THE AGENCY RELATIONSHIP
Creating an Agency Relationship
Note: Corporations require agents to act on their behalf, because corporations are not capable of acting on their own.
Jenson Farms v. Cargill – Plaintiff farmers seek to recover money owed by Warren, whom they believe is an agent of Cargill. Cargill says Warren is not their agent, but an independent actor. CT find that a constructive agency relationship does exist here. “The point at which the creditor becomes a principal is that at which he assumes de facto control over the conduct of his debtor.”
Cargill court notes Cargill’s right of first refusal, Cargill’s determination that Warren required “strong paternal guidance,” and Warren’s inability to act without Cargill’s permission (Cargill responsible for financing, and Warren could not enter into mortgages, purchase stock, or pay dividends without Cargill’s approval). A creditor can require periodic audits and offer advice without incurring principal liability, but Cargill went beyond that.
i. Agency exists where (1) one person [the principal] consents that another [the agent] shall act on the principal’s behalf and subject to principal’s control and (2) the agent consents to so act.
1. Must be agreement between P & A, but there does not necessarily have to be in contract
2. May be proved circumstantially
a. Types of Agent Authority:
i. Actual –
1. Actual express: principal expressly authorizes agent to act
2. Actual implied: agent has authority to do those things that are incidental to doing what is expressly authorized
a. Both actual and implied authority are determined by considering the relationship between the principal and the agent.
ii. Implied – actual authority that is circumstantially proven where principal actually intended the agent to have authority inquiry focused on present/past conduct of P
iii. Apparent – when there is an appearance of authority, the principal will still be bound even if they did not expressly authorize the authority, if the agent has been “held out” as having such authority.
1. Apparent authority is determined by considering the relationship between the principal and third parties. What did third party believe?
iv. Estoppel/Ratification – not technically an agency relationship – when there is action taken by an unauthorized agent, a principal may nonetheless ratify the agreement, thus giving it effect. If the principal does not attempt to stop the unauthorized agent, principal may be equitably estopped from denying effect to agreements made by unauthorized agent.
v. Liability of the Undisclosed Principal – (§2.06) – not technically an agency relationship – where a principal attempts to obscure its identity and offer the agent as an independent actor, the undisclosed principal may be subject to liability for the actions of the agent.
vi. Consider Problems – Page 16 for determining types of agency relationships.
ii. Supplier v. Agent distinction – A supplier of a product is not necessarily an agent. A supplier that is shown to have an independent business is not considered an agent of the principal product producer.
To prevent an agency relationship, put into writing that there is no such relationship, and make sure you are not participating in constructive agency. Otherwise, fully supervise your agent to ensure you, as principal, do not have any nasty surprises.
Agency and the Law of Contracts – Liability of Principal to 3rd Parties in Contract
Mill Street Church v. Hogan – Church hired Bill Hogan to paint the church. In the past when the Church hired Bill on jobs, Bill had been allowed to hire his brother Sam as his assistant. Unbeknownst to Bill, the Church leaders had decided that they would prefer Bill hire someone other than his brother to assist. So, Bill hired Sam yet again – but Sam was badly injured during the job. Sam attempted to collect workers comp through the Church. Church argues that Bill did not have (implied) authority as an agent of the Church to validly hire Sam.
i. Note: Person that alleges that an agency relationship exists bears the burden of proof.
ii. CT: Considering the circumstantial evidence, finds that Bill had implied authority. Specifically, the CT points to: (1) past circumstances – Bill had been able to hire Sam when needed, (2) present circumstances – the painting job required assistance. Also, Bill had apparent authority, as consideration of Sam’s beliefs makes evident. (3rd person’s beliefs) – Sam believed that Bill had the authority to hire him.
iii. Consider: the fact that the painting job required another person to complete creates an argument for actual implied authority – hiring another person is “practically necessary to carry out the duties actually delegated.”
Church is bound by Bill’s action, because Bill was an agent of Church.
Dweck v. Nasser – Dweck was president of Kids, Int’l. Nasser was chairman of the BOD of Kids. Nasser fired Dweck, claiming that Dweck was operating competing businesses from Kids HQ. Dweck in turn filed a complaint alleging that Nasser had breached his fiduciary duty by replacing Dweck with Nasser’s own nephew. Dweck and Nasser entered into settlement negotiations. Dweck was represented by Atty Watchel. Nasser’s attorney of record was Atty Heyman, but Atty Shiboleth, a friend of Nasser, was also heavily involved. The issue arose when Shiboleth notified Watchel that the action was settled. Nasser then later objected to the settlement that Shiboleth that authorized on Nasser’s behalf.
i. CT: An atty of record in a pending action who agrees to the settlement is presumed to have lawful authority to make such agreement. However, here, Heyman, not Shiboleth, was the attorney of record. Shiboleth is not presumed to have such authority. Whether or not Shiboleth possessed authority to act on Nasser’s behalf depends on whether there was an agency relationship.
1. Actual express authority? Nasser instructed Shiboleth to “do what you want or what you understand.” He also said that Shiboleth “can talk in my name.” Nasser argues that because the settlement includes terms that he considers “non-negotiables,” it is unenforceable. CT: Shiboleth had express authority – Nasser bound to settlement agreement.
2. Actual implied authority? “Implied authority is authority that the agent reasonably believes he has as a result of the principal’s actions. May be shown by evidence of the agent’s course of dealing.” In the course of dealing with Nasser over 20 years as well as his actions in connection with settlement negotiations, Shiboleth reasonably believed that he had authority based on Nasser’s actions. CT: Shiboleth had implied authority – Nasser bound to settlement agreement.
3. Apparent authority? “A principal is bound by an agent’s apparent authority which he knowingly permits the agent to assume of which he holds the agent out as possessing.” Nasser told D’s family members that he did not intend to read the settlement and would sign when he was instructed to do so. So, Nasser held out Shiboleth as having the authority to settle on Nasser’s behalf. CT: Shiboleth also had apparent authority.
Nasser, the principal, is bound by the settlement agreement (aka contract).
370 Leasing Corp. v. Ampex Corp. – Kays, an Ampex saleman, initiated discussions with Joyce, 370’s only employee. Document for Kays to Joyce provided for the purchase of six memory units. Joyce executed the agreement. But Ampex argues that that document was not formally executed by Ampex. Ampex contends that the document constituted a solicitation. 370 counters that even if the document signed by Joyce constituted, at most, an offer – the offer was accepted by representatives of Ampex. This is the view that the CT takes – so, to find a valid contract, there must have been some acceptance of Joyce’s offer. Kays sent a letter to Joyce confirming the delivery dates for the memory units – this constitutes acceptance.
i. Did Kays have apparent authority to bind Ampex, the principal? “An agent has apparent authority sufficient to bind the principal when the principal acts in such a manner as would lead a reasonably prudent person to suppose that the agent had the authority he purports to exercise.”
1. Here, Kays’ title was that of “salesman” – which suggests that he had the authority to sell the products.
2. Joyce had requested that all communication be through Kays, and the upper management at Ampex agreed.
3. Though there might have been an understanding within the company that only certain people could authorize a sale, this policy was not communicated to Joyce.
CT: Kays had apparent authority. Delivery confirmation constituted acceptance. K formed!
Agency and the Law of Torts; Franchises
Servant versus Independent Contractor – In the following “gas station” cases, the legal issue turns on whether the operator of the station was an employee – a “servant” in legal terminology – or an independent operator – an “independent contractor” or “franchisee.” Because, under the doctrine of respondeat superior [from Torts], a “master” (employer) is liable for the torts of its “servants” (employees). A master-servant (i.e. employer-employee) relationship exists where the servant has (a) agreed to work on behalf of the master and (b) to be subject to the master’s control or right to control the “physical conduct” of the servant. [That is, the master controls the way that the job is performed, not just what the end result is.]
Terminology:
ARCHAIC: “Servant” “Indpt Contractor – Agent” “Indpt Contractor – Non-Agent”
MODERN: “Employee” “Non-Servant Agent” “Non-Agent Indpt Contractor”
The determination in the “gas station” cases of whether an agency relationship exists is the control given (or reserved from) to the operator of the station. (Though there is an argument to be made that the two operators in Humble Oil and Sun Oil had similar levels of control.
Humble Oil v. Martin – A vehicle left at Humble Oil rolled into a nearby front yard, injuring the Martin family. Humble Oil argues that it is not liable as the station was operated by an independent
o him.
i. CT: If a servant takes advantage of his service to make a profit for himself, in the sense that the assets of which he has control or the position that he occupies are the real cause for his obtaining the money, then he is accountable for it to his master.
ii. Here, the officer’s position was the only reason he obtained the smuggling job, and the resultant money. The Crown is the only party to which the money can be “properly paid.” Money must be paid to the principal.
b. Note: it seems important to the court that the activity was kept a secret from the principal. If the agent had gotten permission, it would seem to be a different case – “if the servant has unjustly enriched himself by virtue of his service without the master’s sanction, the law says that he ought not be allowed to keep the money.”
c. Consider: Hypos on page 78-79
d. General Automotive Manufacturing Co. v. Singer – Automotive had hired Singer, a mechanic with a great reputation. Singer was a very valuable employee for Automotive. Singer was contacted regarding some possible work for Automotive, but determined that Automotive was not equipped to complete the work. He made arrangements to have the order fulfilled elsewhere and kept the profit for himself… without informing Automotive. He later opened a side ‘consulting’ business as well.
i. Do Singer’s actions constitute violations of the duty of loyalty owed by Singer to Automotive?
ii. Singer argues that the two businesses (manufacturer and consultant) are different types of businesses, and that he was, therefore, not in competition with Automotive.
1. CT: It is not the name of the business that determines conflicts, but the nature of the business. Here, as a consultant, Singer was expected to find the lowest cost manufacturer… even though he was supposed to bring in business for Automotive (which would not always be the lowest bidder).
2. Singer then argues that refusing orders which he felt that Automotive could not produce was within the scope of his discretion as general manager of Automotive.
3. CT: Singer had a duty to exercise good faith by disclosing this information to Automotive. Then it would have been Automotive’s decision to fill the orders outside the business if necessary… and it would have been Automotive making the profit, rather than Singer. “Singer violated his fiduciary duty to act solely for the benefit of Automotive.” Employee must turn his profit over to principal.
e. Note: The rule that any profits of the agent earned as a result of his relation to the principal must be paid to the principal is a default rule that applies in the absence of agreement otherwise. Hence, you can contract around this outcome.
Duties During and After Termination of Agency – “Grabbing and Leaving”
a. Town & Country House v. Newberry – Employer sues ex-employees, alleging that employer’s business is “unique” and that ex-employees cannot engage in the business without breach of the confidential relationship in which the employees learned the company’s trade secrets.
i. TCT: Complaint dismissed – methods not unique, customer contacts not confidential, and no negative covenants present here.
ii. App CT: Reversed. Ex-employees conspired to terminate their employment, form a new business and solicit employer’s customers.
iii. CT: TCT should not have dismissed the complaint entirely. “Even where a solicitor of business does not operate fraudulently under the guise of his former employer, he still may not solicit the latter’s customers who are not openly engaged in business in advertised locations or whose availability is not readily ascertained but for the employer’s efforts.” The customers that the ex-employees solicited were not readily obtainable without the knowledge obtained from the employer. The ex-employees only solicited the employer’s customers.
Employer entitled to enjoin ex-employees from further solicitation of its customers. Damages to be paid.
b. Moral of the Story: There are some fiduciary duties that may survive the “death” of the relationship between the principal and the agent.
