Business Organizations Professor Baynes
Spring 2007
Agency
Agency is defined as the fiduciary relationship that results from the mutual manifestation of consent that one person (the agent) shall act on behalf of and subject to the control of another person (the principal).
§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 taken is the principal
(3) The one who is to act is the agent
i. General Points—Policy
One of the major advantages of agency is that it allows people to get more things done—it allows them to have others working in their stead. The downside is that agency theory makes a principal liable for his agent’s actions. This theory increases the principals liability but it is based on the premise that the principal derives the benefit of the agent’s actions, and the agent is standing “in the shoes” for the principal—thus the principal is ultimately responsible.
Note:
– No compensation or consideration is required to create agency, but there seems to be a need for some benefit to the principal. One reason for such is that, otherwise, we would be vulnerable to inadvertently creating agencies all the time.
a. Debtor-Creditor Relationships
These kinds of relationships often feature a creditor exerting some control over the debtor. Too much control to save the loan might create an agency relationship. See Cargill
The cornerstone of principle/agency relationship is control of day-to-day operations. Make sure you are not so paternalistic.
Ways to limit/control agency problems
· Screen partners better. Do not extend more credit when there are existing problems
· Ask owner to sign a personal guarantee.
· Avoid appearance of controlling the other entity—not appointing a manager to oversee the other entity’s daily operations.
· One may be involved without creating a principal-agent relationship—for instance, a creditor may exercise veto power over the business acts of his debtor. The line is crossed however at the point where the creditor assumes de facto control over the conduct of his debtor.
Issues of Authority
§ 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 contactor is a person who contracts with another to d
d implied authority to hire his brother to work in the church because it had given him that permission in the past. Court said that if the church really wanted a particular person working alongside Hogan they should not just have suggested it but they should have specified this.
3. Inherent authority: It is determined by the agent’s status itself. Is it customary for someone in agent’s position to have the authority in question? A store manager who orders rock salt: do store managers in this industry usually have this authority?
Avoiding problems—for a 3rd party to protect himself in this area he should get in writing that the supposed agent has the authority/power to make the purported agreement/promise.
4. Apparent authority: A principal will be bound by his agent’s unauthorized acts if the principal has manifested to a third party, through words or conduct that the agent has authority, and the third party reasonably relies on this manifestation. Apparent authority has two elements: a) manifestation from principal; b) reasonable reliance.
Two questions to ask: 1) Has the principal manifested assent to the agent having the authority in question? And, 2) Did the 3rd party reasonably rely on these manifestations?
