Business Associations
Saint Louis University Law School
Professor: Constance Wagner
Fall 2016
AGENCY
Agency Formation- Who is an Agent?
Test for Agency Formation (R. 2nd of Agency, § 1; R. 3rd of Agency, §1.01)
Agency is the fiduciary relationship that results in:
(1) Manifestation of consent (assent) by principal
(2) That the agent shall:
(a) act on principal’s behalf; and
(2) subject to principal’s control
(3) Consent (assent) by the agent so to act for the principal
“Agency is the relationship 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”
Exists in Three Forms
(1) A principal and an agent*
(2) A master and a servant
(3) Employer or proprietor and an independent contractor
Gorton v. Doty
Principal manifested consent by telling agent that he could use the car if he personally drove it. This also satisfied the elements of (a) acting on principal’s behalf, and (b) subject to the principal’s control, by telling him that kids could not drive it. Finally, the agent consented by actually driving the car.
Rule: Where one undertakes to transact some business or manage some affair for another by authority and on account of the latter, the relationship of principal and agent arises
There does not need to be a contract, exchange of compensation or formal business relationship for creation of an agency relationship; just agreement
Ownership of a vehicle establishes a prima facie case against the owner that the driver is the agent, regardless of whether or not the owner is present.
Dissent- Agency means more than mere passive permission. It involves request, instruction, and or command. It was a gratuitous bailment. Just lent the car.
Hypothetical #2
A restriction to not act in a way that harms the principal’s reputation or damage the product is likely not a strong enough to create “control” by the principal
Formal Relationships that May Give Rise to Agency
Test for Agency Formation in Creditor/Debtor Situation (R. 2nd of Agency, §140)
Creditor who assumes control of his debtor’s business may become a principal with liability for acts and transactions of debtor in connection with his business (Veto power is OK)
If creditor takes over management of the debtor’s business and directs what contracts may or may not be made, the court will likely find an agency relationship exists (de facto control)
Test for Agency Formation in Buyer/Supplier Situation (R. 2nd of Agency, §14K)
One who contracts to acquire property for a 3rd person and convey it to another is the agent of the other if agreed that he is to act primarily for the benefit of the other and not for himself.
Comment lists out factors indicating that one is a supplier, rather than an agent
(1) Supplier receives a fixed price for the property irrespective of the price paid by him
(2) Supplier acts in his own name and receives title to property which it thereafter transfers
(3) Supplier has an independent business in buying and selling similar property (Important)
Jenson Farms v. Cargill
Plaintiffs are 86 crop farmers who sold their grain to Warren Grain & Seed, a grain elevator, who is in a financing agreement w/ Cargill. Warren Grain & Seed defaulted on its K with the farmers and Cargill was brought in as a defendant under the principal/agent theory of liability
Factors: Cargill constantly made recommendations to Warren, Cargill had right of first refusal on grain, Warren was limited in independent dealings, Cargill’s correspondence and criticism of Warren’s finances, salaries, inventory, Cargill provided “strong paternal guidance,” provided financing, etc.
Agency or Creditor?
D argues that it was merely a creditor of Warren, and that an agency relationship could not exist because D never consented to the agency
Rule- A creditor who assumes control over his debtor’s business may become liable as principle for acts of the debtor in connection with the business (R. 2nd of Agency §140)
Comment: “merely exercising veto power…by preventing purchases or sales” insufficient standing alone; & “creditor becomes a principal when it exercises de facto control over conduct of debtor.” (hands on day-to-day control is what the court is looking for)
D had considerable control over Warren and by directing Warren to implement its operational recommendations, D manifested consent to the agency relationship
Was not at arms length here – was very intimate and personal (Cargill was essentially running Warren)
Agency or Buyer-Supplier
D’s other argument is its relationship w/ Warren was that of buyer-supplier
Rule- Under Restatement 2nd of Agency, it must be shown that a supplier has an independent business before it can be concluded that he is not an agent [See § 14K and factors above*]
Here, Warren’s entire operation was financed by D, and Warren sold almost all of its grain to D
Holding
Cargill by its control and influence over Warren, became liable as a principal in contracts made by Warren with plaintiffs
Liability of Principal to Third Parties in Contract – Attribution Rules
Two Questions
(1) Is there an agency-principal relationship?
(2) What kind of authority, if any, does the agent have?
Actual
Express
Implied
Apparent
Inherent
Estoppel
Ratification
(1) Actual Authority (Express or Implied)
Authority in General (R. 2nd of Agency, §7)
Authority is the power of the Agent to affect legal relations of principal done in accordance with principal’s manifestation of consent to agent
Test for Creation of Authority (R. 2nd of Agency, §26)
(1) Objective manifestation of principal
Where the problem is with finding express; where implied comes in to fill the gap
(2) Agent’s reasonable interpretation of that manifestation
(3) Agent’s belief that she is authorized to act for plaintiff
Test for Implied Authority (R. 2nd of Agency, §35)
Restatement 2nd of Agency §35- When Incidental Authority is Inferred
Acts which are incidental, usually accompany, or are reasonably necessary to accomplish a transaction
Fills the gaps in express authority
*Reasonably inferred from circumstantial evidence (present/past conduct of principal)
Focus on the agent’s understanding of his authority
Specific conduct by the principal in the past permitting the agent to exercise similar powers is crucial
Mill Street Church v. Hogan
The agent (Bill Hogan) of the principal (The Church) hired a helper (Sam Hogan) to help paint the church without Church knowledge. Only way Sam Hogan can file Work Comp claim is if Bill Hogan had authority to hire him
Implied Authority + Rules – The agent reasonably believes because of past or present conduct of the principal that the principal wishes him to act in a certain way or to have a certain authority
The burden is on the party that is trying to use the principal of authority
Important to focus upon the agent’s understanding of his authority
The existence of prior similar practices and specific conduct by the principal in the past permitting the agent to exercise similar powers is crucial
Includes such powers practically necessary to carry out delegated duties
Holding- Implied authority existed because Church had allowed Bill Hogan to hire his brother in past; job required more than one person; and Sam Hogan reasonably believed that Bill Hogan had the authority to hire him (both were even paid)
Express authority d
the business over a course of time in many different scenarios (CEO, General Manager); full blown authority to bind a corporation
§195A: Unauthorized Acts of Special Agents
A special agent for an undisclosed principal has no power to bind his principal by contracts or conveyances which he is not authorized to make unless:
(a) The agent’s only departure from his authority is:
(i) in not disclosing his principal, or
(ii) in having an improper motive, or
(iii) in being negligent in determining the facts upon which his authority is based, or
(iv) in making misrepresentations; or
(b) The agent is given possession of goods or commercial docs with authority to deal with them
Courts are reluctant to use inherent authority when they are SPECIAL AGENTS because they don’t have full authority to run the business like GENERAL AGENTS do
Watteau v. Fenwick
Ds bought a hotel and pub from Humble, kept him as manager and gave him authority to buy only certain items; kept his name on the sign. Humble bought on credit certain items that the Ds told him not to buy
Actual authority cannot be used when principal expressly tells agent he cannot do something
Apparent cannot be used because 3Ps did not know about the dormant principal; no objective manifestation of authority on behalf of the Ds to the 3P
Holding- An undisclosed principal is liable for the acts of its agent taken in the ordinary course of business even if the principal did not authorize the agent to act, nor held out the agent as his agent (Mischievous consequences could result if held otherwise)
*Example of legal principle filling the gap, otherwise creditor would be left unpaid
Ds enabled agent to hold himself out as proprietor of business, P showed that goods supplied were such ordinarily used in business and within scope of authority
*Note: this is an English case, but American courts also recognize the inherent authority of agents (basis of RS2 rules outlined above)
Nogales v. Arco
Sales rep for Arco entered into discount deal with Nogales, subsequent breach of K claim
Arco conceded that the man acting on their behalf was an agent, but Arco claims the agent that allegedly promised the discount was not authorized to promise such a discount (not a question of agency, but of authority)
Actual Authority- Arco told its agent that it could not authorize such discounts
Apparent Authority- Not met because circumstances did not sufficiently indicate to a reasonable person in 3P position that principal had manifested that the agent had authority to enter transaction
Inherent Authority- turns on what party reasonably believes & “the customary authority of the agent” in a similar position
Principal of estoppel to protect 3Ps from agent conduct
Holding- The court found for Arco (D) because actual and apparent authority were not present, and inherent authority was never in the jury instruction
However, because of scope of agent’s authority, the Court found that he was a general agent and held the inherent authority to bind the principal
