SOKOL – BUSINESS ASSOCIATIONS SURVEY – FALL 2011
· Agency is a legally-recognized relationship between a Principal and Agent that can be entered into formally (partnership agreement) or informally (sharing profits w/o formal agreement).
· Agency is an objective characterization invoking not just what the parties intended but what the community thinks of as an agency relationship
· Agency Costs describe the cost of delegating authority to an agent.
o Incentives: Important to align Agent and Principal incentives
Two Forms of Agency
1. Doctrinal Agency
· Common law doctrine used to apportion risk and liability between two or more parties
o Party will always be either Principal, Agent, or 3P
2. Economic Agency Costs
· Most generally: What arises out of delegation.
· Duty issues
o Shirking (duty of care) – When one partner isn’t pulling their weight
o Stealing (duty of loyalty) – When one partner is self-dealing or competing with other P
· A Principal’s liability is based on the extent of control that P has over the Agent
· Sometimes, the risks of legal liability (i.e. insufficient control) will be justified by the benefit of control (i.e. not spending money closely monitoring agents).
Creation of Agency Relationship
Agent Third Party
Agency is a three way relationship between Agent / Principal / and Third Party (3P)
· Inward Consequences: P & A
· Outward Consequences: P/A & 3P
· Agency relationships between any of the three can be created explicitly (contract) or implicitly (context).
o Ex: You don’t need to formally start a partnership for the law to recognize one.
Agency is created by the ABC’s: Assent, Benefit, Control.
· P & A manifest assent (Assent to act)
· A to act on P’s behalf (Behalf)
· A to be subject to P’s control (Control)
“Agency is the fiduciary relationship which results from the manifestation of consent by one [principal] person to another that the other shall act on his behalf and subject to his control, and consent by the other [agent] so to act.”
“Agency is the fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an “agent”) that the agent shall act on the principal's behalf and subject to the principal's control, and the agent manifests assent or otherwise consents so to act.”
· Assent element: Consent (2d) vs. Assent (3d)
o This difference is negligible
o Rest. 3d: The difference in terms is meant to indicate that unexpressed reservations cannot be used as an argument against the creation of an agency relationship.
o Assent = More active.
U.S. v. Cyberheat. ∆ is a porn website seller, has affiliates that make commission of getting people to sign up for the Cyberheat websites. Federal statute prohibits sending sexually-explicit emails to person w/o their consent; some of ∆’s affiliates did that. Holding: No agency relationship between ∆ and affiliates; ∆ is not vicariously liable.
· Criteria for finding agency relationship: “how much power and ability Cyberheat had to control, monitor, or supervise affiliate operations.”
· No clear standard developed; but agency will require:
o Constructive Knowledge
o Some control or ability to control responsible affiliates
o Failure to terminate violators or otherwise address violations
· Authority: contract enforced
o Actual: Consent-based
o Apparent: 3P’s perspective
o Implied: A’s perspective
o Inherent: ?
· Estoppel: Reliance-based damages
· Ratification: Post-contractual consent
· Restitution: Unjust Enrichment
Fiduciary Duties of Agent & Principal
Agent’s Duties to Principal
Good Faith & Fair Dealing
§§ 8.15 “A principal has a duty to deal with the agent fairly and in good faith, including a duty to provide the agent with information about risks of physical harm or pecuniary loss that the principal knows, has reason to know, or should know are present in the agent's work but unknown to the agent.”
You can contract around the DOL
§ 8.01: “An agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship.”
§§ 8.03 Acting As Or On Behalf Of An Adverse Party – “An agent has a duty not to deal with the principal as or on behalf of an adverse party in a transaction connected with the agency relationship.”
§§ 8.04 Competition – “Throughout the duration of an agency relationship, an agent has a duty to refrain from competing with the principal and from taking action on behalf of or otherwise assisting the principal's competitors. During that time, an agent may take action, not otherwise wrongful, to prepare for competition following termination of the agency relationship.”
§§ 8.05 Use Of Principal's Property; Use Of Confidential Information – “An agent has a duty
1. Not to use property of the principal for the agent's own purposes or those of a third party; &
2. Not to use or communicate confidential information of the principal for the agent's own purposes or those of a third party.
§§ 8.05 Working for Multiple Principals – An agent who acts for more than one principal in a transaction between or among them as a duty:
1. Duty to deal in good faith with each principal
2. To disclose to each principal:
1. Good faith
3. Fair Dealing
The fact that the agent acts for the other principal(s)
b. All other facts that the agent knows, has reason to know, or should know would reasonably affect the principal's judgment unless the principal has manifested that such facts are already known by the principal or that the principal does not wish to know them
3. To otherwise deal fairly with each principal
Food Lion v. Capital Cities. TV reporters (∆) got hired by Food Lion in order to do undercover documentary about meat handling practices. Reporters were hired without revealing they were ABC employees on application; misrepresented employment background. Quit after a few weeks, documentary harmful to Food Lion aired a few weeks later. Holding: ∆ breached their DOL.
· Court zeroed in on the fact that ∆’s interests were adverse to P’s interests; and ∆ had “requisite intent” to act against P’s interests.
o “Accidental” occasions where an agent acts against principal – i.e. their second job making them “too tired” to be good at primary job – are not DOL breaches.
· Specific DOL Breaches:
o Misappropriation of Profits/Opportunities
o Non-disclosure of confidential information
Contracting Around Duty of Loyalty
§§ 8.06 Principal's Consent
Agent conduct that would otherwise amount to a DOL violation is not a DOL violation IF:
1. In obtaining the P’s consent, the A:
a. Acts in good faith
b. discloses all material facts that the agent knows, has reason to know, or should know would reasonably affect the principal's judgment unless the principal has manifested that such facts are already known by the principal or that the principal does not wish to know them, and
c. otherwise deals fairly with the principal
2. The consent concerns either (1) a spe
to such third persons.”
Comment: AA only exists to extent it is reasonable for 3P to believe A is authorized.
“Apparent Authority is the power held by an A or other actor to affect a P’s legal relations with 3P when the 3P reasonably believes the actor has authority to act on behalf of the P & that belief is traceable to manifestations of P to 3P.
· 3d Only [Comment c]:
o Apparent Authority trumps any restrictions that Principal has privately placed on Agent’s Authority
· “A person manifests assent or intention through written or spoken words or other conduct” [R3 § 1.03] · Types include [Comment c] o Explicit statements that a principal makes directly to a third party,
o Statements made by others concerning an actor's authority that reach the third party and are traceable to the principal.
§ For example, a principal may make a manifestation about an agent's authority by directing that the agent's name and affiliation with the principal be included in a listing of representatives that is provided to a third party.
§ The principal may make a manifestation by directing an agent to make statements to third parties or directing or designating an agent to perform acts or conduct negotiations, placing an agent in a position within an organization, or placing the agent in charge of a transaction or situation.
Bethany Pharmacal v. QVC. QVC used IL state employee to find contest applicants; employee accidentally told P they won (they are actually alternates). P spent $100k after “winning,” sued arguing there QVC gave employee Apparent Authority. Holding: No apparent authority because no reasonable belief that ∆ gave employee authority.
· Key Factors:
o All communications from employee to P clearly stated “only valid contract is QVC Purchase Order” – which was never sent
o QVC immediately notified P of mistake
Overview: “A principal may be estopped from denying apparent authority if (1) the principal's intentional or negligent acts, including acts of omission, created an appearance of authority in the agent, (2) on which a third party reasonably and in good faith relied, and (3) such reliance resulted in a detrimental change in position on the part of the third party. [Restatement 2d § 8(B)]
Restatement 3d § 2.05
A person who has not made a manifestation that an actor has authority as an agent and who is not otherwise liable as a party to a transaction purportedly done by the actor on that person's account is subject to liability to a third party who justifiably is induced to make a detrimental change in position because the transaction is believed to be on the person's account, if:
(1) the person intentionally or carelessly caused such belief, or
(2) having notice of such belief and that it might induce others to change their positions, the person did not take reasonable steps to notify them of the facts.
Estoppel v. Apparent Authority
· Estoppel does not require as close a fit between P’s manifestations & 3P’s belief