. 638 (Alta. T.D.) at 644; Great Northern Grain Terminals Ltd. v. Axley Agricultural Installations Ltd. (1990), 1990 ABCA 252, 76 Alta L.R. (2d) 156 (C.A.) and Rand v. MacDonald (1995), 45 R.P.R. (2d) 293 (Ont. Gen. Div.) para. 52. The decision of Crampsey v. Deveney (1968), 1968 CanLII 34 (SCC), 2 D.L.R. (3d) 161 (S.C.C.), in which the court held that the silence and inactivity of the children were not evidence of approval and adoption of a contract for the sale of their land made by their mother, is distinguished on the basis that the children were ignorant of their rights and one of them had no knowledge that a contract had been made. For implied ratification to occur as a result of standing by, the principal must have full knowledge of the agent’s dealings with the third party.
34Similarly, Fridman states at 105:
… a failure to return goods obtained by an agent may well amount to ratification, unless to demand their return would be inequitable on the part of the third party.
35Harvey concludes at 49:
There appears to be a principle that can be drawn from these cases: If the principal has obtained or seeks to obtain a benefit from the unauthorized action of the agent, ratification should be implied to obviate an unjust enrichment.
36In this case, Kotov stood by and did nothing after December 7, 1995, although he was aware that Ziner was invoicing his company for lumber throughout the balance of December and January. He allowed Ziner’s lumber to be incorporated into his home. Kotov has obtained a benefit from the actions of Elizabethan and Turk.
37A more difficult question is whether Kotov is liable for the lumber invoiced in February. Assuming Kotov did not receive these invoices at the time the invoices were sent, the fact remains that on Kotov’s own evidence he terminated Turk for alleged fraudulent conduct. He did not notify Ziner of this. By paying for some of the invoices and by not notifying Ziner that he had terminated Turk’s authority, Kotov made possible Ziner’s error. Kotov enabled Turk to continue to act with his apparent authority. Bearing in mind that Turk was at this stage the agent of a disclosed, albeit unnamed, principal, Kotov can be held liable for his actions. Moreover, when lumber was returned in March, Ziner ensured his company, Tradeoil, received the credit. As a result, I am of the opinion that Kotov should also be held liable for the $5,262.59 invoiced in February.
38In conclusion, I would dismiss the appeal.
Released: OCT 17 2000 Signed: “Karen M. Weiler J.A.”
CAO “I agree C.A. Osborne A.C.J.O.”
“I agree Louise Charron J.A.”
The rule which allows an undisclosed principal to sue or be sued on a simple contract has been criticized. Some argue that the doctrine is anomalous and that it violates some of the basic tenets of the laws of contract and of agency: see, e.g., J.B. Ames, “Undisclosed Principal – His Rights and Liabilities” (1909), 18 Yale L.J. 443; M. Schiff, “The Undisclosed Principal: An Anomaly in the Laws of Agency and Contract” (1983), 88 Com. L.J. 229. Critics of the rule argue that contracts are premised upon the agreement of two or more persons to be bound to each other and to the terms pursuant to which they will be so bound. It appears to be inconsistent with this fundamental principle to bind the third parties to principals with whom they did not contract.
While some commentators have criticized the rule relating to undisclosed principals, other commentators have argued that the rule is consistent with commercial reality. Although the undisclosed principal may not be named in the contract, he or she does exist in fact and directs the agent. The agent is simply the instrument through which the principal acts. Since the principal controls the agent and receives the benefit of the contract with the third party, there does not appear to be any injustice in making the principal directly answerable to the third party or in allowing the principal to enforce the contract against the third party. The rule simply gives effect to what exists in fact, even if that fact is not reflected in the contract: see Keighley Maxsted & Co. v. Durant, [1901] A.C. 240 (H.L.), at p. 261, per Lindley L.J.; E.J. Weinrib, “The Undisclosed Principle of Undisclosed Principals” (1975), 21 McGill L.J. 298.
Regardless of the criticism of the rule, it is firmly established that undisclosed principals may sue or be sued on simple contracts entered into by their agents. …
Footnotes
- This rule is subject to certain exceptions not relevant to this appeal. See for example, Friedmann Equity Developments Inc. v. Final Note Inc., a decision of the Supreme Court of Canada released July 20, 2000 affirming that a contract made under seal is an exception to the general rule. At paras. 16, 17 and 18, Bastarache J., on behalf of the Court, also affirms the general rule:
- Both authors indicate that some scholars have argued that an undisclosed principal should be able to ratify and cite S.J.Stoljar, The Law of Agency (London: Sweet & Maxwell, 1961,) at 199-202 and A. Rochvarg’s article, “Ratification and Undisclosed Principals” (1989), 34 McGill L.J. 286 to this effect.
- The effect of contracting with an entity that does not exist was not argued before us and I do not propose to deal with it.
- One of the appellant’s complaints is that the trial judge did not specifically state Elizabethan was the agent of Kotov. Because Ziner chose to sue Kotov, the principal, it was not necessary for the trial judge to make a specific finding as to whether Elizabethan or Turk was the agent.
