Business Associations Outline

BUSINESS ASSOCIATIONS
Scarlett, Fall 2008

I. AGENCY

Summary

First, did an agency relationship exist?
If so, did the agent have authority (actual, apparent or inherent)?

A. Does an Agency Relationship Exist?

“Agency”: The principal is responsible for the acts of his agent. Gorton

i. Two-Step Test for Agency: Agency is the fiduciary relation which results from the manifestation of consent by one person (the principal) to another (the agent) that the other shall: a) act on his behalf and b) subject to his control, AND
1. “Manifestation”: doesn’t have to be written or oral (nor aware that relationship constitutes an agency). Can be inferred from conduct. But the manifestation by or attributable to the principal must somehow reach the agent.
a. Agreement, but no K necessary: In order to create an agency there must be an agreement, but not necessarily a K between the parties. The relationship of the parties does not depend upon what the parties themselves call it, but rather in law what it actually is.
ii. consent by the other to so act. Gorton (Look at circumstantial evidence to determine if these two steps have been met.)
1. Objective standard for determining consent: The courts use an objective standard for determining consent: Has the “principal” done or said something that the “agent” reasonably interpreted as consent that the “agent” would act for the “principal”? Has the “agent” done or said something that, reasonably interpreted, indicated agreement to act?
2. Compensation: It is not essential to the relationship of principal and agent that either receive compensation. Gorton.

Burden: Where a party seeks to impose liability upon an alleged principal on a K made by an alleged agent, the party must assume the obligation of proving the agency relationship. It is not the burden of the alleged principal to disprove it.

Creditor/ Debtor relationship v. Principal/Agent relationship: The point at which a creditor becomes a principal is that at which he assumes a de facto control over the conduct of his debtor, whatever the terms of the formal K with his debtor may be. Factors must be viewed in light of all the circumstances. Cargill.

B. Liability of Principal to Third Parties in Contract
Rst 144: a principal is subject to liability upon Ks made by an agent acting w/in his authority if made in the proper form and w/ the understanding that the principal is a party

Summary: To hold principal liable on contract, plaintiff (third party) must prove

agency relationship existed AND
what kind (or kinds) of authority agent possessed

i. Hierarchy of authority: An agent can have the power to bind a principal through:
1. actual authority (express or implied);
2. apparent authority;
3. inherent authority;
4. estoppel; AND/OR
5. ratification.

“Authority”: Authority is the power of the agent to affect the legal relations of the principal by acts done in accordance with the principal’s manifestations of consent to him. RS §7.

Do the legal consequences of an agent’s acts depend on the type of authority the agent possessed? No. Authority is authority. If the agent was authorized (under any of the forms), then the principal is bound.

Three Types of Authority: EXAM: All of these categories overlap. A lot of times you will find more than one.

Actual authority: “Actual authority” is authority that the principal, expressly or implicitly, gave the agent.

i. Elements:
1. an objective manifestation by the principal;
a. Express actual authority: look at agreement
b. Implied actual authority: Implied actual authority is the act of putting agent in such a position leads agent to reasonably believe he has authority
i. Incidental: agent has authority to use all means reasonably necessary to carry out result mandated by principle
ii. Custom: if it is customary in trade/community for this type of agent to have certain powers, then the agent has it
iii. Pattern of conduct: if P knows A has engaged in pattern of behavior and P fails to object to continuance of it, then A has authority to continue it
2. followed by the agent’s reasonable interpretation of that manifestation;
3. which leads the agent to believe that it is authorized to act for the principal. RS §26.

Apparent Authority: An agent has apparent authority sufficient to bind the principal when the principal acts in such a manner as would lead a reasonably prudent person to suppose that the agent had the authority he purports to exercise. Lind; Ampex; RS §8. (Apparent authority can co-exist with actual authority.)

i. The power to affect the legal relations of another person by transactions w/ 3rd persons, professedly as an agent for the other, arising from and in accordance w/ the other’s manifestations
ii. Elements: Creation of apparent authority involves:
1. an objective manifestation from one party (“apparent principal”),
a. “Objective manifestation”:
i. direct communication by P to T
ii. inaction by principal
iii. *placing agent in position with customary powers (“implied apparent authority”).
iv. principal authorizes agent to state he is authorized
v. course of conduct
b. Issue: What were principal’s manifestations? This will factor into whether it was reasonable for third party’s belief was reasonable.
2. which somehow reaches a third party, AND
3. which causes the third party to reasonably believe that another party (“apparent agent”) is indeed authorized to act for the first party (i.e., for the apparent principal). RS §27
iii. Implied apparent authority: the act of putting agent in such a position that leads third party to reasonably believe agent has authority
1. Implied authority is “a kind of authority arising solely from the designation by the P of the kind of agent who ordinarily possesses certain powers” (Lind)
iv. What company can do to avoid apparent authority:
1. make some requirement that agreements w/ 3P be in writing and signed by President
2. employee manual, setting forth who has authority to do x, y, z…
v. What should 3P do?
1. Confirm that person has apparent authority
2. Put the K in writing

Inherent Authority: “Inherent agency power is the power of an agent which is derived not from authority, apparent authority or estoppel, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent.” Restatement § 8A.

i. the principal is liable for all the acts which are w/in the authority usually conferred to an agent of that character-Watteau
ii. Elements: Under the doctrine of inherent agency power:
1. if a general agent,
a. “General agent”: If a principal authorizes an agent “to conduct a series of transactions involving a continuity of service,” the law calls the agent a general agent. RS §8A, cmt a. (Example: copy clerk has inherent authority to order supplies of paper.)
b. “Specific agent”: If a principal authorizes the agent only to conduct a single transaction, or to conduct a series of transactions that do not involve “continuity of service,” then the law calls the agent a special agent.
2. acting in the interests of the principal,
3. does an act usual or necessary with regard to the authorized transactions, AND
4. the third party reasonably believed the agent had authority,
5. then the act binds the principal regardless of whether the agent had actual authority and even if the principal has expressly forbidden the act. RS §161; RS §8A.
iii. Have to prove (Rs 161)
1. Agent was the principal’s general agent (RS 3)
2. The act was the type of thing that would “usually accompany or are incidental to transactions which the agent is authorized to conduct”
3. The 3P reasonably believed the agent had authority
iv. Inherent authority adds to apparent authority by custom b/c if have a 3P that has no idea what the customary agent’s powers usually are can use inherent authority
1. Ex/ 3P is unaware of the typical authority of a bar manager… so can’t have authority by custom
v. When used: Two classic situations in which inherent authority has been found
1. Undisclosed principals
a. RS §194: An undisclosed principal is liable for acts of an agent done on his account, if usual or necessary for such transactions, although forbidden by the principal.
b. RS §195: An undisclosed principal who entrusts an agent with the management of his business is subject to liability to third persons with whom the agent enters into transactions usual in such business and on the principal’s account, although contrary to the directions of the principal.
2. Agent exceeds authority

Hypos:

P owns a bldg and hires A to manage it. P tells A to hire a company to cut grass and she does