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Business Organizations
Rutgers University, Camden School of Law
Barkasy, Richard A.

Business Organizations Professor Barkasy

Spring 2013

1. Agency

A. Introduction to Agency

· The most basic business organization is the principal-agent relationship.

· “Agency is the fiduciary relationship that arises when one person (a principal) manifests assent to another person (an agent) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents to the act.”

o Thus, an agent holds a power to affect the principal’s legal relationships within the scope of the agent’s agreed-on appointment (or employment) and beyond the scope in some circumstances.

§ Agents may be:

· Special agents: agency is limited to a single act or transaction.

· General Agents: the agency contemplates a series of acts or transactions.

§ Principals may be:

o Disclosed when 3rd parties understand that an agent acts on behalf of a particular principal.

o Undisclosed: when 3rd parties believe an agent to be the principal.

o Partially disclosed: when the 3rd parties deal with an agent without knowing the identity of their principal.

i. Formation of Agency Relationship

– Restatement 1.03:

· Manifestation of assent can be written, spoken, “or other conduct.”

· Assent doesn’t have to be in writing, can be inferred through conduct and action.

– Look for:

· Assent (informal agreement between the principal who has capacity and the agent),

· Benefit (the agent’s conduct must be for the principal’s benefit) and

· Control (principal has the right to control the agent through the power to supervise the manner of agent’s performance).

ii. Termination of Relationship

· Relationship is terminable at will.

· If the parties had agreed that the relationship would have a specific term, either party can still get out of the agency relationship.

· Principal or agent can renounce.

o Terminable at will.

o “Relatively unstable relationship”

· No specific performance of an agency relationship.

· If there are any damages, they are money.

iii. Parties Conception Does Not Control

· Agency relations may be implied even when the parties have no explicitly agreed to an agency relationship.

· An important context in which agency relationships are implied is when a party such as a bank assumes “too much” control under a contract that ostensibily makes for a debtor-creditor relationship.

· Agency can be inferred by conduct of parties.

o Not the subjective intent in one of the parties mind.

o Assent must be expressed somehow.

Jenson Farms Co. v. Cargill, Inc.


Cargill lent extensive credit to Warren, a grain elevator, which was overextended. Cargill got excessively entangled in Warren’s business – decision making, reviewing the books – and when Warren went under, other creditors went after Cargill as Warren’s principal.

Issue: Whether Cargill, through its control and influence over Warren, became liable as a principal over Warren.

Decision: Cargill was a principal over Warren and is therefore liable for the damages sustained by Plaintiffs.

– Indicators of control over Warren:

– Constant recommendations to Warren by telephone

– Cargill’s right of first refusal

– Warren’s inability to enter into mortgages, to purchase stock or to pay dividends without Cargill’s approval

– Cargill’s right of entry onto Warren’s premises to carry on periodic checks and audits,

– Cargill’s correspondence and criticism regarding Warren’s finances, officers salaries, and inventory

– Cargill’s determination that Warren needed “strong paternal guidance”

– Provision of drafts and forms to Warren upon which Cargill’s name was imprinted,

– Financing of all Warren’s purchases of grain and operating expenses; and

– Cargill’s power to discontinue the financing of Warren’s operations.

– Warren exists to benefit Cargill.

B. Liability in Contract

i. Actual and Apparent Authority

· Actual authority is that which a reasonable person in the position of A would infer from the conduct of P.

o Includes both express delegations of authority (the principal states to the agent that he wants something done) and implied delegations (past practice implies ongoing authority; general directions include implied authority to do all things proper, usual, or necessary).

o Includes incidental authority, the authority to do those implementary steps that are ordinarily done in connection with facilitating the authorized act.

· Apparent authority is authority that a reasonable 3rd party would infer from the actions or statements of P.

o Apparent authority depends on the employee’s position, the reasonableness of the offered terms, and the employer’s communications to the third party through the employee.

o Apparent authority is in the nature of an equitable remedy designed to prevent fraud or unfairness to 3rd parties who reasonably rely on P’s actions or statements in dealing with A.

o This will be true even if unbeknownst to the 3rd party, P had quite explicitly limited the authority of A in a way that precluded A from engaging in that action.

White v. Thomas


White authorized his agent, Simpson, to attend a land auction and bid on his behalf and Simpson, after realizing she over bid, made an agreement with Thomas to sell him 45 acres of land she had just purchased for White, indicating that she had power of attorney, when this did not exist. White contended that his agent, Simpson, did not have apparent authority to enter into a contract for the sale of land to Thomas (plaintiff) (he repudiated).

Ruling: In the absence of a principal and any indicia that an agent has authority to engage in a specific action on the principal’s behalf, the agent does not have apparent authority to engage in any such action merely because the agent asserts that she has such authority.

• Here, Simpson had neither the express nor the implied authority to contract to sell Thomas a portion of the land. In order for White to be liable, Simpson’s actions had to have fallen within the scope of her apparent authority. Here, the only indication that Simpson had limited authority was a possession of a check and Thomas chose to rely on Simpson’s claims.

à An agent can’t declare his or her own agency or the extent of his authority.

ii. Liability in Contract: Inherent Authority

· Agent has the power to bind the principal even against the principal’s wishes as long as it is reasonable for the third party to assume authority in the agent and rely upon i

his station as an independent contractor.


· There is no agency relationship between a supplier and retail outlet where the retail outlet is solely responsible for profits and losses and the supplier exercises no dominion or control over the retailer.

o In this case, the Court found no relationship between the supplier, Sun Oil, and the retailer other than a landlord-tenant relationship and that both had an interest in selling Sun products. Sun asserted no operational control and was not responsible for the profits and losses of the retail outlet, but Barone was and there was no requirement that Barone had to implement the suggestions that Sun made.

· Liability in tort requires more control than liability in a contract claim.

o There was apparent authority since Sun put the people in Sunoco uniforms and there was inherent authority since customer expectation is that gas station attendants are authorized to pump gas. However, Barone was in the best position to prevent because while Sunoco made regular visits, Barone was under no obligation to listen to recommendations.

Distinguishing Hoover and Humble:

• In Humble, there are expectations.

– Schneider was only permitted to sell Humble products.

– Humble made Schneider make written reports.

• In Hoover,

– Barone was allowed to sell other products.

– Lease could be terminated one annually.

– These differences seem to suggest that Humble had a greater amount of control over the agent.

à The more control the principal asserts over the agent, the more likely it is the principal will be liable in tort.

iv. Liability in Tort under the Apparent Authority Doctrine

· An employer may become vicariously liable for tortious acts committed by its employees “acting within the scope of employment.”

· But a principal is generally not liable for acts of a non-agent general contractor, unless the principal is negligent in hiring the contractor.

C. The Governance of Agency

i. The Nature of the Agent’s Fiduciary Relationship

– In corporations, it is for the directors to advance the purposes of the corporation.

– Law of agency creates two open-ended duties owed by the agent:

• Duty of Loyalty

– Pervasive obligation always to exercise legal power over the subject of the relationship in a manner that the holder of the power believes in good faith is best to advance the interest or purposes of the principal or beneficiary and not to exercise such power for a personal benefit.

• Duty of Care

– The duty to act in good faith as one believes a reasonable person would act in becoming informed and exercising any agency or fiduciary power.