Select Page

Business Organizations
Rutgers University, Camden School of Law
Ryan, Patrick J.

1. Agency
Corporations can protect themselves from actions of Agents by training employees and establishing controls.
2. Agency: Relationship where one person acts on behalf of another.
a. 3 Basic forms of Agency:
i. Relation of Principal to Agent.
ii. Relation of employee to employer.
iii. Relation of master and servant.
iv. Relation of Employer/Proprietor and Independent Contractor.
b. 3 Types of Individuals Involved with Agency: Principals, agents and 3rd parties
1. Restatement of Agency §1: an agency is the fiduciary relation resulting from manifestation of consent by one person (P) to another (A) that the other shall act on his behalf and subject to his control, and consent by the other (A) so to act

1. Are relationships voluntary or involuntary?
a. No contract required by there must be a voluntary relationship between 2 parties.
2. Does agency only exist where there is an economic transaction?
a. NO

3. BURDEN OF PROOF: Where party seeks to impose liability upon an alleged principal on a contract made by an alleged agent, the party assumes the obligation of proving the agency relationship. (Hoddeson v. Koos Bros.
4. Types of Authority:
a. Actual Authority: 3 types
i. Express (Issue between principals and agents).
ii. Implied (Issue between principals and agents).
b. Apparent Authority (Usually at issue between 3rd parties and agents and principals).
c. Inherent Authority (Protects 3rd party: will be covered to the extent that they dealt with the principal’s employee/designee).
Actual Authority – Express or Implied (Btwn Principal and Agent)
§2.02: defined by scope of activity or as agreed by parties; focus inquiry between P and A
Express Authority – (Focus: Principal to Agent)
1. Significant Relationship: Express authority deals with the relationship between the principals and agents. P and A agree to the relationship; need not be a K.

2. Written or Oral Agreement: Express Agency agreement can be either (1) written (2) oral based upon parol evidence. (Gorton v. Groty; woman had allowed school athletic director to borrow on the condition that he alone would drive. Court held that athletic director was acting as agent for woman who lent car: agency existed, car is not a loan: condition on who can drive the car proves agency).
Implied (Focus: Principal to 3rd Parties)
1. Significant Relationship: Implied authority deals with the relationship between the principals and the agents. (Mill Street Church of Christ v. Hogan; church hired Hogan to paint, and told him he could hire someone else to help him. Hogan selected brother who was hurt on the job and church was held liable because although the church did not give the okay to hire brother specifically, it was implied in the instructions to Hogan that another person would have to be hired and he had hired brother in the past).
2. Difference between implied and inherent authority is what judges are trying to work out. The issues are: control and agreement. More control = more liability
3. Gay Jenson v. Cargill: lawsuit against grain elevator company (Warren) and company who helped to finance and oversee the management operations of Warren (Cargill). Court held that actions of Cargill were more than the actions of creditor and therefore, Warren was an agent of Cargill). So agency can even be found in debtor/creditor relationships sometimes if there is more control than normal debtor-creditor situations. CONTROL WAS KEY HERE
Apparent Authority (Btwn Principal, Agent and 3rd Party) (2nd Restatement of Agency § 8)
1. Definition: Power to affect legal relations of another person by transactions with 3rd persons, professedlyas agents for the other, arising from and in accordance with the other’s manifestations of consent to him. (2nd Restatement of Agency §8). Apparent authority can coexist and be coextensive with actual authority. Appearances are what matter for the 3rd party. Going back to Mill Streetagain, brother believed Bill has authority to hire him.
2. Three Seventy Leasing v. ampex: Doctrine of apparent authority (p. 24): when P acts in a manner as would lead reasonably prudent person to suppose that A had authority he purports to exercise, absent knowledge of the 3rd party to the contrary, A has apparent authority to do that which is usual and proper to conduct of business which he is employed to conduct.

3. Significant Relationship: Apparent Authority concerned with relationship of 3rd parties, agents, and principals.

4. Court looks to following:
a. Plaintiff must show reliance on “indicia of authority” originated by P
b. Court will consider the Parties’ Expectations
c. Reasonableness of reliance: the reliance must be reasonable.
d. 3rd Parties perceptions become important.

5. Consequences of Apparent Authority: For contracts, apparent authority creates the same results as does actual authority. If an apparent agent, acting with apparent authority, makes a contract on behalf of an apparent principal, then the principal is bound just as if the principal had itself entered into the contract. The 3rd party is likewise bound to the contract.
Inherent Agency Power (2nd Restatement of Agency § 8A)
There is usually a pre-existing principal/agency relationship
1. Overall Notes: Inherent Agency Power is a “Catch-all doctrine based upon FAIRNESS. In some situations, an agent has neither actual nor apparent authority, estoppel does not apply, and yet the agent has the power to bind the principal.
a. 2 Functions of Inherent Agency Power: Holds principal responsible for:
i. Certain unauthorized acts of an agent whom the principal has entrusted with ongoing responsibilities, and for,
ii. Certain false representations of an agent or apparent agent.

2. Purpose: Protects 3rd parties who deal with principal’s employees or designees. Making intermediaries into independent contractors or brokers is a theoretical way to break the liability chain; but it adds transaction costs.
a. 2nd Restatement of Agency §8(A): Indicates the power of an agent which is derived not from authority, apparent authority, or estoppel but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent.
3. Situations:
a. Undisclosed Principals: There is an express principal/agent relationship. (Watteau v. Fenwick; Agent buys goods that are not approved by the principal and the court holds that the 3rd party can enforce the claims against the principal even though the principal expressly told the agent not to buy these goods).
i. In order to limit the agent, the principal should emerge so that agent didn’t get the wrong impression and think that agent had apparent authority. Undisclosed principal is not protected.
ii. Kidd v. Thomas A. Edison, Inc.;.
iii. Nogales Service Center v. Atlantic Richfield Co.; agents looking for principals. Inherent authority does not depend on actual/apparent authority: principal may be liable to 3rd party who did not know of his existence for conduct he didn’t want.

4. BASIC RULE: THE MORE CONTROL, THE GREATER THE POTENTIAL LIABILITY. General agency: Agency is authorized to conduct a series of transactions involving continuity of services: it makes not difference that agent is disregarding principals’ directions as long as agency continues in large filed measured by general scope of the business.

a. 2nd Restatement of Agency §194 (Acts of General Agent): Undisclosed principal is liable for acts of an agent done on the principal’s account if usual and necessary, even if the acts are forbidden by the principal.
b. 2nd Restatement of Agency §195 (Acts of Managers Appearing to be Owner): Undisclosed principal who entrusts agent with management of his business is subject to liability to 3rd persons with whom the agent enters into transactions usual in such business and on the principal’s account, although contrary to the directions of the principal.

5. Differences Between Apparent Authority and Inherent Agency Power:
a. Formal differences:
i. Apparent authority argues 3rd Parties’ reasonable understandings of P’s relationship with agent.
ii. Inherent agency power looks at the structure of the principal/agent relationship.
b. Both Covers a lot of the same factual ground:
i. Apparent authority and inherent agency power usually argued in the alternative.
ii. Both doctrines tend to impose liability.
Binding Principal in Tort
1. Background: Agency law contains rules for attributing an agent’s tort to its principal, even though the principal has not itself engaged in any wrongful conduct including:
a. Respondeat Superior: A master (employer) is liable for the torts of its servants (employees).
i. Master-Servant Relationship: Exists where servant has (1) agreed to work on behalf of the master AND (2) to be subject to the master’s control or right of control the “physical conduct” of the servant. (2nd Restatement of Agency § 2(2): A servant is an agent employed by a master to perform service in his affairs whose physical conduct in the performing of the service is controlled or is subject to the right to control by the master)
i. Primary Issue = Control.

2. Servants vs. Independent Contractors: Servants are distinguished from independent contractors.
a. General Rule: Usually compare master/servant relationship with independent contractors because masters are not liable for torts of independent contractors but they are responsible for torts of employees. In master servant relationship: s

urt held that although pitcher was acting intentionally which normally breaks the causal chain for agency but in this instance, the player was acting in the interests of the team, therefore, agency could be established.)
c. Failure to Act: Servant’s failure to act can also come within the scope of employment but only if:
i. The omitted act is within servant’s duties, AND,
ii. Servant’s failure to act causes master to breach duty to injured party.
i. NOTE: Easier to find vicarious liability when you are looking for more than 1 agent.
ii. Policy Considerations: Ability of one party to better be able to pay the damages will lead to a more efficient allocation of resources.

5. Statutory Claims/Liability: It is possible for a statute to impose greater liabilities on principals than the common law? Yes. (Arguello v. Conoco, Inc./69; Gas stations were independently owned and Conoco did not control the daily activities of the company. Although principal was found liable based upon scope of employment doctrine, Ryan thinks actions of the contractor were because of statute which created different standard for finding principal liable for acts of agents/independent contractors than common law)
1. Ratification: The affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account. (2nd Restatement of Agency §82). – PROCESS BY WHICH A PRINCIPAL CAN AFFIRM THE ACTS OF AN AGENT.

2. Requirements For Ratification:
i. Acceptance of the results of the agent w/
ii. Intent to ratify, and, (Botticello v. Stefanovicz; wife of husband who sold option with lease to buy did not ratify the contract to sell the land just by accepting the money from the contract; she had expressly said she would not sell for the land for the stated amount).
iii. With full knowledge of all the material circumstances.

Ratification – 2 Part Analysis:
1. What types of Acts constitute an affirmation by the principal?
2. What type of effect should we give to that affirmation?

Agency by Estoppel (Principal has duty to 3rd party: 3rd party relies)
2. Agency by Estoppel (AKA TORTIOUS DISREGARD FO DUTY TO PROSPECTIVE CUSTOMERS: (Hoddeson v. Koos Bros.; П deceived by imposter salesman; D is liable for action of imposter through estoppel; duty of proprietor requires exercise of reasonable care to protect customers)
3. (2nd §8B): 3rd party reliance on A: burden of proof falls on 3rd to substantiate belief that P had rel’shp w/ alleged A.
a. Relationship Focus: Focus is between the principal and the 3rd party (here the purchaser.) Does the agency have a duty to protect the 3rd party?
b. Elements:
i. Principal creates negligently, or intentionally by act, word, or omission, the appearance of authority
ii. 3rd party reasonably and in good faith acts in reliance on this appearance
iii. 3rd party “changes position” in reliance upon appearance. (3RD PARTY MUST ACT).

4. Estoppel imposes liability on a person for:
a. A transaction purported to be done on his account … to persons who have changed their positions because of their belief that the transaction was entered into by or for him, if
i. He intentionally or carelessly caused such belief, or,
ii. Knowing of such belief and that others might change their positions because of it, he did not take reasonable steps to notify the 3rd party of the facts.

5. Difference Between Apparent Authority and Estoppel: Unlike apparent authority, estoppel can apply even though claimant can show NO MANIFESTATION attributable to the asserted principal,

6. Agents Liability on the Contract: Unless otherwise agreed, a person purporting to make a contract with another for a partially disclosed principal is a party to a contract.
If there is a fully disclosed principal, contract is between principal