Business Organizations
Prof. Baynes Spring 2012
I. Agency
a. Overview
i. Problems in agencies arise in the following three types of issues
1. Problems between the agent and the principal
2. Problems involving a third party trying to hold the principal to an agreement based on the agent’s conduct or on an express agreement
3. Problems involving a third party trying to hold a principal liable for the torts of an agent
ii. Type Types of Agency Relationships (generally the more control the principal has, the more liable he is)
1. Principal and Agent
2. Master and Servant: narrow type of agency relationship, master has more control over agent’s physical conduct and day to day operations than a principal would have
3. Employers/Proprietor and Independent Contractor
iii. Proving an Agency:
1. The parties asserting that there is a principal agency relationship has the burden of proving it.
a. Proving agency does not depend on the intent of the parties
i. May have agency without intending to do so
ii. May intend to have agency without meeting the factual elements necessary
2. There must be an agreement between the parties that the agent will undertake some act on behalf of the principal, with the understanding that the principal is to remain in control of the undertaking
iv. Fiduciary Relationship
1. Every agent is a fiduciary
a. A owes a high standard of care to P
b. Fiduciaries must avoid conflicts of interest
b. Who is an Agent? Agency is the fiduciary relationship that results from the manifestation of consent (objective standard-does not matter what P intended, but rather on what A believed P intended) that A shall act on behalf of and subject to the control of P.
i. Gorton v. Doty:
1. D offered high school football coach her car to transport team to and from game; coach got into accident while driving D’s car
2. Coach was an agent of D; D consented to coach acting on her behalf in driving her car to and from the game; she volunteered use of the car with the express condition that he drive it
a. There was no mention of loaning or borrowing
b. Both parties were consenting; no K needed
3. Further, ownership of a car alone, regardless of the owner’s presence in the car at the time of the accident, establishes a prima facia case against the owner because there is a presumption that the driver is the owner’s agent.
4. How would you advise the teacher next time?
a. Say NO!
b. Indemnity
c. Draft a contract
d. Add coach to her insurance.
ii. Gay Jenson Farms v. Cargil:
1. D enter into K with W; D loans money to W and W appointed D as its grain agent; D had a right of refusal to purchase grain sold by W; W purchased grain from local farmers and shipped D 90% of the grain it purchased; W received its funds and paid its expenses using drafts drawn on D thru banks; both W and D’s names were on the drafts; proceeds from W’s sales were deposited with D; under the K, W would provide D with annual financial statements and either D would keep the books for W, or an independent firm would perform an audit of W; D determined that W financial statements had been falsified; 86 farmers (P’s) sued to recover $2 million in payments for grain sold to W, D was named as a defendant, alleging that D was a principal and W was an agent
2. When an agency relationship is to be proven by circumstantial evidence, the principal must be shown to have consented to the agency since one cannot be the agent of another, except by consent of the latter
3. Court held this was a principal agency relationship
a. D maintained too much control over W
b. A creditor who assumes control over a debtor business may become a principal without consenting
c. Regardless of the terms of the K, when a creditor assumes de facto control over his debtor, he becomes the principal
i. D’s actions rose to the level of de facto control
1. W was not able to make capital investments in excess of 5k, declare a dividend or sell or purchase stock without D’s permission
2. D reviewed W’s operation, expenses and recommended that certain actions be taken
3. D provided W with drafts and forms with D’s name imprinted on them
4. D maintained a right of entry onto W’s premises to carry out checks and audits
ii. The more in debt, the more control there was!
d. By directing W to implement its operational recommendations, D consented to the principal agency relationship. W in turn acted on D’s behalf in procuring grain
e. Nor was this a buyer/supplier relationship; under the Restatement (2nd) § 14K it must be shown that a supplier has an independent business before it can be proven that he is not an agent; here there was no independent business
4. Court also mentions that under Restatement (2nd) § 14, a creditor who exercises veto power over business acts of his debtor does not become a principal. If he takes over the management of the business, oversees contracts, this is considered de factor control and he is a principal
5. How would you advise D?
a. Don’t take control
b. Just exercise veto power, this doesn’t rise to level of de facto control
§1 Agency; Principal Agent
(1) Agency is 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.
(2) The one for whom action is to be take is the principal.
(3) The one who is to act is the agent.
§2 Master; Servant; Independent Contractor
(1) A master is a principal who employs an agent to perform service in his affairs and who controls or has the right to control the physical conduct of the other in the performance of the service.
(2) A servant is an agent employed by a master to perform service in his affairs whose physical conduct in the performance of the service is controlled or is subject to the right to control by the master.
(3) An independent contractor is a person who contracts with another to do something for him but who is not controlled by the other nor subject to the other’s right to control with respect to his physical conduct in the performance of the undertaking. He may or may not be an agent.
c. Liability of Principal to Third Parties in Contract
i. Once you have established an agency; a third party wanting to hold the principal liable must demonstrate the scope of A’s authority to act for P. 5 sources of authority to bind parties:
1. Express Authority:
a. Relationship between P and A. P tells A, “You go do this.”
i. Go buy grapes
b. In the agreement
2. Implied Authority:
a. Derived from express authority
i. You go to buy grapes, and you run out, so you go buy more
b. Necessary to carry out duties delegated
3. Apparent Authority: P may act in such a way that a third person reasonable believes that someone is the P’s agent
a. Has to be reasonable reliance by the third party
b. Not an actual authority like express/implied
c. There must be some holding out by P that causes third party to reasonably believe
4. Inherent Authority: person who holds position usually has this power
a. i.e. president of a company
5. Ratification: This occurs when the P accepts the benefits or otherwise affirms the past conduct of someone purporting to act for the P, even though no actual principal/agency agreement exists.
a. Causes the agents act to be treated as if the principal had authorized it at the outset
b. Ratification requires intent and full knowledge
c. “Go on with your bad self”
§7 Authority
Authority is the power of the agent to affect legal relations of the principal by acts done in accordance with the principal’s manifestations of consent to him
§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, authori
into Ks on D’s behalf, this was never have authority to speak for the company. K was a salesperson for D. An agent has apparent authority to do things that are usually and proper to the conduct of the business he is employed to conduct. It’s reasonable for a third party to assume that a sales person has authority to bind his employer to sell. M had acknowledged in an intra-company memo that all communications to J should be channeled thru K, and M directed K to submit the document in question to J
v. Ratification→
1. Botticello v. Stefanovicz:
a. H and W owned a farm as tenants in common. P made an offer of 75k to purchase the farm. W told P that she could never sell the farm for less than 85k. P and H later agreed on a price of 85k for a lease with an option to purchase. H’s attorney prepared agreement and it was then signed by H and P. P’s attorney did not conduct a title search and was unaware of W’s legal interest. W did not indicate to P, P’s atty or his own atty that he was acting as an agent for his wife. P took possession of the property and made substantial improvements. He then attempted to exercise his option to purchase. H and W then refused to honor the option
i. Was H acting as an agent for W?
1. Proving agency is a question if fact and are not proven by marital status alone, nor by the fact that parties own land jointly. It must be shown that principal consented to agent acting for her, that agent accepting the undertaking, and the parties understood that principal would be in control
2. D’s discussed selling the farm, W’s statement that she would not sell for less than 85k is by no means the equivalent of an agreement to sell for that amount. Even though H customarily handles business for the couple, H had never signed any documents as an agent of M. M had signed deeds and mortgage paperwork.
ii. Did W ratify the K by her conduct?
1. Ratification requires acceptance of the results of a prior act with intent to ratify and with full knowledge of all the material circumstances. While W observed P using the property and making improvements and received payments from P, this is not enough to indicate that he had knowledge of the terms of the agreement. H had the power to lease his undivided ½ interest in the property and there is nothing to indicate W had any reason to believe that the K was for anything more than that
2. Ruth v. Evans
a. D needed gravel to perform a K; subcontracts to independent contractor, who hired workers; Contractor was not D’s agent and had no authority to bind him; weighing slips bore D’s name and were delivered to him daily; D exercised no supervisory control over the operation; P was hired by the contractor and was told that D would pay him; P goes to D for payment; D assures P that he would pay P as soon as affidavit was submitted to show the work had been performed; P was never paid, and refused a 53% settlement offer; is a principal bound by the acts of those without authority to act on his behalf after he has subsequently ratified the act? Yes
b. Ratification is the subsequent approval of an unauthorized act and relates back in time and makes binding the original act. No new considered is required since the act performed on the basis of agent’s alleged authority are sufficient. Does not matter that the party originally making the promise was not principal’s agent; Ratification supplies the agency relationship; by agreeing to pay P, D approved the original hiring.
