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Business Organizations
UMKC School of Law
Luppino, Anthony (Tony) J.

Professor Luppino

Business Organizations

Fall 2016

List of Topics for Business Organizations from Syllabus

Agency Law and Management

Agency Law

Chapter 2: Agency

Agency law is the legal principles that govern the ability of one person to have another person act on his behalf.
The entities in an agency relationship do not have to both be human, one or both could be a corporation
The principle sources of agency law today are the Second and Third Restatements of Agency

The creation of the agency relationship

Agency is defined as 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”
The person who is acting for another is the agent; the person for whom the agent is acting is the principal
There are three elements of an agency relationship: (1) consent by the principal and the agent; (2) action by the agent on behalf of the principal; (3) control by the principal
If there is mutual consent to an arrangement involving an agent acting to further the principals interest and subject to the principal’s control, then it is appropriate to make the principal liable for the agent’s actions
Consent of both the principal and the agent is necessary to form an agency relationship.

The principal must manifest or convey his consent to the agent. This manifestation of consent may be written, oral, or implied from the parties conduct. The agent’s consent may also be established by written or oral statements, or implied by the parties conduct.

On Behalf of: the agent must be acting on the principal’s behalf. This is understood to mean that the agent must be acting primarily for the benefit of the principal rather than for the benefit of the agent or some other party

Simply acting in a way that benefits another, even when there is control, is insufficient to establish an agency relationship; instead a court must believe that the agent was acting primarily for the benefit of the other person
For example, an electrician that is called to fix a light is not necessarily the agent of the homeowner, even though there is some element of control and the electrician is acting on behalf of the homeowner. The electrician is still acting for their own benefit.

The agent must act subject to the principal’s control, but the degree of control exercised by the principal does not have to be significant

A principal need not exercise physical control over the actions of its agent in order for an agency relationship to exist; rather the agent must be subject to the principal’s control over the result or ultimate objectives of the agency relationship.

If the legal definition of agency has been met through satisfaction of the elements, an agency relationship is present regardless of whether the parties intended to create such a relationship

To constitute the relation, there must be an agreement, but not necessarily a contract, between parties

Liability from the agency relationship

There is often liability associated from the actions of either the agent or principal in an agency relationship

Tort liability

A general tenet of agency law is that a principal has the right to control the conduct of an agent with respect to matters entrusted to the agent. The principal can determine what the ultimate goal is, and the agent must strive to meet that goal
There is a difference between a master/servant (now employer/employee) relationship and that of an independent contractor

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”. A servant is an agent who is employed by the master. Most employment relationships are master/servant relationships
An independent contractor is a person who contracts with another to do something for him but who is not controlled by the other no subject to the other’s right to control with respect to his physical conduct in the performance of the undertaking.
If a person is subject to the control of another as to the means used to achieve a particular result, he is a servant. If a person is subject to the control of another as to his results only, he is an independent contractor.

Ex. An employee at GM that designs cars is a servant because he works for the company, the principal.
Ex. A builder that contracts with an owner to build a house in accordance with certain plans given by the architect is an independent contractor because he is employed to accomplish a specific result and is not otherwise subject to the owner’s control.

While a master is liable for torts committed by a servant within the scope of his employment; a principal is generally not liable for torts committed by an independent contractor in connection with his work.
A principal has vicarious liability over the actions of their agent. Vicarious liability refers to the imposition of liability on one person for the actionable conduct of another.

A principal is only liable for the actions of the agent if the tort was done during the course of the agent’s employment. I.e. if a delivery driver was driving goods for the agent. If the agent was taking a “frolicking detour” and outside the scope of their employment, then the principal likely would not be liable.

Remember that if the agent is the tort-feasor then they are still responsible to the injured party for their actions
There are cases where the principal is liable for the actions of an independent contractor. These occur if there are non-delegable duties (such as duties associated with abnormally dangerous activities); torts that are authorized by the principal; and fraud or misrepresentation by the agent.

Contract Liability from the Agency Relationship

A contractual transaction between an agent and a third party may impose liability upon the principal, the third party, or the agent.
There can be a disclosed principal; a partially disclosed principal; or an undisclosed principal

A principal is disclosed, if at the time of the agent’s transaction, the third party has notice that the agent is acting for a principal and has notice of the principal’s identity. It could be that the third party does not actually know the principal’s identity by they should be able to reasonably infer it.
A partially disclosed principal is when the third party has notice that the agent is or may be acting on behalf of a principal, but has no notice of the principal’s identity
A principal is undisclosed if the third party has no notice that the agent is acting for a principal.

Liability of the Principal to the Third Party

A principal will be liable on a contract between the agent and a third party when the agent acts with actual authority, apparent authority, or inherent authority.

Actual authority: arises from the manifestation of a principal to an agent that the agent has the power to deal with others as a representative of the principal.

An agent who agrees to act in accordance with that manifestation has actual authority to act and his actions bind the principal
If the principal’s words or conduct would lead a reasonable person in the agent’s position to believe that the agent has authority to act on the principal’s behalf, the agent has actual authority to bind the principal
Ex. P has a credit account at a grocery store, A has been going to the grocery store for P many times and P has approved A’s purchases, therefore a reasonable person in A’s position would believe that A had the authority to act on P’s behalf.
A common type of implied actual authority is incidental authority. Incidental authority is simply authority to do incidental acts that are related to a transaction that is authorized.

Apparent authority and Estoppel

Apparent authority arises from the manifestation of a principal to a third party that another person is authorized to act as an agent for the principal.

That other person has apparent authority and an act by him within the scope of that authority binds the principal.
If the principal’s words or actions would lead a reasonable person in the third party’s position to believe that the agent has authority to act on the principal’s behalf, the agent has apparent authority to bind the principal

Apparent authority commonly arises when a principal creates the impression that broad authority exists in an agent when it in fact does not.

If a third party relies on the appearance of authority, the third party may hold the principal liable for the action of the agent.

The major difference between apparent authority and actual authority is that actual authority flows from the principal to the agent; but apparent authority flows from the principal to the third party.
In some circumstances, the scope of an agent’s apparent authority will be equivalent to the scope of the agent’s actual authority.

Ex. When a principal sends identical letters describing the agent’s authority and its limits to both the agent and the third party, actual and apparent authority are co-extensive

Apparent authority can exist even in the absence of a principal-agent relationship

Ex. Apparent authority can arise when a person falsely represents to a third party that someone else is his agent

Apparent authority cannot be created by the mere representations of an agent to the third party
Apparent authority may be established by the agent’s title or position.

Ex. If the agent has the title of “Treasurer” then the third party will believe that they have the power to act as a treasurer reasonably would

The doctrine of estoppel is closely related to the concept of apparent authority. The doctrine of estoppel applies when the principal has not made any manifestations of authority to the third party at all; instead the principal is held responsible because the principal contributed to the third party’s belief or failed to dispel it.

Most often the person estopped will be responsible for the third party’s erroneous belief as the consequences that foreseeably led to the belief, or to correct the belief once on notice of it.
The third party also needs to have detrimentally relied on the belief that the agent acted on behalf of the principal.

Apparent authority and estoppel differ to the extent that apparent authority may be created without the need to establish a detrimental change in position.

Inherent authority

This term is used to describe the power of an agent which is derived not from actual or apparent authority, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent.

Ex. A branch manager of a local grocery store has inherent authority to manage the store as a manager would be expected to

Even if an agent acts without authority, the principal will be liable to a third party if (1) the agent purports to act on the principal’s behalf, and (2a) the principal affirmatively treats the agent’s act as authorized (express ratification) or (2b) the principal engages in conduct that is justifiable only if the principal is treat

vicarious liability: you are liable for something that someone else did
The agent is always liable for their own torts, but sometimes the principal will be liable too

Relationship between principal and agent:

Either an employer/employee relationship or an independent contractor
If it is an employer/employee relationship, then generally the principle will be liable for torts of agent. If it is an independent contractor relationship then the principal will not be liable
For an employer/employee relationship there has to be more control than just basic control (i.e. more than just having an electrician come over).

A broker is an employee agent because they are acting on behalf of a master.
An electrician is acting for himself

Exceptions to the rule that the principal is not liable for the IC:

Things that are inherently dangerous or if the principal gets wrapped up in a misrepresentation or fraud. Then the principal would be liable for the actions of an IC

In the employee relationship a principal could not be liable for an agent if the agent acted outside the scope of the employment

If the employee went to a baseball game when they were supposed to be delivering goods and injured someone at the baseball game. This is sometimes called a frolicking detour

Contract liability in agency relationship

There can be a disclosed principal; a partially disclosed principal; or an undisclosed principal

Disclosed means the third party knows the agent is only an agent and knows who the principal is, or reasonably should know who the agent is
Partially disclosed: the third party knows the agent is an agent, but they do not know who the principal is
Undisclosed: the third party has no notice that the agent is an agent and that there is a principal

Actual authority involves an agreement between the principal and agent. The agent can only do what has been conveyed to him by the principal. The communication can also be implied
Apparent Authority is between the principal and the third party. The third party believes the principal gave the agent the authority to act. This doesn’t have to be expressed, it can be implied

The third party cannot have knowledge that the agent does not have the authority

Inherent authority: authority from the agency relationship itself
Estoppel: different than apparent authority. The principal did not make manifestations, but they knew the agent was representing themselves in a certain way and the principal did not stop it. For estoppel to be applied there has to be a change of position, i.e. the principal accepts money from the transaction. The change in position has to affect the third party
Ratification: agent does something and the principal goes along with it. This ratification could be express or implied

The third party can get out of the contract before it has been ratified by the principal

When is the third party liable to the principle

If it is a disclosed or partially disclosed agency and there is apparent or actual authority.

Third party can also be liable if there is inherent authority

If the third party can demonstrate that they would never have done business with the principal had they known who he was.
There also could be an argument that they only trusted the agent and not the principal

When is the agent liable

If the contract is a partially or undisclosed principal, then generally the agent is liable
If it is undisclosed then the agent is fully liable because the third party wouldn’t be able to investigate the principal

Duties between principal and agent

Principal does not have a fiduciary duty to the agent. Principal cannot intervene with the agent’s work; they are supposed to act in good faith; they are supposed to indemnify the agent; they are supposed to pay reasonable compensation
Principal can revoke the agency relationship, but if there was a contract in place, then principal could still could still be liable under breach of contract and have to pay damages
There is a difference between the power to withdraw from this fiduciary duty and whether that is still a breach of contract
The agent has fiduciary duties—that means they have the duty of care and the duty of loyalty

Loyalty means they can’t work to undermine the principal and seize benefits that really belong to the principal
Can’t put agents goal over the principals or corporations
Have to have more than simple negligence to violate the duty of care
In the business orgs context, the duty of care is up against the business judgment rule