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Business Organizations
Touro Law School
Miller, Meredith R.

Default Rules–à Regarding business law, there are default rules contained in the restatements (however, these rules may be contracted around by agreement)
BUT–à mandatory rules (i.e. the duty of good faith, ect…) may not be contracted around
         A. Creation of Agency: Who is an agent?
Agency—à Defined (2nd RT) —- The relationship which results from the manifestation of assent by one person to another that the other shall act on his behalf and subject to his control, and the agent manifests assent or otherwise consents so to act
Agent:—à The person who is going to act is the agent
Principal:-à The person for whom the action is to be taken is the principal
Manifestation:-à (3rd RT) — a person manifests assent or intention through written or spoken words or other conduct
Subject to principal’s control:This is an important element to discuss …Ex: Coach was considered teacher’s agent b/c the teacher expressed a condition that coach was only person that could drive her car (she controlled the situation and was therefore deemed to be principal) Ex: Case of lender to farmer where they exercised control over how they invested the money, their client base, other parts of the business -à the issue, is the amount and extent of control the potential principal has been using
– Agreement: There must be an agreement b/w the parties but there does NOT have to be a K (there could be an agency relationship even though the parties do not call it that)
Once you can establish that there is “agency” relationship then the principal will be liable for the agent’s actions that were within his scope of authority
B. TYPES OF AUTHORITY (Liability of Principle to 3rd Parties)
* you must establish there is authority for the agent to act, to hold the principal liable
1) Expressed Authority—à Where principal tells agent, “you are authorized to do this”
                        – you always look at the manifestations from the principal to agent
2) Implied Authority—-à Different ways that authority can be conferred that might not be expressed –à gives agent authority to do acts which are incidental to it, usually accompany it, or are reasonably necessary to accomplish it… principle does not say do X, but what they’ve been asked to do requires X
Ex) Joe tell real estate agent, that he can sell his house — he did not give the agent expressed authority to take an ad out in the paper, BUT taking the ad out in the paper is incidental to selling the house (its incidental) and therefore the agent has the implied authority to do it
* Minor deviations from the actual authority conferred will still bind the principal when the 3rd party is unaware that the agent exceeded their authority (voice recording K case)
– An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent so to act (RT 3rd)
Principal actually intended the agent to possess and includes such powers as are practically necessary to carry out the duties actually delegated
Giving the agent the power to conduct the business (what powers are reasonably necessary for the agent to do what the principal wants him to do)
Factors à The court will look toward past conduct (what the principal allowed the agent to do in the past)
Agent would have actual authority to take action when its necessary or incidental to achieving the principal’s objectives, as the agent reasonably understands the manifestations and objectives of principal to be
What is reasonable? When the manifestation reflects any meaning known by the agent to be ascribed by principal and in absence of such meaning, as a reasonable person in agent’s position would interpret the manifestations in light of the circumstances
Court looks toward what is the custom in what were dealing with as well as prior dealings b/w the parties
Burden on Agent: -à The agent must prove by circumstantial evidence that his belief was reasonable that the principal wished him to act in a certain manner
APPARENT AUTHORITY (dealing with 3rd parties)
–          The agent wasn’t authorized to act the way he did, BUT it appeared to the world that the agent had the authority to do what he did
–          (RT 3rd) Power held by agent or other actor to affect principal’s legal relations with 3rd parties when a 3rd party reasonably believes the agent or actor has authority to act on behalf of the principal and that belief it traceable to principal’s manifestations
o   Here, we look towards what the principal manifested to the 3rd party
o   Questions to ask yourself: Was the 3rd party reasonable in believing there was authority? Why?
o   What the principal did (either taking action or inaction) to indicate to 3rd party that agent has the authority?
– Burden on 3rd party:à Where the 3rd party has no reason to believe actual authority does not exist and the authority being exercised is in furtherance of the usual and proper business duties the agent was employed to perform
Ex) A supervisor who offers to give a raise to an employee below him—that employee under the right circumstances would have a reasonable basis for belief that his supervisor has the authority to confer this raise upon him
Ex) Vespa Scooter case–à the domain name the agent had when had no authority and then solicited a 3rd party–à it was reasonable for the 3rd party to believe that the agent had apparent authority to act based on the domain name
– The principal liable based on policy: if you’re a principal and you don’t want to be liable you just make sure that agent doesn’t disclose that you exist.
                            General Rule: if the principal is disclosed, agent is not liable.
Exception: if principle is undisclosed, liable for acts of agent is done in usual course of business OR if the 3rd party was induced
Disclosed principal: 3d pty has notice agent is acting for a principal, and has notice of the identity of the principal
                   Undisclosed principal: 3d pty has no notice that agent is acting for principal
UNDISCLOSED PRINCIPAL —–à IF the principal is undisclosed to the 3rd party (they don’t know who the principal is and the 3rd party is unaware that the person with whom he is dealing with is actually an agent serving the principal’s interests
RT 194–àUndisclosed principal is liable for acts of an agent done on his account, if usual or necessary in such transactions, although forbidden by principal. (Usual course of business)
(RT 3rd) -à Undisclosed principal is subject to liability to 3rd party who is justifiably induced to make a detrimental change in position by an agent who doesn’t

ENDENT CONTRACTOR (agent type)–à This is a person who had agreed to act on the behalf of another (the principal), but NOT subject to the principal’s control over how the result is accomplished
Ex) Carpenter hired to build garage and carpenter is just responsible for getting the job done and doesn’t take directions from home owner; than carpenter is IC and not acting as agent of homeowner
**Burden: In order to prove the principal is liable; you need to show that the employee was acting within the scope of their employment and is NOT an Independent Contractor -à if there is an IC, then principal is not liable (why? B/c if they are an IC, than they are not being controlled by the principal)
à In order to show the negligent individual was an employee and NOT an IC, you must show how the principal CONTROLLED the individual; how he was paid, control over the day to day operation, amount of business discretion, setting hours of operation, method of payment, who bears the risk of loss, ect…go through the factors
Ex) Owner is liable for an operator’s negligence if the owner directs the manner under which the station is operated — (the gas station case) – the operator of the station was under the control and direction of the principal and therefore was not an IC and the principal was held liable 
–          If the company retains control over the day-to-day operations than the manager/owner is an employee and not an independent contractor and therefore there is an agency relationship and the principal is liable
o   Humble Oil v. Martin Woman left car at Humble, a station operated by Schneider, for repair and it rolled into the street and hit Martin. Martin sued Humble, who argued no liability because Schneider not Humble’s agent. Court disagreed, found master-servant relationship= liability.
Ex) Servants are not the same as independent contractors.
        Agent-type independent contractor: one who agrees to act on behalf of the principal but is not subject to the principal’s control over how the job is done (e.g. carpenter who, with homeowner’s permission, buys lumber for the contracted job on the homeowner’s credit)
        Non-agent independent contractor: one who operates independently and enters into arm’s-length transactions with other (e.g. carpenter who agrees to build a garage for a homeowner)
        Hoover v. Sun Oil – Sun Oil owned a gas station operated by Barron. Station employee attended a car, which caught fire; Sun Oil was sued for damages. Court found no liability, relationship more like landlord/tenant than master/servant.
Apparent Agency and Torts
A franchisor may be held to have actual agency relationship with its franchisee when the franchiser controls, or has the right to control, the franchisee’s business.