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Business Associations
Rutgers University, Newark School of Law
Gatti, Matteo

Business Associations
(Spring 2015)
Professor: Gatti

Chapter 1.     Acting Through Others: The Law of Agency
a.       1.1: Introduction
i.      The Agency relationship arises out of consent
1.      Objective Theory of Consent
a.       Doesn’t matter what the parties understood the deal to be
b.      Trying to find out what objectively people can infer from the manifestation of their actions
ii.      Definition [Restatement (Third) Agency § 1.01] 1.      “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 so to act.”
iii.      Core of the Agency Relationship: Agent (A) can bind the Principal (P) to a Third Party (T)
1.      In contract, the economic value of agency is precisely that A can bind P to T, and vice versa
iv.      Background on Rules
1.      Formation and Termination of an Agency Relationship
2.      P’s liability for A’s authorized and unauthorized contracts, and for torts committed by A
3.      A’s duties to P
b.      1.2: Agency Formation, Agency Termination and Principal’s Liability
i.      1.2.1: Formation
1.      To create a normal Agency relationship, Restatement (Third) Agency § 1.01 says you need:
a.       Manifestation of intent to create the relationship; AND
b.      Consent by the other party [Restatement (Third) Agency § 1.01] 2.      Scope:
a.       Special Agents v. General Agents
i.      Special Agents; OR
1.      The agency is limited to a single act or transaction
ii.      General Agents
1.      The agency contemplates a series of acts or transactions
b.      Agency creates legal effects on another person
i.      Corporations have their own rules to determine a corporate officer’s power to bind the corporation
3.      Disclosure to Third Party
a.       Principal may be:
i.      Disclosed;
1.      i.e. When Third Parties understand that an Agent acts on behalf of a particular Principal
ii.      Undisclosed; OR
1.      i.e. When Third Parties believe an Agent to be the Principal
iii.      Partially Disclosed
1.      i.e. When Third Parties deal with an Agent without knowing the identity of their Principal
4.      Right to Control the Agent
a.       Right to Select and Control the Agent is an essential aspect of agency
b.      Employee (or “Servant”) vs. Independent Contractor (“IC”)
i.      Employee
1.      When a Principal secures from her agent the right to control in detail how the agent performs his task  (example: the time he devotes to his tasks, or the precautions he takes), the Agent is called an Employee
ii.      Independent Contractor
1.      When Principal’s Control Rights are limited and the agent exercises considerable discretion (example: When the agent is a professional who is bound to provide independent judgment or when the agent is an established business in its own right, like a building contractor), the Agent is described as an Independent Contractor
c.       Both Employees and IC’s can be agents, but not all employees are necessarily agents
i.      Only Employees give rise to Vicarious Liability on Principal
5.      NOTE: When an Agent signs a document, he signs his own name
ii.      1.2.2: Termination
1.      Termination At Will
a.       Either the Principal or the Agent can terminate agency AT ANY TIME
b.      If the contract which creates the agency relationship fixes a set term of agency, then Principal’s decision to REVOKE, or the Agent’s decision to RENOUNCE gives rise to a claim for damages for breach of contract
iii.      1.2.3: Parties Conception Does Not Control
1.      Agency relations MAY BE IMPLIED even when the parties HAVE NOT EXPLICITLY AGREED to an agency relationship
2.      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 ostensibly makes for a Debtor-Creditor relationship
a.       Why don’t we want creditors controlling debtors?
i.      Creditors aren’t looking to maximize profits – just want to make enough to be paid what they are owed
ii.      Creditors don’t fully internalize the benefits and costs of the debtors actions
3.     Jenson Farms Co. v. Cargill, Inc. [p. 9] a.       Minn. 1981
b.      FACTS:
i.      Warren operated grain elevator, getting grain from farmers
1.      90% of the grain goes to Cargill, and Cargill extends loan so Warren can purchase the grain
2.      Remaining 10% is sold to the Minnesota Grain Exchange
c.       ISSUE:
i.      Did Cargill, by its course of dealing with Warren, become liable as a Principal on contracts made by Warren with plaintiffs?
d.      HOLDING:
i.      When viewing all relevant factors as a whole, there was sufficient evidence from which the jury could find that Cargill was Warren’s Principal.
e.       RULE:
i.      An Agency is created through a course of conduct where the facts, taken as a whole, show that:
1.      Party 1 has manifested consent that Party 2 be its agent;
2.      Party 2 has acted on behalf of Party 1; AND
3.      Party 1 exercises control over Party 2.
f.       REASONING:
i.      All 3 elements of Agency were present
1.      Cargill manifested its consent that Warren would be its Agent;
2.      Warren acted on Cargill’s behalf in procuring grain for Cargill as the part of its normal operations, which were completely financed by Cargill;
3.      Cargill exercised more than nominal control over Warren and was an active participant in Warren’s operation (as opposed to a simple financier)
a.       Factors Indicating Cargill’s Control Over Warren
i.      (1) Cargill’s constant recommendation to Warren by phone;
ii.      (2) Cargill’s right of first refusal on grain;
iii.      (3) Warren’s inability to enter into mortgages to purchase stock or to pay dividends without Cargill’s approval;

ecific action on the Principal’s behalf, the agent doesn’t have apparent authority to engage in such action merely because the agent asserts that it has such authority
2.      Agent’s Apparent Authority is authority that a reasonable Third Party would infer from the actions or statements OF THE PRINCIPAL (not those of the Agent)
a.       Third Party is required to do his or her due diligence in determining whether an Agent has authority
vi.      REASONING:
1.      Fact that Simpson was in possession of a blank check signed by White indicates some limited authority on her part to make a purchase
a.       BUT no evidence that White knowingly permitted her to enter into a contract to sell or that he ever held her out as having such authority
b.      Also, Simpson didn’t have implied authority to contract to sell Thomas a portion of the property that she had purchased, since the sale was not necessary to accomplish her assigned task of purchasing the entire tract
2.      Purchasing and Selling aren’t so closely related that a Third Party could reasonably believe that authority to do the one carries with it the authority to do the other
a.       Thomas was clearly concerned about Simpson’s authority, since he specifically asked her whether she was so authorized to sell
b.      Thomas made no attempt to contact White
c.       Thomas didn’t demand to see the written POA under which Simpson was acting
2. Inherent Authority
a.       Inherent Authority (Inherent Power)
i.      General Agent can bind Principal (whether disclosed or undisclosed) to an unauthorized contract, if Agent would ordinarily have the power to enter such a contract and Third Party doesn’t know that matters stand differently
1.      [Restatement (Second) Agency §§ 161, 194] b.     Gallant Ins. Co. v. Isaac [p. 17] i.      Ind. App., 2000
ii.      FACTS:
1.      TIMELINE
a.       June 2nd – Gallant (Principal) sells car insurance to Isaac (Third Party), through Thompson-Harris (Agent)
i.      Policy states that any changes would have to be authorized by the Principal
b.      December 2nd – Six months later, Isaac buys new car, which Thompson-Harris agrees to insure, effective immediately
i.      Agreed that Isaac would have to come fill out paperwork on December 5th
c.       December 4th – Isaac gets into car accident
d.      December 5th – Isaac goes to Thompson-Harris’ office to fill out the paperwork as planned, then reports her accident
2.      Gallant denies coverage because Thompson-Harris wasn’t authorized to renew Isaac’s policy without Gallant’s authorization