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Business Organizations
Rutgers University, Camden School of Law
Laby, Arthur B.

Business Organizations


Fall 2011

I. Agency Law

A. The Agency Relationship

1. Definition

i. Restatement §1 – the relationship which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control and consent by the other so to act

ii. the fiduciary relationship that arises between principal and agent when the latter undertakes to transact some business or manage some affair for the other by authority and on account of the principal

2. Requirements

i. there needs to be a meeting of the minds that one will act for and on behalf of the other

ii. does not require a contract

iii. does not require consideration/compensation

iv. the relationship of principal and agent may result even though the parties did not call it an agency and did not intend the legal consequences

v. disclaimers of an agency relationship will not prevent the court from finding such a relationship

a. this presents a contract law issue (discuss)

vi. therefore, circumstantial evidence may be used to show a course of dealing b/t the parties that establishes the relationship

3. Why place responsibility on the principal?

i. because they have control over the agent’s actions

ii. the agent is acting on the principal’s behalf, i.e. an exemption of the principal itself

4. Common examples

i. master and servant

ii. lawyer and client

iii. employer – employee

iv. creditor and debtor

5. Case Law

i. Gorton v. Doty – high school teacher lent car to football coach; held: agency relationship; by designating a driver, and that driver consenting, there was mutual manifestation of consent

a. dissent – telling the coach to drive was common sense and is not the same control of a principal over an agent; also, the driver was not acting for the benefit of the teacher, but for the benefit of the school

b. Laby – the court is using this decision for public policy purposes (get insurance)

ii. Farmers v. Cargill – Warren was indebted to farmers; Cargill financed Warren; farmers went after Cargill as the principal

a. Restatement §14 – a creditor who assumes control of his debtor’s business may become liable as a principal for the acts of the debtor in connection with the business; a creditor becomes principal when assuming de facto control over the debtor’s business affairs

b. de facto control is established by looking at all of the factors surrounding the relationship; “totality of the circumstances”

c. held: agency relationship

1. constant recommendations, right of first refusal, required consent to enter new mortgages, right of entry to audit

d. Laby

1. the farmers could have protected themselves by making a direct contract with Cargill or by having Warren sign a guarantee of payment

2. Cargill could have limited their control over Warren to avoid this outcome

1. narrow the scope of control over the debtor

2. limit control to matters that relate only to the loan, not to the business

3. as a lender, this means asking for financial records, but not telling the company how to run its finances

3. if Cargill wanted to make changes without becoming the principal, they could have obtained outside consultants to make recommendations to Warren that would have benefited Cargill

4. companies must choose what is more important: if they have tolerance for risk then they can exercise control (Starbucks & McDonald’s); if not, they will have to cut back their control

6. Incentives, a.k.a. “Agency Costs”

i. giving employees incentives, ensuring that they will be motivated to act in the best interest of the principal/company

ii. can be very risky

iii. procedural safeguards to protect against risk

B. Consequences of Creating an Agency Relationship

1. there are generally three parties involved in agency litigation: P, A, and third party

2. Types of Agency

i. Express

a. principal tells the agent to do something and the agent does so

b. third party can enforce a contract against the principal even if the third party didn’t know the agent was acting on behalf of the principal

c. principal is liable for the acts done by the agent (as if they had done the action themselves)

ii. Implied

a. actual authority circumstantially proven which the principal intended the agent to possess and includes such powers as are practically necessary to carry out the duties expressly delegated

b. if the principal cannot think of everything the agent has to do to accomplish the principal’s objectives and the agent takes additional steps beyond what is explicitly authorized, the principal will be responsible for the acts of the agent

c. to establish implied authority requires some prior conduct and the nature of the task

d. example in appendix

iii. Apparent

a. the principal creates apparent authority if they tell a third person that the agent is authorized to act on their behalf

b. the principal holds out the agent as possessing authority

c. requirement of reasonableness: the perception of the third party must be reasonable

1. an agent has apparent authority sufficient to bind the principal when the principal acts in such a manner as would lead a reasonably prudent person to believe the agent had the authority he purports to exercise

d. focus on the communication b/t the principal and third party only

e. example in appendix

iv. Inherent

a. the principal is responsible for some actions that were not really authorized, but were close to or incidental to authorized actions

b. similar to implied authority

c. applies mostly where the principals are undisclosed and there can be no “holding out” by the principal

v. Ratification/Estoppel

a. if the principal adopts a contract entered into by an unauthorized third person, acting as an agent, the principal is bound

1. Ratification: Principal takes action after the fact to affirm a previously unconfirmed action

b. the principal is then estopped from later saying that the act was unauthorized

1. It would be unfair

3. Case Law

i. Mill Street Church v. Hogan- Hogan

an agency relationship

2. tenancy in common does not create an agency relationship

b. ratification

1. Restatement §82- ratification is the affirmance by a person of a prior act which did not bind but which was done or professedly done on his account

2. requirements:

1. the original transaction must purportedly be done on account of the principal

2. acceptance of the results of the act by the principal

3. intention to ratify

4. full knowledge of all the material circumstances

3. express or implied

1. express affirmance

2. implied affirmance through acceptance of benefits at a time when it is possible to turn them down

3. implied affirmance through silence or inaction

4. implied affirmance by suing to enforce the contract

c. held: wife did not ratify. she did not consent to the agreement. Walter was not an agent for her- he never purported to be acting on his wife’s behalf. she was not aware of all material facts.

d. analysis problem in appendix

vi. Hoddeson v. Koos Bros- plaintiff went to furniture store and made an order; the salesman took her money and gave her a slip; the furniture was never delivered; the employer said the salesman was an impostor

a. theories of liability

1. not express, implied or inherent

2. apparent authority? the court says no b/c the employer(principal) did not make any communication w/the buyer(3rd party)

1. implied communication- an open store with salesmen walking around is an implied communication to 3rd parties; not often accepted by the courts

b. Estoppel

1. the duty of the proprietor to exercise reasonable care and vigilance to protect the consumer from loss occasioned by deception

2. where a proprietor, by his dereliction of duty, enables one who is not his agent to act as such and to transact the proprietor’s business w/a patron in the establishment, the appearance of such that would lead an ordinary, prudent person to believe the impostor was in truth the proprietor’s agent, the law does not permit the proprietor to avail himself of the impostor’s lack of authority to escape liability

3. requires the aggrieved 3rd party to have changed their position in reliance upon the impostor’s actions

c. held: there was a change in position due to reliance. the plaintiff could not describe the man, so it was remanded. the court and Koos. Bros. both think she was full of shit b/c there is obviously no receipt to show that she detrimentally changed her position in reliance