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Business Organizations
University of Dayton School of Law
Chaffee, Eric C.

Chaffee_Fall2010_Business Organizations

Chapter 1; Agency (based on mutual consent)

Who is an agent:

Gorton v. Doty – Page 1

Is an agency relationship created when one loans her vehicle to another on the condition that the other drive?

Yes. Permission to drive one’s vehicle creates an agency relationship

An agency relationship results from one person’s consent that another will act on his behalf and subject to his control, and the other person’s consent so to act (no need for a contract)

Agency indicates the relation which exists where one person acts for another-it has 3 forms

Relation of principal and agent

Where one undertakes to transact some business for another or manage some affair for another by authority and on account of another

The relation of master and servant

The relation of employer or proprietor and independent contractor

Agency: A fiduciary relationship created by express or implied contract or by law, in which one party (the agent) may act on behalf of another party (the principal) and bind that other party by words or actions

3 requirements for an agency relationship

Manifestation by the principal that the agent will act for him

Acceptance by the agent of the undertaking AND

An understanding between the parties that the principal will be in control of the undertaking

The existence of an agency relationship is a question of fact

The burden of proving agency is on P and must be proven by a fair preponderance of the evidence

Agent: one who is authorized to act for or in place of another; a representative

Principal: one who authorizes another to act on his behalf as an agent.

Manifestation of consent by one that the other person will act on her behalf–I want you to do something, ok, I’ll do it (agency relationship)

Take away from case:

Agency is a factually sensitive inquiry, meaning that intelligent minds can differ

Gay Jenson Farms Co. v. Cargill – Page 7

Whether Cargill, by its course of dealing w/Warren, became liable as a principal on contracts made by Warren w/P. (Is a creditor that assumes control of its debtor’s business a principal that is liable on the debtors contracts?)

Yes. Cargill, by its control and influence over Warren, became a principal with liability for the transactions entered into by its agent Warren.

A creditor who assumes control of his debtor’s business may become liable as principal for the acts of the debtor in connection with the business.

One who contracts to acquire property from a third person and convey it to another is the agent of the other only if it is agreed that he is to act primarily for the benefit of the other and not for himself

Right of First Refusal: A potential buyer’s contractual right to meet the terms of a third party’s offer if the seller intends to accept that offer.

Take away from case:

Case is talking about control rather than consent.

Control is included in the consent issue (discussed in Gorton).

Principal must control actions of an agent.

b. Liability to 3rd parties in a contract
i. Authority (3 Types of Authority)
1. Authority: The right or permission to act legally on another’s behalf; the power delegated by a principal to an agent

a. Mill Street Church of Christ v. Hogan – Page 14
i. Does an agent who is told to hire whomever he chooses have implied or apparent authority to hire any person to assist him?
ii. Yes. Bill Hogan had implied authority to hire Sam Hogan as his helper and Sam was within the employment of the Mill Street Church of Christ at the time he was injured.
iii. Take away from case:
iv. Authority limits scope of agency; there must be formation of agency relationship and agent must be acting w/in the scope of their authority
1. Scope of authority: indicates whether or not the principal is going to be liable.

2. Actual Authority: (relationship between principal and agent) Authority that a principal intentionally confers on an agent, including the authority that the agent reasonably believes he or she has as a result of the agent’s dealings w/the principal.
a. authority that the principal, expressly or implicitly gave the agent (ie: negotiate w/someone-expressly authorized)
i. Express Authority: Authority given to the agent by explicit agreement, either orally or in writing.
ii. Implied Authority: (not expressly stated) (AKA: Inherent Authority) 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.
1. To establish, the agent must establish through circumstantial evidence, including the parties’ acts and conduct and especially the continuous past conduct btwn the parties, that the agent reasonably believed the principal whished him to act in a certain manner b/c he had been similarly authorized in the past.
2. Actual authority given implicitly by a principal to his agent or the kind of authority arising solely from the designation by the principal of a kind of agent who ordinarily possesses certain powers

3. Apparent Authority: (what principal has suggested to a third party) Not actual authority but is the authority the agent is held out by the principal as possessing. Can be created by law when no actual authority has been conferred

1. No actual authority, only the appearance of authority to a third party

Arises when a principal acts in such a manner as to convey the impression to a third party that an agent has certain powers which he may or may not actually possess

Under apparent authority, a principle becomes liable because it has made representations to a third party to suggest that an agent possess authority to act on the principals’ behalf

Also created when an agent’s action are an ordinary and proper extension of the actual authority bestowed on him by his principal

3. Three-Seventy Leasing Corporation v. Ampex Corp. – Page 23

Does an agent have apparent authority sufficient to bind a principal if the principal’s acts would lead a reasonably prudent person to suppose that the agent had the authority he purports to exercise?

Yes, an agent has apparent authority sufficient to bind the principal when the principal’s acts would lead a reasonably prudent person to suppose that the agent had the authority he purports to exercise.

Absent contrary knowledge, a salesperson has apparent authority to bind his principal to sell its products.

4. Inherent Authority: (relationship between principal and agent); implied from actual authority given
a. Arises solely from the designation by the principal of a kind of agent who ordinarily possesses certain powers
b. Although actual authority that is implied is close to inherent, there are cases where actual authority that is implied is not inherent authority
c. Take away from case:
d. Don’t need actual authority to be bound by another type of authority (someone can have apparent or inherent authority, but might not have actual) –

iii. Inherent Agency Power
1. Watteau v. Fenwick – Page 26
a. Is a principal bound by the acts of an agent who conducts the principal’s business under the agent’s name and credit, unknown by the third party?
b. Yes, a principal is liable for his agent’s acts when authority to act is usually conferred upon an agent in the course of the principal’s business.
c. Application of authorities: No actual or apparent authority but you still have inherent authority
d. When a principal is undisclosed to third parties, the actions taken by an agent in furtherance of the principal’s usual and ordinary business binds the principal.
If the principal is undisclosed to a third party and that party is unaware that the person with whom he is dealing is actually an agent serving a principal’s interest, apparent authority could not be established
i. Only those acts specifically authorized by the principal could bind the principal to a third party
ii. An undisclosed principal may not avoid liability for the actions of an agent who incurs usual and ordinary debts necessary to conduct the principal’s business
iii. If the third party knows he is dealing with an agent, then the agent may bind the principal only if he acts with actual authority or the principal otherwise holds the agent out as having authority.
v. Mischief w/o recognition of inherent authority (need to protect the third party; why not protect the principal? Because the principal is the person or entity that can easily avoid the situation)
vi. Take away from case:

Inherent and implied are not the same thing

1. Ratification

Botticello v. Stefanovicz – Page 31

Is a party bound by an agreement that a third party alleges the other party ratified, even if the other party did not have full knowledge of the material terms?

No, agency requires a manifestation from a principal that an agent will act for him, acceptance by the agent of the undertaking, and an undertaking between the parties that the principal will be in control of the undertaking.

Since Walter did not purport to act on his wife’s behalf, as is essential to effective subsequent ratification, Mary is not bound by the terms of the agreement, and specific performance cannot be ordered as to her.

Agent Type Independent Contractor: 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

Non Agent Independent Contractor: one who operates independently and simply enters into arms length transactions with others

Ex. Carpenter is hired to build garage. If he is responsible for doing the job and that’s it, then he is an independent contractor, not acting as an agent. If he agrees to buy wood on the homeowner’s credit, he is an independent contractor, but also an agent of the homeowner (acting on his behalf in the purchase of the wood)

Under Respondeat superior, a master (employer) is liable for the torts of its servants (employees)

Master-servant relationship occurs when the employee has agreed:

To work on behalf of the master AND

To be subject to the mater’s control or right to control the physical conduct of the servant (the manner in which the job is performed)

Humble Oil & Refining Co. v. Martin – Page 43

Is a principal liable for the negligence of one who contractually operates its business?

Yes, an owner is liable for an operator’s negligence if the owner directs the manner under which the station is operated.

One who maintains control over a business enterprise’s operation, even if it entrusts the operation to one acting w/o meaningful discretion, is liable as a principal for the negligence of those entrusted w/his business

Take away from case:

Application of agency principals in the tort context: based on control; consent is not forgotten but consent to be controlled and consent to control; factually sensitive inquiry

Consent is still present but control is the dominant factor

Hoover v. Sun Oil Co. – Page 45

Is a business operator who bore the risk of profit and loss, determined his own business hours, managed his workforce, and posted his name as the proprietor an independent contractor so that the principal is not liable for the operator’s employee’s negligence?

Yes. No agency exists if an oil company does not control a service stations’ operations. Agency arises if a principal retains the right to control the details of the day to day operation of the agent’s business.

3. No agency exists if an oil company does not control a service station’s operations
4. The test is whether the oil company has retained the right to control the details of the day to day operation of the service station; control or influence over results is insufficient
5. Agency arises if a principal retains the right to control the details of the day to day operation of the agent’s business.
6. Take away from case:

Application of agency principals in terms of torts: agency turns on amount of control

Determining control is factually sensitive inquiry; circumstances that look similar, can produce different outcomes

This case presents a good example of an essay question for an exam.

vi. Murphy v. Holiday Inns, Inc. – Page 48
1. Does a franchise agreement whereby the franchisor provides the trade name and trademark under which a franchisee does business establish a principal agent relationship if the franchisor retains no power to control daily operations?
2. No. A franchise agreement that provides an operation system for a franchisee does not establish a principal agent relationship.
3. Actual agency is a consensual agreement. Agency is 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
It is the element of continuous subjection to the will of the principal which distinguishes the agent from other fiduciaries and the