Business Associations Outline
Spring 2017 | Professor Johnson
CHAPTER 1: AGENCY
FORMATION OF AGENCY RELATIONSHIP
Elements à §1 of 2R (2nd Restatement of Agency)
Principal and agent must consent to the agency
Agent must act on behalf of the principal
Principal must exercise control of the agent
Three types of agency
Principal/agent
Master/servant
Employer/independent contractor
Elements may be inferred circumstantially
Gordon v. Doty – unintentional consent
Facts: Doty loaned car to Garst, football coach to transport members of team to game with the condition that he must drive the car. Garst had car accident where Gorton was injured. Gordon’s father sued Doty under agency theory.
Held: Coach was Doty’s agent, acted on her behalf when actually driving the car and manifestation of consent was from condition precedent she set.
The agency is implied from the conduct of the parties
Consent must be a mutual agreement but don’t need formal contract
Intent is irrelevant, compensation is irrelevant
Jenson Farms v. Cargill Inc. – unintentional control
Facts: Cargill loaned money to Warren Grain Co. and eventually took over the day-to-day operations. Cargill is the principal, plaintiffs are farmers in contract with Warren who had no interaction with Cargill.
Held: When a creditor assumes paternalistic / de facto control of debtor’s business they are liable as a principal for acts of debtor in connection with business à §14(o) of 2R
Must be affirmative control, passive/negative is insufficient
Affirmative = directing Warren what to do
Passive = rejecting plans that Warren comes up with
If the agent disregards the principal’s control
Warren did not implement some of Cargill’s suggestions
Still found as an agent relationship though
Termination of Agency Relationship
Agreement of the parties = the k between principal and agent states when it ends
Agency at will = at common law, agency relationships are presumed to be “at will” and thus terminable at any time by either party after notice
Revocation: principal revoked authority of agent to act
Renunciation: agency notifies principal that they quit
Fulfillment of the purpose = once task has been completed, relationship ends
Operation of law = termination occurs automatically (e.g. upon death of party)
Liability of principal to third parties in contract
Issue: whether the principal is bound by the agent’s actions from a contractual agreement where the agent has some form of authority
§144 “A principal is subject to liability upon contracts made by an agent acting within his authority if made in proper form and with the understanding that the principal is a party.
“Authority” §7 = you have been given the consent to do something on behalf of principal, this is what legally binds the principal
“Power” §6 = an agent has the capacity to make something happen, even without knowing if he actually had the authority to do it yet
Actual Authority
Principal bears all the risk for the actions of the agent, agent is not liable to the principal or to third parties. But if agent breaches a fiduciary duty in acting, he will be liable to the principal for any detriment.
Two types:
Express: oral/written statement from principal saying that agent can fulfill a certain duty (e.g. you may hire someone to assist you)
Implied: circumstantially proven by conduct that the principal intended the agent to possess authority
Two possible sources:
Past conduct = when agent believes he has actual authority based on past dealings with the principal (he let me do this last time) or in general (usually to do what he asked me, I need to do this)
Incidental = principal tells agent to do x, but in order to do that must also do y, so it’s implied that principal wants agent to do x and y
Mill St. Church v. Hogan
Facts: Church hired Hogan to paint building, Hogan hired his brother Sam to help bc he has done that in the past. Sam gets injured and files workers comp. claim and needs to be an agent to succeed.
Held: Hogan had implied authority to hire Sam bc it was done in past.
Apparent Authority
Arises from a manifestation from the principal to a third party that the agent has the authority to perform the act in question even when the agent did not have the actual authority to do so. Focus on what the third party believed à §8
Mill St. Church v. Hogan
Facts: Church hired Hogan to paint building, Hogan hired his brother Sam to help bc he has done that in the past. Sam gets injured and files workers comp. claim and needs to be an agent to succeed.
Held: Hogan had apparent authority bc Sam (as a third party) believed that Hogan had the authority to hire him. Principal held out the agent as having the authority.
Inherent Authority
When an undisclosed principal grants powers to agent that are reasonably construed as duties principal would perform. Third party reasonably believes that agent is the principal bc the third party has no notice that principal exists/agent is acting for a principal. à §8A
Watteau v. Fenwic
he was not an employee but a con artist taking her money, sued store alleging privity of contract on basis of agency.
Held: While there was no evidence that furniture store created the impression that the imposter worked for them, court holds them liable in interest of justice bc they have a duty of care to make sure all sales are legitimate.
Liability of principal to third parties in tort
Issue: whether the principal may be found liable for the torts of an agent, even though the principal himself was not negligent.
§219(1) 2R à “A master is subject to liability for the torts of his servants committed while acting in the scope of their employment.”
Employee vs. Independent contractor à §2; see §220(2) on p. 6 of supp. for factors to consider
Servant/employee: an agent performing services in the master’s affairs whose physical conduct is controlled or is subject to the right of control (does not need to be an actual exercise of control) by the master
Independent contractor: person who agrees to carry out some task but is not subject to the principal’s control. Principal sets forth the desired result but does not tell agent how to achieve that result.
Types of independent contractors
Agent-type
Subject to limited control by principal with respect to chosen result
Agent has power to act on principal’s behalf
Example: carpenter hired to build garage for homeowner and agrees to buy lumber for the project on credit account of homeowner – he is now acting on behalf of the homeowner
Non-agent type
Less control on principals part
Agent has no power to act on principal’s behalf
Example: carpenter hired to build garage for homeowner, carpenter simply responsible for getting job done and is not to take directions from homeowner
Franchise Arrangements: Substantial Risk & Control Test
Tort liability is assigned to a franchisor who exercises substantial control over daily operations and/or when they carry a substantial risk of loss in the business of the franchisee as a result of the employer-employee relationship that this creates
