Agency, Partnerships, and Limited Liability Entities Outline
Professor Prince
Fall 2015
Who is an Agent?
Basic definition of agency (2nd Restatement § 1)
Agency is fiduciary relationship which results from manifestation of consent by one person [principal] to another [agent] that [agent] shall act on [principal's] behalf and subject to [principal's] control (control = the means and/or details of the process by which the task is accomplished), and consent by [agent] so to act
Mutual Consent
Agent Acting on Behalf of Principal
Agent Agrees to Act Under Control of Principal
Required Actors:
: one for whom action is to be taken
: one who is to act for principal
Third party
Note: Marriage does not create agency relationship
Identifying/Creating Agency Relationship
Agency relationships can be implied from parties' conduct; formal agreement not required
Restatement (Second) § 26
Agency relationship may be established by conduct alone – if parties label relationship one way, courts may re-designate as agency based on conduct alone (see Cargill)
Independent Contractor: An independent contractor may or may not be an agent depending on how much control principal has over contractor
Debtor/Creditor: although not an agency relationship on its face, it can become one if creditor goes too far in controlling debtor (ex: Cargill case)
Look at substance of transaction, not name/label on relationship
Requisite level of control may be found so long as principal is able to specify task agent is to perform even if principal is unable to ensure that agent carries out that task
Liability of Principal to Third Parties in Contract
In general:
A P who authorizes an A to enter into a K with a 3rd party is liable on the K
The 3rd party can enforce the K and recover damages from P
Under certain circumstances, A can be held liable
Authority determines which acts fall within scope of agency relationship so as to bind principal
Agent's act bind principal only if agent acts within scope of his/her authority
Analyze the surrounding circumstances in order to determine the extent of an agent’s authority
Examples: the parties’ relations to one another, the undertaking in which the parties are engaged, the general practices of those engaged in such undertakings
“Authority” defined by Restatement (Second) § (7) as “power of agent to affect legal relations of principal by acts done in accordance with principal’s manifestations of consent”
Same set of facts can apply to more than one theory (there are overlaps)
Actual Authority (Easiest to prove) [aka Actual Express Authority]
Focus on communications between principal and agent
Actual Express Authority
Specific authorization of agency
Principal tells agent to do something, agent does it, principal is bound
Note: once you prove a relationship, strict liability applies and P will always be liable
Actual Implied Authority (AGENT’S INTERPRETATION)
If principal doesn’t tell agent how to carry out instructions, agent is allowed to carry out instructions in usual manner/take additional steps (if necessary), and principal is bound by consequences
Agent is allowed whatever is necessary/proper to complete task
Focus upon agent's understanding of authority
Nature of task/job
Existence of prior similar practices (very important)
There must always be some express authority to accompany implied authority
Puts incentive on principal to make sure that instructions are clear so principal will not be bound to something didn't want
Apparent Authority (THIRD PARTY’S INTERPRETATION) – Restatement (Second) §8/2
Focus is on communications between principal and third party
What does third party reasonably believe agent’s power to be?
Look at the reasonable expectation of the third party
Principal must in some way hold out agent as possessing certain authority
Third party must reasonably believe agent has such authority
CANNOT create own apparent authority, only principal
Restatement (Second) § 8
Third party dealing with agent à third party reasonably believes agent has authority à principal can still be bound depending on principal’s actions
Inherent Agency Power/Authority – Restatement (Second) § 8A
Inherent agency power = Authority derived solely from agency relationship and exists for protection of persons harmed by or dealing with agent
“Power” not “authority” à shows that P has not authorized the A’s action by manifesting consent to either the agent or the third party
Inherent agency power is infrequently used to decide agency cases and usually surfaces where courts must choose between imposing a loss on an innocent third party and an innocent P
Restatement 3rd doesn’t explicitly have inherent authority; just included as apparent authority
States are split on using R2 and R3
But apparent authority does not extend to cases involving undisclosed Ps, which traditionally were decided under inherent agency power
Distinction between disclosed and undisclosed Ps is important because apparent authority is not present when a 3rd party believes that an interaction is with an actor who is a P [3rd party thinks A is P because the real P is undisclosed] (meaning apparent authority doesn’t exist in cases with undisclosed P)
New section (2.06) would make undisclosed P liable for actions of A who act without actual authority if:
P does not take reasonable steps to notify 3rd party of the misplaced reliance
(Watteau case) Used in a situation where 3rd party does not know P (undisclosed P) because if 3rd party knew P and thought A was being held out by P as having the authority, it would be apparent authority, not inherent authority
Based on sympathy/fairness
Restatement (Second) § 8A
There actually is no authority for agent to act; in fact, agent can be acting contrary to what they were told by principal
There must be a shared common understanding that if put someone in particular position, the
Key to estoppel: something principal doesn’t do that would lead reasonable person to believe that imposter (Hoddeson – failing to monitor floor and keep impostors off) was principal’s agent
There must be some kind of breach of duty by principal to third party (ex: in Hoddeson, expectation that principal would control premises and make sure only people with authority deal with customers)
Agent’s Liability on Contract
Types of Principals:
Third party knows they are dealing with agent acting on behalf of someone else (agent indicates they are acting on behalf of P and identifies who P is)
P is disclosed and bound to the K by any types of authority
Generally, A acting on behalf of P = A not liable
A may be liable if:
A fails to represent A’s capacity
A bound if A intends to be bound
Third party may sue either A or P if A fails to disclose
But can’t collect twice, so must make an election on who to sue
Modern approach: third party can sue P and A together
Either D can require third party to make an election before judgment
Partly Disclosed
Third party knows agent is acting for principal, but doesn’t know identity of principal
Rules are similar to those applied to undisclosed P
Generally when A works for partially disclosed P, A may bepersonally liable for K; but P will be liable because 3rd party knows he is making a K with P, just doesn’t know who P is
Third party doesn’t know principle even exists
Reasons P is undisclosed:
Able to negotiate a deal (3rd party may not want to deal with big corporation)
Negotiate a better deal (3rd party doesn’t know how much money P has)
Conceal an investment in project or donation to charity
A’s Liability:
3p can sue A if default on K
3p believes only two parties to the K
P’s liability:
P liable for breach if 3p later discovers ID of P if A authorizes to make agreement
3p must elect to sue A or P
If 3p sues A and loses before discovery of P, 3p is not considered to have made an election and will be permitted to sue P
– principal held out agent as if owned business and transaction between agent and third party was one that would normally be expected in that business
To protect third parties, court places risk of liability on party that puts agent in such a position
