Business Organizations – Gerla – Spring 2012
Introduction to Agency Principles
Agency is the fiduciary relation which results from
1. the manifestation of consent by one person (the principal) to another (the agent)
2. that the agent shall act on (the principal's) behalf an subject to (the principal's) control
3. with the consent of the agent so to act.
Note: the language in #1 – “person” > This standard applies to both natural (human beings) and non-natural persons (legal constructs).
This agency relationship may be governed by contract, but it is not a contractual relationship.
Ex. I am thirsty. I give you a dollar and ask you to go get me a bottle of water. You accept. Is there a contractual relationship?
NO! There is no consideration from me to you.
Is there an agency relationship?
YES! You have agreed to act as my agent.
Now, assume that you are 12 years old. As a minor, any contract you may enter into is voidable because of your minor status. HOWEVER, as previously stated, an agency relationship is not a contract. Can you, as a minor, enter into an agency relationship?
YES! The operating action is simply a manifestation of consent. (Consent = assent)
Note: You don't have to be aware that you are creating an agency relationship (you don't even have to understand the concept of agency relationships) to enter into one. By consenting to act in the form of an agency relationship, you have created one.
There are two key ideas in the Restatement 2nd's definition (above): acting on behalf of a principal, and subject to that principal's control.
There is surprisingly little control needed to establish the agency relationship.
The only thing that is necessary to establish control is the ability to determine the “ends” of the agency relationship.
Ex. In the above example, I am asking you simply to bring me a bottle of water (the ends). I do not have to specify which means you are to undertake to accomplish those ends.
Further example: I send a parcel via UPS. I have the control to dictate the ends (delivery of the package). Does an agency relationship exist? – No. UPS is not working on behalf of the principal (me). They are simply performing a service for which there is a contract.
The key to determining an agency relationship is whether or not the “agent” is actually acting on the principal's behalf.
Simple consideration paid is not enough to determine that an agency relationship does not exist. In fact, an independent business is NOT LIKELY to be found to be an agent, but this is not guaranteed.
Ex. When, as an attorney, you represent clients in your practice, you are acting as the client's agent. Even though this client is not your sole client, and you are being paid for your services; you are still considered to be in an agent relationship with the client.
Gay Jensen Farms Co. v. Cargill, Inc.
The Warren Seed and Grain Co. operated a grain elevator in Warren, Minnesota. This grain elevator bought grain from local farmers, stored it, and resold the grain to national grain exchanges. Warren would pay the farms in “drafts,” a form of a check that was drawn on Cargill, Inc.'s accounts and printed with both Warren and Cargill's names.
Cargill, Inc. provided a loan account to Warren, and later entered a contract with Warren that granted Cargill the right of first refusal on any grain sales made. Proceeds from Warren's sales would be deposited with Cargill, and credited to Warren's loan account.
Cargill, meanwhile, had provisions put in place to monitor the whole of Warren's financial arrangements, including capital improvements, wages, and debts. Many of the suggestions that Cargill made to Warren went unheeded, and Warren's debts spiraled out of control.
After Warren ceased operations, it was found to be indebted to both Cargill, and local farmers. The farmers sued Cargill for breach of contract, on the idea that Warren was the agent of Cargill, the principal.
QUESTION: Does an Agent-Principal relationship exist between Warren and Cargill?
The court proceeded to outline the large amount of control that Cargill had over Warren. HOWEVER, this evidence of control was not demonstrated to fulfill the requirement of “control” above, but to show that Warren was acting on Cargill's “behalf”!
The more control that the supposed principal exerts on the supposed agent, the more likely it is that the controlled “person” is acting on the behalf of the controlling “person”.
Note: The “right” of control is sufficient to determine that one person controls another, even where that right to control is not actually exercised. “De facto” (the power to control in fact, if not in law) control is also sufficient.
When is a principal contractually bound by an agreement of their agent? (Contract Claims)
If the agreement is within the scope of the agent's authority, the principal is bound.
The question then becomes, When is an agreement within the scope of the agent's authority?
Types of Authority
Actual authority (Express or Implied)
Express – A specific authorization of agency
Implied – Flows from an express grant of agency.
Based on the agent's reasonable belief that they have the authority to act.
Ex. From where does Prof. Gerla derive his authority to administer tests to his class? Does he have an express grant of authority in his contract? Or does his authority stem from his express grant of agency as a professor?
A. Prof. Gerla has a reasonable belief that his express authority as a professor implies that he has the authority to administer tests.
Most actual authority will be in the form of implied actual authority. Consider the following: Does a cashier at a supermarket require an expression of their authority to take monetary consideration of each denomination, year, minting, etc.?
In the event of conflict between the two, express will always trump implied.
Based on the third party's reasonable belief that the principal has given authority to the agent.
There must be a manifestation by the principal that creates this reasonable belief.
The manifestation is often the principal placing the agent in the position that
aspect, the principal can be liable. (Fact-driven)
4. Non-delegable duties. Courts define the non-delegable duties. Most often implemented with common carriers (Public transportation, taxis, public utilities, etc.)
5. Statutory – Some statutes may dictate that a principal is liable for certain actions, regardless of the other exceptions.
In general an employer is vicariously liable for the negligent actions of its employees, as long as those negligent actions were undertaken in the scope of employment.
In the case of franchisor/franchisee relationships, the court generally looks to determine whether the franchisee has an agency relationship which is:
1. an agent-employee relationship, or
2. an agent-independent contractor relationship
What do you do about a misrepresentation or fraud claim by an agent?
Claims against agents are traditionally divided into two arenas, contracts and torts, with the differences described above. However, actions for misrepresentation and fraud can be pursued as either a tort or as contracts.
Courts have determined their own bright-line rule for dealing with this issue. A given jurisdiction may state that misrepresentation and fraud are to be treated as a contract claim, while another may state that they are to be treated as a tort claim.
Partnership is defined in both the Uniform Partnership Act (1914) and the Revised Uniform Partnership Act (1997).
UPA (1914) §6. Partnership Defined
(1) A partnership is an association of two or more persons to carry on as co-owners of a business for profit.
RUPA (1997) §101. Definitions
(6) “Partnership” means an association of two or more persons to carry on as co-owners a business for profit formed under Section 202, predecessor law, or comparable law of another jurisdiction.
Note: The parties are not required to be aware that they are acting as a partnership. So long as they are carrying on a business for profit as co-owners, they are partners.
What makes someone a co-owner?
Profit-sharing provides a prima facie showing of partnership, except in instances where that profit sharing is:
RUPA (1997) §202(3)
(i) in payment of a debt by installments or otherwise
(ii) for services as an independent contractor
(iii) of rent
(iv) annuities, retirement benefits, or health benefits to a beneficiary, representative, or designee, etc.
Co-ownership is generally understood to operate on the amount of control that a person exercises over the business.