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Agency, Partnership and the LLC
University of Cincinnati School of Law
Willbrand, David J.

May include stuff in book but not covered in class.
Only thing not covered in book is vicarious liability.
Agent: Someone who works under the authority of someone else.
Restatement 3rd of Agency: A fiduciary relationship that arises when the principle (P) manifests assent to the agent that the agent should act on behalf of P subject to P’s control, and A consents to do the action.
If Sarah is my agent, and she signs a contract to pay Pete, I am liable.
Is Sarah liable for it? No.
What if I pay but Pete doesn’t do the work.—Pete is responsible to me.
Is Sarah responsible to me if Pete refuses to perform—No.
Agent not responsible for nonperformance of 3rd party
Sarah pretends to be your agent, and charges a widget from Pete to your account. Sarah takes the widget. Am I required to pay Pete? No.
Is Sarah liable to Pete? Yes.
What is Sarah later comes back and says—I have this widget, you can have it you play Pete. Am I liable to Pete? Yes—I am liable for a K that I later ratified.
I hire Sarah to buy shoes from Pete.   She never goes to see Pete. Does Pete owe the shoes? No.
Does Sarah owe Pete? No.
Do I owe Pete? No.
Is Sarah liable to Me? Yes—I can get the money, probably not the shoes.
I meet Sarah at an art auction—She’s an art expert—we talk and get along.   I ask her to look at my painting, and she takes it. Is she my agent?   No—we didn’t make an agreement.
Bailment—taking possession of something when you aren’t an agent.
What if Sarah says she thinks she could sell the painting at another auction, and I say take the painting and sells it.   Later, Sarah gets in an accident and destroys the painting—is she liable to me? Yes.
What if she sells the painting for $50K.   Do I owe Sarah anything? Yes, if the fee is “usual and customary”—the agent will expect to receive the typical commission or fee, even if it’s not agreed to in an actual K.
An agency can exist w/o the specific words being used, or even being in writing.
I hire Sarah to find me an apartment in a new town.   She then hires Pete to do it b/c she’s too busy.   Pete signs a lease on my behalf.   I go to see it and hate it.   Am I responsible for the lease? Yes—if it would be customary for Sarah’s organization to use subagencies.
Generally, subagencies are permitted unless specifically prohibited.
Exceptions—marriage, employment
Pete hires Sarah to rent out his apartment.   Sarah signs on behalf of Pete as LL and me as the Tenant.   I hate the apartment.   Am I responsible for the lease? Sarah violated her fiduciary duty to you.   Prof says better approach—restatement says there is an inappropriate conflict of interest (dual agency) and K is voidable.   If Sarah did good job, and everyone is happy, K is valid.
I hire Sarah to buy me a piece of property, but tell her not to tell anyone she’s acting on my behalf.   Am I bound to pay for the land? Yes.   B/c she has the actual authority to contract for you regardless of whether or not the 3rd party knows about it.
After Sarah makes the K, then she discloses.   Then the landowner says no way, I won’t sell it!   Can I sue to enforce the contract? Yes.
Only exception is if Sarah engaged in some sort of fraud (can’t have explicity denied that she’s your agent)
Sarah buys land for me as an “undisclosed principal” from Tom.   After she buys it, I don’t want it anymore.   Could Tom sue Sarah for that land?
Tom can sue Sarah b/c from his perspective, he made the deal with Sarah.
Facts of 1st case in the book:
Plumber takes out an old water heater that didn’t last too long, and mentioned that there’s some kind of recall.   My bill is $100. Homeowner says you take the heater, and try to get a credit for it.
Is the plumber the homeowner’s agent? Yes—he is acting on her behalf to try to claim a warranty.
What standard of dilligence should the Plumber exercise? How quickly should he act?   Should the HO have to pay the $100 bill?
Case says that he should have acted before the bill was due.   Standard is “reasonable diligence”
Generally, an agreement to do a favor for someone does not create an agency relationship.
You can have a gratuitous agency.
Elements of an Agency:
P agrees to give A authority
A agrees to act.
P controls A’s actions in some way.
Elements of Agency (from book):
On behalf of
More than just acting to benefit the principle.
Consent (by P for A to act on behalf of P, subject to P’s control, and consent by A to act)
Duties owed by Agent to a Principle:
Reading for next class—p. 11-55
Misc Notes on Agency:
Proof of Agency
A question of fact.
Burden of proof is on the party asserting the existence of agency.
Can be established by express authorization or may be implied from the circumstances and the conduct of the parties.
Extent of Agency
Whatever a person can lawfully do himself, he can do through an agent.
Hunter Mining Lab v. Management Assistance, Inc., NV SC, 1998, p. 15
Facts: Hunter contracted with Hubco to purchase some computer equipment and software. Hubco would also install and customize some of the software.   Hubco closed business before completing the project, and hired Data Doctors to complete the unfinished programming, but Data Doctors also failed to perform.   Hubco and Data Doctors were both licensed installers of the software, manufactured by MAI.   Hunter brought a breach of contract claim against MAI, claiming that they had an agency relationship with Hubco and DD.
Procedure: Jury found MAI liable for breach of K, but TC issued a JNOV b/c it found no evidence to support the jury’s implicit finding of an agency relationship. AC???. SC affirmed.
Issue: Does any evidence tend to support the jury’s finding of agency?
Holding: No
MAI had some control over Hubco through it’s licensing agreement, but the court says that that type of control is typical of a manufacturing/distributor agreement, and not sufficient to cause a question of fact regarding agency.
Hubco was not obligated to act primarily for the benefit of MAI
Authority (“on behalf of”)
Hubco and DD did not have authority to create any K between MAI and another party—the agreement even specifically negated such authority.
Prof says that in this case, control does exist, but the “on behalf of” does not—there is an “intervening profit motive” of the distributor, which is usually enough to defeat the agency argument.
Look at risk of loss—if P doesn’t have a risk of loss, then it is unlikely that an agency relationship exists.
Company in financial trouble make a deal w/ the Bank who they owed money—bank takes over day to day operations of the company—farmers who had contract to sell grain sued the Bank to enforce the deal.   Bank would get paid for their debt if the company returns to profitability. Does an agency relationship exist?
Court found that the company was an agent of the bank—
Prof says that this is bad facts making bad law… for EXAM, if there is no risk of loss, then the Bank is not the agents.
If a spouse went into business and I am not a part of that business, I am not an agent of that business (unless there are other reasons to assume you’re part of the business-you’re answering the phone on the business line).   Even being a shareholder or on the board of the business does not create agency relationship.
Other people who work for your employer are not your agent—they are an agent of the employer who they work for. They can’t bind an insurance company to anything that doesn’t already exist, and you can’t sue them for giving you bad advice (like put all your money into the 401k).
Capacity to Contract (EXAM)
An agent doesn’t need to have capacity to contract in order to bind P, as long as P has capacity (you could hire a minor as your A).
However, I cannot hold that minor resp for the duties A owes to me, b/c they lack the capacity to bind themselves to the contractual relationship btwn P and A (no fiduciary duties, etc.).
Eg., a 16yr old P cannot hire you as an A, b/c 16yr old doesn’t have capacity to contract.
Agency & Trusts:
Trust: a fiduciary relationship w/ respect to property, subjecting the person by whom the title to the property is held to equitable duties to deal w/ the property for the benefit of another person, which arises as a result of a manifestation of an intention to create it.
An agent who receives title to property of his principle is always a trustee.
Title: Agent doesn’t necessarily hold legal title.
A acts in the name of P, T acts in his own name.

may recover from P the expenses of his defense.
Principle—since the business is P’s, both the profits and the expenses should also be P’s.
Court rejects argument that Admiral should have notified Atlantic to defend the suit.
Atlantic was already a party in the same suit.
No requirement to in the K.
Atlantic never volunteered to defend Admiral
Admiral had it’s own interest to defend as well.
US should be liable for the defense costs:
It chose not to charter ships the company, but to put them into traid on it’s own account—it bears the risks and rewards.
A is entitled to be indemnified even if A losses the suit brought against him, if A’s conduct was w/in the scope of his authority from P.
P does not have to indemnify A for losses arising from A’s own negligence, illegal acts, or other wrongful conduct.
P does not have to indemnify A for expenses typically borne by A under the customs of the business/nature of the relation.
Subagents—if SA was hired w/o knowledge or consent of P, SA is actually an agent’s agent, not an SA, and P has no duty to indemnify.
Subagents—You either need express authority in the K to hire a subagent, or it has to be common practice in your industry.
A subagent can sue the agent or P, and A and P would be joint and severally liable.   Then A and P could sue eachother over who pays.
Agent can be reimbursed for defense costs from P, whether they win or lose…
EXCEPT, if P offered to bear the costs of a joint defense,
EXCEPT if A reasonably believed that their interests would not be protected in a joint defense.
Notice—does A have to give P notice of the suit?   Yes, b/c it’s a material fact. Notice is generally required if you’re seeking indeminifcation. Can be actual notice—doesn’t have to be formal or written.
Duties of Agent to Principal
Duty of Good Conduct & to Obey P
A must act in such a way that an ongoing relationship w/ P is possible (can’t be mean to get out of the agency).
A can’t spread disrepute about P
Caveat—Fed law overrides this (you can go to court against P, for example)
A doesn’t have to obey unethical or unreasonable instructions
Duty to indemnify P for loss caused by misconduct
Duty to Account (for expenses)
Fiduciary Duties: (do not begin until agency relationship begins)
Fiduciary duties can apply to a prospective agent prior to the formal creation of agency.
Duty of Care
A must act w/ duty of a person w/ the degree of expertise they claim to have.
Duty of Disclosure
Restatement says this is required even if agent is acting as a dual agent.
Duty to disclose all facts that may be material to the agency
Def—A matter is material if a reasonable person would consider it important in deciding on a course of action—def. in book p. 43-44.
Can’t misrepresent any facts (I’m an expert at X)
Duty of Loyalty (Gelfand)
During relationship
Where A causes loss to P through his disloyalty, A can be held liable whether or not he personally benefits from it.
After relationship
Non-loyalty is OK as long as you aren’t engaging in unfair competition or breaking a K.
Covenants not to compete:
Are inforceable if they are intended to adequately protect the interests of employer and are sufficiently limited in scope, geography, and time.
Geography—if E only works in Hamilton co, then K can only restrict in Hamilton K.
Scope—if E makes X, not Y, E can’t restrict you from making Y