Agency & Partnership
Professor Bruce McGovern
Summer 2016
Learning Objectives
Describe the nature of the principal-agent relationship;
Distinguish the principal-agent relationship from other types of relationships;
Predict when—and why—an agent’s actions, omissions, and knowledge will be attributed to the principal;
Explain the legal consequences of the agent’s actions, omissions, and knowledge being attributed to the principal;
Define and differentiate several types of unincorporated business organizations—the general partnership, limited partnership, limited liability partnership, and limited liability company;
Demonstrate knowledge of how each type of business organization is formed;
Explain the legal consequences of forming, operating, and terminating each type of unincorporated business organization; and
Evaluate how a particular type of business organization can be appropriate or inappropriate for business participants
PART 1
Chapter 1: The Firm & Its Agents
A. The Agency Relationship
General Definition of Agency (ALL THREE MUST BE PRESENT)
Mutual consent
That one person will act on behalf of another
That that person will act subject to the other’s control
Restatement (Second) of Agency § 1(1)
Agency: the fiduciary relation 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.”
Restatement (Third) of Agency § 1.01.
Agency: 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
Characteristics of the Agency Relationship (helpful guidelines for determining agencyàNOT determinative, exclusive or conclusive; should be viewed within the context of the entire circumstances of the transaction or relations)
The agent’s power to alter the legal relations of the principal
“an agent holds a power to alter legal relations between the principal and 3rd persons and between the principal and himself.” RS2 14
The agent’s duty to act primarily for the benefit of the principal.
Derives from agent’s status: “an agent is a fiduciary with respect to matters within the scope of his agency.”RS2 14
The principal’s right to control agent
NOT necessary for principal to exercise physical control over every little detailà INSTEAD, the principal must have control over the RESULT or ULTIMATE OBJECTIVES of the agency relationship
Level of control a principal must exercise over the agent becomes more clear when it is contrasted with the control exercised by the master in a master-servant relationship
Principal-agent relationship: only a minimal degree of control is necessary—the right to specify the object of the agency.
Master-servant relationship: a greater degree of control is necessary—the right to control the details of the work.)
= a person who represents another in contractual negotiations or transactions akin thereto
= a person who is employed to perform personal services for another in his affairs, and who, in respect to his physical movements in the performance of the service, is subject to the other’s control or right of control.
**Persons who render services but retain control over the manner of doing it are NOT servants.
Control of principal over agent is LESS than the control of master over a servant
Primary determination of whether a principal-agent relationship exists involves ascertaining the parties’ intent, as evidenced by their agreements and actions:
2 fundamental elements for the creation of the agency relationship:
(1) some manifestation or indication by the principal to the agent that he consents to the agent’s acting for his benefit, and
(2) consent by the agent to act for the principal
Consent may be inferred from words or conduct, including acquiescence.
“An agent need not necessarily communicate his consent to the principal if, under the circumstances, embarking on the purpose of the agency is, itself, a sufficient indication of consent.”
B. Formation of Agency Relationships
Restatement (Second) of Agency § 26—Creation of Authority; General Rule
Except for the execution of instruments under seal or for the performance of transactions required by statute to be authorized in a particular way, authority to do an act can be created by written or spoken words or other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal’s account.
Exception for instruments under seal (doesn’t occur often): at common law, if something required a sealed instrument, then the principal must give authorization to the agent in a sealed instrument
Exception for the performance of transactions required by statute to be authorized in a particular way: when a state statute requires grant of authority to comply with specific formalities
A contract that must meet the statute of frauds does NOT automatically mean the grant of authority must also comply with SoF
Restatement (Third) of Agency §3.01—Creation of Actual Authority
Actual authority: created by a principal’s manifestation to an agent that, as reasonably understood by the agent, expresses the principal’s assent that the agent take action on the principal’s behalf.
Restatement (Third) of Agency §1.03—Manifestation
A person manifests assent or intention through written or spoken words or other conduct.
Restatement (Third) of Agency §3.02—Formal Requirements
If the law requires a writing or record signed by the principal to evidence an agent’s authority to bind a principal to a contract or other transaction, the principal is not bound in the absence of such a writing or record. A principal may be estopped to assert the lack of such writing or record when a third party has been induced to make a detrimental change in position by the reasonable belief that an agent has authority to bind the principal that is traceable to a manifestation made by the principal. (second exception from RS 2nd)
C. Principal’s Liability in Contract for Acts of Agents
Restatement (Third) of Agency §6.01—Agent for Disclosed Principal
When an agent acting with actual or apparent authority makes a contract on behalf of a disclosed principal,
(1) the principal and the 3rd party are parties to the contract; and
(2) the agent is not a party to the contract unless the agent and 3rd party agree otherwise
Comment b. Bases and Consequences of Contractual Liability when Agent Acts on Behalf of Disclosed Principal:
An agent acts on behalf of a disclosed principal when the 3rd party with whom the agent deals has notice that the agent acts for a principal and also has notice of the principal’s identity (see §1.04(2)(a)). An agent has power to make contracts on behalf of the agent’s principal when the agent acts with actual or apparent authority. This power is consistent with the bargain principle in contemporary contract law under which “the formation of a contract requires a bargain in which there is manifestation of mutual assent to the exchange and a consideration.” RS (2nd) Contracts §17(1). An agent enters into a contract on behalf of the agent’s principal by manifesting assent to an exchange that constitutes valid consideration. The 3rd party manifests assent to the exchange to the agent, having notice that the agent acts on behalf of a particular principal.
A principal may manifest assent to the agent’s power to commit the principal either to the agent or to 3rd parties. If the principal’s manifestation is made to the agent and the agent acts reasonably in accordance with the manifestation, the agent acts with actual authority. See § 2.01, 2.02, and 3.01. If the 3rd party reasonably believes that the agent acts with authority and that belief is traceable to a manifestation made by the principal to the 3rd party, the agent acts with apparent authority. See § 2.03 and 3.03. Actual authority does not require that apparent authority be present.
Restatement (Third) of Agency §6.05(1)
(1) If an agent makes a contract with a third party that differs from the contract that the agent had actual or apparent authority to make only in an amount or by the inclusion or exclusion of a separable part, the principal is subject to liability to the third party to the extent of the contract that the agent had actual or apparent authority to make if
(a) the third party seasonably makes a manifestation to the principal of willingness to be bound; and
(b) the principal has not changed position in reasonable reliance on the belief that no contract bound the principal and the third party.
General Rule: when an agent acts for a disclosed principal, they don’t become a party to the contract (unless otherwise agreed to between the agent and 3rd party)
An agency is either actual or ostensible
Actual Agency: when the principal appoints the agent
Agency: when the principal by conduct or want of ordinary care causes a third person to believe another, who is not actually appointed, to be his agent.
Ostensible agency for which a principal may be held liable must be traceable to the principal and cannot be established solely by the acts, declarations or conduct of an agent.
When an agent exceeds his authority: his principal is bound by his authorized acts ONLY so far as they can be plainly separated from those which are unauthorized
If a
er 2: Actual Authority of Agents
A. Express Actual Authority
RS (3rd) of Agency §3.01—Creation of Actual Authority
Actual authority is created by a principal’s manifestation to an agent that, as reasonably understood by the agent, expresses the principal’s assent that the agent take action on the principal’s behalf.
Looking at the mindset/belief of the agent
RS (2nd) of Agency §26—Creation of Authority: General Rule
… authority to do an act can be created by written or spoken words or other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal’s account.
RS (3rd) of Agency §1.03—Manifestation
A person manifests assent or intention through written or spoken words or other conduct.
RS (3rd) of Agency §2.01—Actual Authority
An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent so to act.
RS (3rd) of Agency §2.02—Scope of Actual Authority
(1) An agent has actual authority to take action designated or implied in the principal’s manifestations to the agent and acts necessary or incidental to achieving the principal’s objectives, as the agent reasonably understands the principal’s manifestations and objectives when the agent determines how to act.
(2) An agent’s interpretation of the principal’s manifestations is reasonable if it reflects any meaning known by the agent to be ascribed by the principal and, in the absence of any meaning known to the agent, as a reasonable person in the agent’s position would interpret the manifestations in light of the context, including circumstances of which the agent has notice and the agent’s fiduciary duty to the principal.
(3) An agent’s understanding of the principal’s objectives is reasonable if it accords with the principal’s manifestations and the inferences that a reasonable person in the agent’s position would draw from the circumstances creating the agency.
Statutory Form Powers of Attorney (note on p. 48-51)
Effective January 1, 2014, Texas has adopted a statutory form for durable powers of attorney that is substantially the same as that set forth in the Uniform Statutory Power of Attorney Act (2006), reproduced on pages 48-49.
Tex. Estates Code sec. 752.051
Adopts an “opt-in” approach that requires initials, rather than the former opt-out approach used in Texas.
: P (Mill Owner) authorized A (purchasing agent) to buy materials for upcoming order. A learns customer has cancelled the order. Does A still have the authority to purchase the materials? à NO
Note 6 (p. 46): If P has authorized an A to act on P’s behalf in certain matters, and A encounters unforeseen circumstances not covered by P’s …. (FINISH)
B. Implied Actual Authority
RS (3rd) of Agency §1.03 (see 2A)
RS (3rd) of Agency §2.01 (see 2A)
RS (3rd) of Agency §2.02 (see 2A)
RS (3rd) of Agency §3.01 (see 2A)
Implied Authority: actual authority circumstantially proven which the principal actually intended the agent to possess and includes such powers as are practically necessary to carry out the duties actually delegated.
Apparent Authority: not actual authority but is the authority the agent is held out by the principal as possessing. It is a matter of appearance on which 3rd parties come to rely.
Chapter 3: Power of Agents to Bind the Principal by Unauthorized Acts
A. Introduction
Q1: Did the 3rd party with whom the agent dealt believe that the principal had consented to the agent binding the principal?
Q2: Was that belief reasonable under the circumstances?
Q3: To what extent was the principal responsible for that belief?
Note: historic tendency of many courts to use the RS (2nd) categories, as well as ostensible authority, interchangeably.
