Business Associations
Agency
A. When you have an agency issue, you need to determine which of three issues is the problem:
a. Is the problem between the agent and the principal?
b. Does it involve a third party trying to hold the principal to an agreement based on the agent’s conduct or agreement?
c. Does it involve a third party try to hold a principal liable for an agent’s torts?
B. Proving Agency
a. You must prove there is a principal-agency relationship
i. The intent of the parties is not relevant
ii. An agency relationship can arise even if the parties don’t intend to be agent and principal
iii. In order to have a principal-agent relationship, there must be an agreement between the parties where the agent will undertake some act on behalf of the principal, with the understanding that the principal is still in control of the undertaking
b. Fiduciary Relationship
i. Every agent is a fiduciary
ii. Fiduciaries must avoid conflicts of interest, self-dealing, disloyal acts, etc.
c. Gratuitous Agents – agents who perform their services without gain
i. Cannot be compelled to perform the duty they have undertaken
ii. Principal is still liable for torts of gratuitous agents
d. The principal has a duty to compensate the agent, unless the parties agree otherwise
C. Agency – the fiduciary relationship the results from the manifestation of consent that one person (agent) shall act on half of and subject to the control of another person (principal)
a. Agency requires a manifestation from a principal that:
i. An agent will act for him
ii. Acceptable by the agent of the undertaking
iii. An undertaking between the parties that the principal will be in control of the undertaking
b. Creation:
i. By agreement
ii. By ratification (principal accepts benefits of someone acting as an agent, even though no formal agreement exists)
iii. Agency by Estoppel (principal acts in a way that a third party reasonably believes that someone is the principal’s agent)
· A creditor that assume control of its debtors business may become liable as principal for the debtor’s acts in connection with the business (A. Gay Jenson Farms Co. v. Cargill, Inc.)
D. Liability of Principal to Third Parties in Contract
a. Scope of Agent’s Authority
i. Actual Authority
1. Expressly conferred on the agent or reasonable implied by custom or the conduct of the principal to the agent
1. Express Authority – actual authority contained within the agency agreement
2. Implied Authority
1. Implied from Past Conduct
ii. Apparent Authority – when principal manifests to a third party that an agent is authorized and the third party reasonably relies on the manifestation
· Apparent authority need not be authority actually given to an agent as long as the principal’s manifestations lead third parties to reasonably believe that the agent possesses authority to act on the principal’s behalf (Lind v. Schenley Industries Inc.)
· An agent has apparent authority sufficient to bind the principal when the principal’s acts would lead a reasonably prudent person to suppose that the agent had the authority he purports to exercise (Three-Seventy Leasing Corp v. Ampex Corp.)
iii. Inherent Agency Power – it is inevitable that in the course of performing his duties, by mistake/negligence/misinterpretation, an agent may harm a third party or deal with one in an unauthorized manner.
1. Agency power that arises even in the absence of actual or apparent authority by estoppel
1. Agency power that arises from designation by principal of a kind of agent who ordinarily possesses certain powers
2. Test is whether the principal could reasonably foresee that an agent would take the action she did
o R 2d 194 – an undisclosed principal is liable for acts of an agent done on his account if usual or necessary in such transactions, although forbidden by the principal (Watteau v. Fenwick)
o R 2d 195 – undisclosed principal who entrusts his agent with management of his business is liable to third persons with whom the agent enters into transactions in the usual course of business even if the agent’s actions are contrary to principals directions
o If a conduct custom is established in an industry, an agent acting within that industry possesses inherent authority to act on all such matters (Kidd v. Thomas A. Edison, Inc.)
o Inherent authority exists if a general agent, as one authorized to conduct a series of transactions involving a continuity of service, does something similar to what he is authorized to do, even f he was not actually authorized to it (Nogales Serv. Ctr. V. Atlantic Richfield Co.)
iv. Ratification – causes the agent’s act to be treated as if the principal had authorized it at the outset
· Ratification requires affirmance by a person with full knowledge of the material terms of a prior act which did not bind him, but which was done on his account; receipt of a contract’s benefits is generally sufficient to es
nns, Inc.)
o Franchisor Liability – a franchisor can be held liable for its franchisee’s negligence if the franchisor retains a right of control over the franchisee’s business operations or holds the franchisee out as its agent (Miller v. McDonald’s Corp)
b. For Respondeat Superior to apply, the employee must have committed the tortuous act within the scope of employment
c. Employers of independent contractors cannot be held liable for their torts on a respondeat superior theory
i. In some situations, an employer may be held responsible for the torts of an independent contractor based on the employer’s own negligence or as a matter of public policy
ii. Generally, the employer who engages an independent contractor is not liable for the negligent acts of the contractor in performance of the contract
iii. Exceptions: the employer will remain liable for the acts of the contractor if he:
1. Retains control of the manner and means of doing the work
2. Engages an incompetent contractor
3. The work contracted for constitutes a nuisance per se
F. Fiduciary Obligations of Agents
a. An agent is a fiduciary and he owes his principal the obligation of faithful service
b. Agent must notify the principal of all matters affecting the agency
i. An agent is charged with the fiduciary duty of loyalty, which includes the duty not to compete with his principal
ii. Remedies available to principal:
1. Damages – an agent may be liable to a principal in tort for breach of fiduciary duty
2. Action for Secret Profits – when an agent breaches a fiduciary duty to the principal and secretly profits from it, the principal may recover the actual profits or property held by the agent
3. Rescission – any transaction that violates the agent’s fiduciary duty is voidable by the principal
c. Post-termination competition with a formal principal is allowed, but the former agent is barred from disclosing trade secrets or other confidential information obtained during his employment
