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Business Organizations
University of Connecticut School of Law
McCoy, Patricia A.

BUSINESS ORGANIZATIONS
Prof. Patricia McCoy
Fall 2008
 
I.      CHAPTER ONE: AGENCY
1.   Who is an Agent?
                                     A.    Bailment or Agency? Gorton v. Doty (Idaho 1937): teacher lets coach borrow her car to bring student/football players to game on condition that coach drives it—not students or anyone else. Coach gets into accident and student/player is injured. Student’s father sues teacher claiming that she was the principal and the coach was her agent. 
Issue:was the coach the agent of the teacher while driving her car?
Holding: YES
Reasoning: Court defines agency relationship as the manifestation of consent from one to another that the other will act on his/her behalf. (Restatement §1)
The Elements of Agency: (1) principal must manifest their consent to having the agent act on their behalf; (2) Agent must manifest consent to being the agent; and (3) principal must exercise some control over how the agent does the job.   
 
NOTE: Court might have been trying to induce people to purchase insurance, this was a long time ago. Dissent mentions that the teacher had liability insurance and the coach did not, so the coach would have been out-of-pocket while the teacher could rely on her policy—counsel mentioned this and was reprimanded by the judge BUT dissent felt that the error still was prejudicial to the jury’s verdict. Dissent also stated that agency means more than mere passive permission. Still, you DON’T need a contract (§15) or an exchange of money (§16) to form an agency relationship, even a very small amount of control may be enough to create the relationship. If this were just a loan, it would have been considered a bailment and no agency relationship would exist—like leaving car in a parking garage. 
 
                                     B.    Buyer-Supplier or Agency? Gay Jenson Farms Co. v. Cargill, Inc. (Minn. 1981): Cargill (Financier) appealed jury verdict after Farmers successfully sued Grain company (Warren) and Cargill for money owed by Warren to the Farmers after it ceased operations. Πs claim was based on allegation that Cargill was a principal with liability for the transactions entered into by Warren. Cargill responded that it never consented to the agency, and that this was merely a buyer-seller relationship. Warren had previously applied for financing from Cargill. Cargill extended Warren’s credit several times in return for certain rights and privileges (control over Warren). Warren contracted with other farmers for the growing of seeds and then went belly up.
Issue: Whether Cargill by its actions became liable as a principal on contracts made by Warren with plaintiff farmers? 
Holding: YES! Many factors indicated that Cargill was in more intimate a relationship than that of lender borrower. 
      Factors Indicating Control:
Constant recommendations by phone
Right of first refusal
Warren’s inability to enter into mortgages, purchase stock, or pay dividends w/out Cargill’s approval
Cargill’s right to carry on periodic checks and audits
Cargills correspondence and critcism regarding Warren’s finances, officers salaries and inventory
Cargills determining that Warren needed strong paternal guidance
Provisions of drafts and forms to Warren upon which Cargill’s name was imprinted
Financing of all Warren’s expenses 
Cargill’s power to discontinue the financing of Warren’s operations. 
Different than Buyer-Supplier:
o   He is to receive a fixed price for the property irrespective of price paid by him—most important
o   He acts in his own name and receives title to the property which he thereafter is to transfer
o   He has an independent business in buying and selling similar property. 
 
Def: Agency—is the fiduciary relationship that 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 others so to act. 
 
Restatement § 14 O: If a security holder takes over the management of the debtor’s business and directs what contracts may or may not be made he becomes a principal.
 
NOTE: Court is looking to see whether the alleged principal has taken over management or not. A veto power is not enough. 
 
2.   Liability of Principal to Third Parties in Contract
                                     A.    Authority (Agency): Can be express or implied both express and implied are actual authority BUT actual authority is distinguishable from apparent authority. Express authority is rare, corporations don’t talk and employees don’t usually come out and say “with the power vested in me I hereby condone this sale,” etc. So implied authority is more common.
1.    Implied authority is actual authority circumstantially proven which the principal actually intended the agent to possess and includes such powers as are practically necessary to carry out the duties actually delegated.   
2.   Mill Street Church v. Hogan (Ky. App. 1990): Church hires Bill to paint their church. Bill hires his brother (Sam) to help, who gets injured on the job and wants comp. claiming that Bill had authority to hire him on behalf of the church.
Issue(s): (1) Did Bill have implied authority to hire Sam; and (2) did Sam have apparent authority to work for Bill (lesser issue)? 
Yes! Bill had IMPLIED authority to hire Sam as his helper.
Why?
In the past the church had allowed him to do it
Hiring an assistant was necessary to finish the project
Bill had no reason to believe Sam was not wanted—didn’t know anything about secret meeting where Petty (who was admittedly tough to reach) was designated the preferred helper. 
     
                                     B.    Apparent Authority: Not actual authority, but is the authority the agent is held out by the principal as possessing. It is a matter of appearances on which third parties come to reasonably rely. (Basically there is an appearance of authority, and it is a reasonable one to fall for.) 
1.   Lind v. Schenley Industries, Inc. (3d Cir. 1960): Guy gets a promotion from his supervisor. However, now the president of the company says that the supervisor did not have the power to give him the promotion. He claims the supervisor did under an argument of apparent authority. Court decides he can be held accountable under apparent authority, because of what was said it was reasonable for Lind to think he deserved his commission.
In Sum: even if Kaufmann didn’t actually have the authority to offer Lind a 1% commission, the facts and circumstances made it appear to Lind as though he was authorized to make such an offer. 
Note: case is very suspicious to McCoy, why did Lind wait so long, why didn’t Lind ever get it in writing?  
 
                                     C.    Inherent Agency Power: where a third party is not aware that a principal exists and the agent is acting outside his/her scope of authority. 
Restatement of Agency 194: An undisclosed principal is liable for acts of an agent done on his account, if usual or necessary in such transactions although forbidden by the principal.
Restatement of Agency 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 the on the principal’s account, although contrary to the directions of the principal.”
1.   Watteau v. Fenwick (Queen’s Bench, 1892): Defendants own a bar, and put a guy named Humble in charge of the bar. They give him the authority to buy alcohol but NOT cigars. Humble, being a douchebag, contracts to buy a bunch of cigars from a cigar seller. The cigar seller at the time of contract has no idea that the defendants really own the bar.
Issue: Can the defendants be held liable for Humble’s actions even though he was explicitly told not to do them, and even though no one knew they were the actual owners. YES! The defendants are liable because Humble had inherent authority.
Policy: Why are we going to hold the silent owners responsible even though they did not hold themselves out as being principal? Because if we didn’t do this then any contract made by an agent could be voided so long as it was outside his explicit authority and the principal was undisclosed.
Economic Rationale: The bar owners were in the best situation to prevent this from happening, it was there fault for not monitoring their agent better Fenwick didn’t know better. McCoy: the court is saying that principals have a duty to police their agents. 
 
3.   Nogales Service Center v. Atlantic Richfield Company (Ariz., 1980):(this is kinda a shitty case) guys who owned truck stop met with representative from ARCO—a kind of truck stop franchisor but not really. The two owners claimed

hese cases try to find out where there is and is not a master/servant, independent contractor/principal relationship. 
 
Two Different Types of Independent Contractors:
1.    Agent type contractor: is one who has agreed to act on behalf of another, the principal, but not subject to the principal’s control over how the result is accomplished. 
2.    Non-agent independent contractor: is one who operates independently and simply enters into arm’s length transactions with others. 
A.    Ex: you hire a carpenter to build an addition on your house and it is understood that the carpenter is simply responsible for getting the job done and will not take directions from the homeowner. 
Crux: whether there is or is not a sufficient level of control exerted by the master/principal over the daily operations of the servant/independent contractor.
 
1.   Humble Oil Co. v. Martin (Tex. 1949):car rolls out of gas station and smacks man and his children. Humble owned the gas station but claimed he was not liable because the station was operated by an independent contractor (Schneider) acting as non-agent (?).
 
Neither Humble, Schneider, nor the other station employees considered Humble as an employer or master, Scheider paid and directed the ees as their boss, and a provision of the agreement repudiated any authority of Humble over the ees BUT this did NOT mean there wasn’t a master-servant relationship between the two. 
The agreement required Schneider to make reports and perform other duties in connection with the operation of the station. Humble was required to pay ¾ of the utilities bills, Humble furnished the station and equipment as well and controlled the operating hours. 
 
Holding: Schneider is an agent, Humble is liable; they exercised too much control.   
 
2.   Hoover v. Sun Oil Co. (Del. 1965):Hoover alleged that the injuries he received from a fire that started near his car were caused by a negligent employee of Barone who worked at the gas station. Sun disclaimed liability arguing that Barone was an independent contractor and Hoover claimed that Barone was Sun’s agent. 
 
DETAILS: Station and all its equipment were owned by Sun, either party could terminate the lease, rental partly dependant on volume of gas sold—but there was a floor and ceiling. Barone was to purchase petroleum products from Sun and Sun was to loan equipment and advertising material to Barone. Station was under Sunoco label, uniforms had the Sun emblem, Barone attended Sun School—for bookkeeping, merchandising, appearance and maintenance (sounds like franchise), Sun sales rep visited weekly, Barone was not obligated to follow advice, Barone determined his own hours of operation, his name was posted as proprietor. 
 
HOLDING: Barone was a non-agent independent contractor. Sun had no control over the details of Barone’s day to day operation so no liability—court also mentioned that even an establishment of a right to control may not be sufficient to establish Sun’s liability. 
 
                                     B.    Tort Liability and Apparent Agency: 
MILLER v. McDONALD’S CORP. (Ore. App. 1997): Woman bit into stone while eating at McDonald’s owned by 3k. McDonald’s claimed that no agency relationship existed. 3k had to operate the store consistent with McDonald’s system which covered standards, policies, practices and procedures, what could and couldn’t be sold, layout, design of building, mandatory adoption of subsequent reasonable changes, hours, personnel numbers, supplies, etc