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Agency, Partnership and the LLC
Southern Illinois University School of Law
Mocsary, George A.

Agency & Partnerships Mocsary Fall 2016
What A&P is about:
Structuring productive relationships
Serving interests, allocating risks, costs, burdens
Navigating layers of regulation
Law (state & federal)
Market (private ordering)
Avoiding transaction costs
Who is an Agent?
Definition of Agency—RST § 1.01. 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 act. Broken down:
Natural persons and legal persons
Manifestation: the principal must manifest to the agent the principal’s consent that the agent should act on the principal’s behalf and subject to the principal’s control.
The manifestation of consent can be
In writing
Implied from the parties’ conduct.
Conversely, the agent need not communicate its consent to so act to the principal
The burden of proof is on the party claiming an agency relationship exists.
The existence of an agency relationship may not be presumed
Consent: there must be an agreement between the principal and agent in order for an agency relationship to come into existence, but a contract is not needed.
The requisite consent may exist even where the parties are unaware that their relationship constitutes an agency relationship and did not intend for their relationship to carry with it the legal consequences of creating an agency relationship.
Every agency relationship requires knowing consent by both parties
The principal must consent that the agent shall act on the principal’s behalf and subject to the principal’s control.
The agent must consent to so act, and if they do so, they have an agency relationship, even if they did not “consent” to the legal consequences that follow.
On behalf of principal:
The agent must be acting primarily for the principal’s benefit, not for the agent’s own benefit or that of another party.
A principal need not exercise physical control over the actions of its agent so long as the principal may direct the result or ultimate objectives of the agent relationship.
Control may be found so long as the principal is able to specify the task the agent is to perform, even if the principal in unable to ensure that the agent carries out the task
General Cases
Gorton v. Doty (teacher lent coach car and coach got in wreck and injured passenger, Gorton (third party), sues owner of the vehicle)
The agency relationship may be purely gratuitous
It suffices that the principal have the power to control the end result of the agent’s actions, which power may be exercised by prescribing the agent’s obligations before or after the agent acts
The teacher said the coach could use the car if he drove it
The court assumed that the coach agreed to act on her behalf and subject to her control based on the simple fact that he used the car and was driving it at the time of the accident.
How could the teacher avoid liability in the event of an accident?
Expressly state that the coach is not her agent, or put it in writing
This probably wouldn’t have changed the outcome though
The best advice is to make sure that her auto insurance policy covers accidents caused by people who use her car with her permission.
The owner of a car is clearly the person best able to insure against these sort of losses
MJ & Partnerships Restaurant Limited Partnership v. Zadikoff
To determine whether an agency relationship exists the court must consider two factors:
Whether the principal has the right to control the manner and method in which the agent performs his services, and
Whether the agent has the power to subject the principal to personal liability
Ct found that Z was an agent
The existence of an agency relationship is determined based on actual practices, not reference to a written agreement
His actual relationship, the control he had over the company, and the control over him by the principal makes him an agent of the company
Rose v.Giamatti
Pete Rose banned from baseball for betting on his own team
Rose challenges due to lack of complete diversity
Court held he is challenging the commissioner’s inquiries, diversity exists
Cannot sue the Reds or MLB
A. Gay Jenson Farms Co. v. Cargill, Inc.
The Minnesota supreme court held that an agency relationship did exist between Cargill and Warren because:
Warren acted on Cargill’s behalf by procuring grain over which Cargill had a right of first refusal, in operations totally financed by Cargill’s line of credit.
Cargill had control over Warren, as evidenced by Cargill’s frequent recommendations as to how Warren’s business should be conducted
Cargill had informed Warren that “since Cargill’s money was being used, Warren should realize that Cargill had the right to make some critical decisions regarding the use of the funds.
Cargill’s regional manager met with Warren both at monthly planning meetings and on a day-to-day basis.
Cargill argued that its relationship w/ Warren was not one of principal and agent, but of creditor and debtor, but the indicia of control indicated the existence of an agency rather than a mere creditor-debtor relationship
This was different from ordinary bank financing b/c Cargill was an active participant in Warren’s operations rather than simply a financer.
The court also rejected Cargill’s contention that it should be regarded as a supplier and buyer.
It must be shown that the supplier has an independent business before it can be concluded that he is not an agent. In this case, Warren had no independence, b/c of Cargill’s total financing of Warren and its almost total purchases of Warren’s market grain.
The court concluded that if Cargill was to get the benefits of ownership, it should also suffer the obligations of ownership; namely, legal status and corresponding liability as a principal of its agent.
RST 2d §140 – a creditor who assumes control of his debtor’s business may become liable as principal for the acts of the debtor in connection with the business. The liability of a principal to a 3rd person upon a transaction conducted by an agent, or the transfer of his interests by an agent, may be based upon the fact that: (1) the agent was authorized; (2) the agent was apparently authorized; or (3) the agent had a power (control) arising from the agency relation and not dependent upon the authority or apparent authority
Control: 90% of qustions of whether an agenc

contrary instructions from the principal) has the authority to use all means reasonably necessary to carry out a particular result expressly mandated by the principal.
Can arise from custom
If it is customary in the trade or community for a certain type of agent to have certain powers, then the agent has implied actual authority to exercise such powers unless the principal directs otherwise.
Can arise from a pattern of conduct between the particular principal and agent in question.
If the principal knows that the agent has engaged in a pattern of behavior and the principal fails to object to the continuance of that behavior, the agent has implied actual authority to continue to engage in that type of transaction. (Mill Street- had hired Sam in the past)
Prior acts of the principal
If the agent reasonably believed, on the basis of the prior course of conduct, that the transaction was authorized.
Calabresi & Melamed
What is the best way to set default rules?
Economic efficiency – maximize value
Administrative efficiency – minimize costs
Types of entitle ments – who, if anyone should decide an outcome?
Voluntary transactions (property rule)
Courts/the state (liability rule)
No one (inalienability)
Least cost avoider
Principal’s liability in Contract
Rstmt (first, second) § 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
Rstmt (third) §§ 6.01-6.02: look up on your own… not gonna happen
Actual (Implied) Authority Cases
Mill Street Church of Christ v. Hogan
Church hires Bill to paint church, with assistance of Petty if needed. In past, Church allowed Bill to hire brother Sam if needed. Bill talks to church elder about help (elder suggests Petty, but doesn't tell Bill to).Sam injured working. Church didn't know Bill had hired Sam.
A person possesses implied authority as an agent to hire another worker where such implied authority is necessary to implement the agent's express authority.
The court held: First, that Bill had implied actual authority to hire a helper, because the job required two men. Second, Bill had implied actual authority to hire Sam based on the Church’s acquiescence in his past practice.
The existence of the prior similar practice of the church allowing the painter to hire his brother created the basis of implicit authority of the agent to hire him again.
In order to eliminate that authority, the Church needed to specifically instruct Bill not to hire Sam and to hire Petty