(1) If a contract concluded by an agent involves the agent in a conflict of interests with the principal of which the third party knew or ought to have known, the principal may avoid the contract. The right to avoid is subject to Articles 3.2.9 and 3.2.11 to 3.2.15.
(2) However, the principal may not avoid the contract
(a) if the principal had consented to, or knew or ought to have known of, the agent's involvement in the conflict of interests; or
(b) if the agent had disclosed the conflict of interests to the principal and the latter had not objected within a reasonable time.
1. Conflict of interests between agent and principal
It is inherent in any agency relationship that the agent, in fulfilling its mandate, will act in the interest of the principal and not in its own interest or in that of anyone else if there is a conflict between such an interest and that of the principal.
The most frequent cases of potential conflict of interests are those where the agent acts for two principals and those where the agent concludes the contract with itself or with a firm in which it has an interest. However, in practice even in such cases a real conflict of interests may not exist. Thus, for instance, the agent’s acting for two principals may be in conformity with the usages of the trade sector concerned, or the principal may have conferred on the agent a mandate which is so stringent as to leave it no margin for manoeuvre.
2. Conflict of interests as grounds for avoidance of the contract
Paragraph (1) of this Article lays down the rule that a contract concluded by an agent acting in a situation of real conflict of interests may be avoided by the principal, provided that the third party knew or ought to have known of the conflict of interests.
The requirement of the actual or constructive knowledge of the third party is intended to protect the innocent third party’s interest in preserving the contract. This requirement is obviously no longer relevant where the agent concludes the contract with itself and is therefore at one and the same time agent and third party.
1. Solicitor A is requested by foreign client B to purchase on its behalf an apartment in A’s city. A buys an apartment client C has requested A to sell on its behalf. B may avoid the contract if it can prove that C knew or ought to have known of A’s conflict of interests. Likewise, C may avoid the contract if it can prove that B knew or ought to have known of A’s conflict of interests.
2. Sales agent A, requested by retailer B to purchase certain goods on its behalf, purchases the goods from company C in which A is a majority shareholder. B may avoid the contract if it can prove that C knew or ought to have known of A’s conflict of interests.
3. Client B instructs bank A to buy on its behalf one thousand shares of company C at the closing price of day M on the stock exchange of city Y. Even if A sells B the requested shares from out of those it has in its own portfolio, there can be no conflict of interests because B’s mandate leaves A no margin for manoeuvre.
4. A, Chief Executive Officer of company B, has authority to appoint the company’s counsel in the event of a law suit being brought by or against B. A appoints itself as B’s counsel. B may avoid the contract.
3. Procedure for avoidance
As to the procedure for avoidance, the provisions laid down in Articles 3.2.9 (Confirmation), 3.2.11 (Notice of avoidance), 3.2.12 (Time limits), 3.2.13 (Partial avoidance), 3.2.14 (Retroactive effect of avoidance) and 3.2.15 (Restitution) apply.
4. Avoidance excluded
According to paragraph (2), the principal loses its right to avoid the contract if it has given its prior consent to the agent’s acting in a situation of conflict of interests, or at any rate knew or ought to have known that the agent would do so. The right of avoidance is likewise excluded if the principal, having been informed by the agent of the contract it has concluded in a situation of conflict of interests, raises no objection.
5. The facts are the same as in Illustration 1, except that before concluding the contract A duly informs B that it is acting as agent also for C. If B does not object B loses its right to avoid the contract. Likewise, if A duly informs C that it is acting as agent also for B and C does not object, C loses its right to avoid the contract.
5. Issues not covered by this Article
In conformity with the scope of this Section set out in Article 2.2.1, this Article addresses only the impact that the agent’s involvement in a conflict of interests situation may have on the external relationship. Issues such as the agent’s duty of full disclosure vis-à-vis the principal and the principal’s right to damages from the agent may be settled on the basis of other provisions of the Principles (see Articles 1.7, 3.2.16, 7.4.1 et seq.) or are otherwise governed by the law applicable to the internal relationship between principal and agent.