Business Associations – Fall 2010 – Professor Lin
Chapter 1 – Agency
1. Who is an Agent?
Gorton v. Doty – Permission to drive one’s vehicle creates an agency relationship. P hurt in car accident after D loaned vehicle to 3rd party to transport to fb game.
i. An Pal-agency relationship arises when one is authorized to “manage some affair for another.”:
1. Manifestation of consent of principal to agent, and agent to principal
2. Act on behalf of second party
3. Control by principal over agent.
a. Control only over the goal, not the means of accomplishing it.
ii. How you describe it makes the diff on whether or not it’s agency:
1. Gave permission – this is a loan, not agency
2. Directed – telling him what to do – this is agency.
iii. May rebut w/ evidence that driver acted w/o the owner’s express or implied permission
iv. Agency has 3 forms: Pal-agent, master-servant, and employer-employee or independent contractor.
1. Bc no compensation for D, cannot be master-servant or employer-employee….
v. It is not essential that there be a contract between the principle and agent or that the agent promise to act as such, nor is it essential to the relationship of principle and agent that they, or either, receive compensation.
vi. Dissent: agency requires a specific undertaking, and loaning was merely a kind gesture. Garst was a gratuitous bailee, not D’s agent.
Jenson Farm v. Cargill – A creditor who controls its debtor’s business operations is liable for the debtor’s debts. P’s contracted w/ Warren for grain, which was financed/controlled by D
vii. “A creditor that assumes control of its debtor’s business may become liable as principal for the debtor’s acts in connection w/ the business.”
viii. Indications of D’s Control: consistent recommendations, rights of 1st refusal, power to inspect and audit, prohibition of mortgages, stock purchases, or dividend declarations.
ix. Nearly all grain was sold to D, indicating that they weren’t separate enterprises.
x. Control over sales and purchases isn’t sufficient; De facto control over management is determinative.
xi. An agreement may result in the creation of an agency even though parties didn’t call it an agency and did not intend the legal consequences of the relation to follow.
1. Difference for a bank is that the lender’s reason for financing is for the interest received. In Cargill, the reason for the financing was to establish a source of market grain for its business & took control of the operation for this purpose.
2. If you’re lending money to a borrower, you would probably take the steps Cargill did to make sure operating properly. Any of the measures Cargill took would be appropriate, but the problem in Cargill is that there is an extraordinary amount of control – too many of these things put together.
Restatement of the Law (Third) Agency
Three Types of Authority:
1. Actual – Express or Implied (to do what is necessary to accomplish goal; or to reasonably interpret)
2. Apparent – (1) “Holding Out” – Pal is holding out relationship to some 3rd party; (2) Reasonable Belief – 3rd party has reasonable belief based on conduct (agent in normal course of biz)
3. Inherent (to prevent inequitable results) –RS2 § 8A (not actual, apparent, or estoppel)
**Apparent Authority Versus Apparent Agency: The key difference between these theories, apart from one obviously being authority and the other agency, is that a finding of apparent agency will in no way bind the principal–it is only a requisite step to finding authority when actual agency does not exist. The fact that apparent agency, and hence apparent authority along with it, is not found, does not mean that if actual agency existed apparent authority could not be found. Though a job title alone is almost never enough to lead to apparent authority, the mere existence of actual agency, by virtue of employment, is a substantial factor supporting the reasonableness of the third party's reliance–possibly leading to a finding of apparent authority.
2. Agency Power to Bind – Liability of Principals to 3rd Parties in Contract
A. The Agent’s Authority
Distinguishing Actual, Apparent, and Implied Authority: Look at the knowledge of the parties involved:
§ If an agent knows he has a Pal’s authority, actual authority exists.
§ If actual authority does not exist, but a 3rd party reasonably believes from the Pal’s actions that authority exists, apparent authority is created.
§ Implied authority is actual authority that the Pal never formally conferred, but that can be inferred based on the authority granted and past conduct btw the Pal and the agent.
*If the 3rd party knows the authority does not in fact exist, any inference of authority is destroyed.
Mill Street Church v. Hogan – Continuous past authorized acts sufficiently confer Implied Authority on an agent. P was injured after he was hired by his brother, who lacked actual authority to hire, to paint the church.
i. Implied authority is actual authority that the P intended the agent to possess and includes such powers as are practically necessary to carry out the delegated duties.
ii. To establish implied authority: the A must establish through circumstantial evidence, including the parties’ acts and conduct and especially the continuous past conduct, that the A reasonably believed the P wished him to act in a certain manner bc he had been similarly authorized in the past.
iii. Also, church ratified that P was an employee when they paid him for his time.
a. past conduct – Bill had been allowed to hire Sam for previous work.
b. necessary to implement the express authority – in order to finish the work, Bill had to hire a helper.
c. agent reasonably believed he had the authority – practice in the past; Bill never told otherwise; Church even paid Sam for hours worked.
Dweck v. Nasser – Settlement agreement was binding when signed by Pal’s primary attorney, not attorney on record. P settled a dispute w/ D’s long-time regular attorney (shibboleth) w/o D’s approval.
iv. Actual authority – expressly granted either orally or in writing, D said to “do what you want.”
v. Implied authority – means actual authority either (1) to do what is necessary, proper, and usual to accomplish or perform an agent’s express responsibilities or (2) to act in a manner in which an A believes the pal wishes the A to act based on the A’s reasonable interpretation of the Pal’s manifestation in light of the pal’s objectives and other facts known to the A.”may be proved by acquiescence (assent) of the pal w/ knowledge of A’s acts, shown by long course of dealing that assent may be assumed.
vi. Apparent authority – A Pal is bound by an A’s apparent authority which he knowingly permits the A to assume of which he holds the agent out as possessing – shibboleth had all three authorities because of past dealings and D’s manifestations.
370 Leasing v. Ampex – Absent contrary knowledge, a salesperson has apparent authority to bind his p to sell its products. P executed a document provided by D’s sales rep for the purchase of computer equipment, but D never executed the document. D argued it was merely an offer to purcahse that D didn't accept
vii. “An Agent has apparent authority sufficient to bind the P when the P’s acts would lead a reasonably prudent person to suppose that the A had the authority he purports to exercise.”
3. This was despite that the rep knew that “only managers could sign,” bc, absent knowledge on the part of 3rd parties to the contrary, an agent has the apparent authority to do those things which are usual and proper to the conduct of the biz which he is employed to conduct.
viii. Agents representations can’t create apparent authority, however, the agents pal informed P that all communication w/ D would go through D’s agent, which was sufficient, so there was “acceptance”
xii. D failed to “expressly limit” Agents authority – Limits on authority must be disclosed to the 3rd party.
ix. Apparent authority exists when a 3rd party has no reason to believe actual authority does not exist and the authority is exercised in the furtherance of the usual/proper business duties A was employed to perform.
Inherent Agency Power – authority that comes from the role/status that comes w/ being an agent. The agent (in the role/status) ordinarily possess certain powers.
Watteau v. Fenwick – Undisclosed Principal (tavern owner) is liable for his agent’s debts owed to an unknowing cigar vendor. Humble operated D’s Tavern and purchased goods from P, despite D’s express denial!
x. When a Pal is undisclosed to 3rd parties, the actions taken by an agent in furtherance of the P’s usual and ordinary business binds the Pal, regardless of whether the A has actual authority.
xi. No apparent authority where pal is undisclosed and P was unaware that person he was dealing was an A.
xii. If 3rd party knows he’s dealing w/ an A, the A may bind the Pal only if he acts w/ actual authority or the Pal otherwise holds the agent out as having authority. See RS (2nd) §194/195.
xiii. § 6.03 Agent for Undisclosed Pal. When an agent acting w/ actual authority makes a K on behalf of an undisclosed Pal, (1) unless excluded by the K, the Pal is a party to the K; (2) the agent and the 4d party are parties to the K; and (3) the Pal, if a party to the K, and the 3rd party have the same rights, liabilities, and defenses against each other as if the pal made the K personally.
xiv. Rest (2nd) Agency § 194 – an undisclosed principle is liable for acts of an agent done on his account, if usual or necessary in such transactions, although forbidden by the principle.
xv. Rest (2nd) Agency § 195 – an undisclosed principal who entrusts an agent with the management of his business is subject to liability to third person with whom the agent enters into transactions usual in such business and on the principal’s account, although contrary to the directions of the principal.
Boticello v. Stefanovicz – Receipt of rent under a lease w/ an option does not constitute ratification of
s not usually act for the master in business relations w/ 3rd parties.
I. Control is an essential element of an agency relationship, whether a servant or an independent contractor. To determine whether the relationship is master-servant, the court will look at whether the principle had control over the day-to-day operations.
Hoover v. Sun Oil – Independent contractor exists. No agency exists if an oil company does not control a service station’s operations. P was injured when his car caught fire while a stations employee was fueling it. Less control over day-to-day operations.
i. D visited station weekly to inspect and take orders, and discuss customer service, but Station owner bore risk of profit/loss, determined his own hours, managed workforce = Ind Contractor.
a. Barone was permitted to sell other products, but required to sell D’s products.
ii. Test: did D retain right to control the details of the day-to-day operation? *Control or influence over results alone is insufficient to show D controlled day-to-day.
iii. Express contract language is NOT always dispositive. Must look at actual control used.
iv. Independent K – contracts w/ another to do work, but is not controlled by the other with respect to his physical conduct in the performance of the undertaking. He may or may not be an Agent.
F. Franchise agreement – the franchisee will agree to operate its business in certain ways, as required by the franchisor, in exchange for the use of the license. The purpose of this is to create standardization in all the franchises nationwide (to achieve the “brand”). However, a franchise could still be a servant-master relationship if there is sufficient control by the franchisor.
Murphy v. Holiday Inns – Franchise agreement that provides an operation system for a franchisee does not establish a P-A relationship. P slipped in a motel owned and operated by a franchisee under a license agreement.
i. If a franchise K regulates the activities of the franchisee as to vest the franchiser w/ control w/in the definition of agency, the agency relationship arises even if the parties expressly deny it.
Test: Nature and extent of control agreed upon – depends on D’s level of control over the alleged “instrumentality” which caused the harm (i.e. security for rape issue) *doesn’t matter if they exercise the right to control, but only that they have the right to do so.
ii. Here, Holiday had no control to maintain premises or managerial activities, so no P-A relationship.
B. Tort Liability and Apparent Agency
Miller v. McDonald’s – Apparent Agency exists. Franchisor liable for holding Franchise out as Agent and 3rd person relied on holding out. P got hurt after biting into sapphire in Big Mac.
i. Liability under Actual Agency Test: Actual agency for vicarious liability requires that D have the right to control the franchisee’s daily operations, an agency relationship exists.
ii. McDonalds controlled by “making” 3k follow their procedures for doing things, like assembling the mac.
iii. Apparent Agency – One who represents that another is his servant or other agent and thereby causes a third person justifiably to rely upon the care or skill of such apparent agent is subject to liability to the third person for hard caused by the lack of care or skill of the one appearing to be a servant or other agent as if he were such.
iv. (Representation) Everything about the appearance of the restaurant identified it with McDonald's – this image the McDonald’s had worked to create – reputation, etc.
v. (Reliance) D countered that P’s reliance was not there – she had to prove her past experiences with McD’s were all with restaurants owned by McD’s and not franchisors – but no good bcGeneral public not expected to understand how franchise works. McDonald’s cannot ignore its own efforts to lead the public to believe that all McDonald's are the same.
a. Court found P-A existed bc sign wasn't enough to show it was a franchise, and P relied on appearance that it was a McDonald’s.