Select Page

Business Associations
University of Illinois School of Law
Sharpe, Nicola Faith

Business Associations Outline Sharpe Fall 2012


Introduction to Agency

Restatement § 1.01 – “Agency is a 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”

Elements – Agency Test:

· Manifestation of consent by the principal to agent that agent should act

o On P’s behalf

o Subject to P’s control

· A’s consent so to act

Restatement § 1.02 – Parties’ labeling and popular usage do not control

Duties of Agents: Fiduciary Duties: (1) Duty of Care and (2) Duty of Loyalty


Gorton v. Doty [forming an agency relationship/manifesting control]

· Facts: the son was a football player in high school and was transported to football game in Appellant’s vehicle driven by the football coach; appellant knew the football team was playing and volunteered her car to transport the team; she asked the coach if he had all the cars necessary for the trip; he said he needed one more and she told him he could use her car but only if he drove it; she was not given promised or given any compensation for the use of her car; the school paid for the gas

· Issue: Did an agency relationship exist between the coach and appellant? As a principal, appellant would be liable for the actions of Garst.

· Analysis:

o They did not have a contract but that was not important to the court [just look at the conduct that meets the definition of agency]

o The majority finds that there IS an agency relationship here by:

§ Manifestation of consent by the principal to agent that agent should act

· On P’s behalf

· Subject to P’s control [by saying she only wanted the coach to drive the car]

§ A’s consent so to act: just assume that the act of driving the car indicates consent

o Also, parties’ labeling and popular usage do not control

· Policy reasons as to why the court found appellant (Doty) liable:

o The school is immune from liability under the state law and Doty’s insurance would have covered the damages

o Also, the coach died in the accident and his estate could not handle the costs

o Also, we may just want the owner to be responsible when letting people drive their cars [the car owner is arguably the best person in the position to insure that these accidents don’t happen and is in the best position to have an insurance policy to cover the damages à so if each car owner knows they are liable, car owners will become more risk averse and be more caution when loaning cars (this is actually public policy in most states)]

o Should this matter where we decide to place the liability? Do we deter potentially social beneficial behavior? They may not have had enough cars to get to the football game.

o The person in control of the vehicle at that time is in the best position to avoid an accident [some states have “no fault liability” to account for this – we want to give incentive for drivers driving someone else’s car to drive safe]

· PAT Triangle [to observe agency relationship between actors]

· This case all comes down to control [think about loaning someone a rake: if you give someone a rake to rake your yard then he would be your agent; if you give somebody a rake to do what they want with it then he would not be your agent because you do not have control and he would then become a gratuitous bailee]

· In Groton, it is very debatable whether or not she exhibited control [court said because she said only he could drive it and because she desires the football team to get to the game means she exhibited control]

· Think about a mortgage and a home owner: you would never say that a bank is the principal but yet they have clauses in the contract that tell you what you cannot do to your house so they exhibit control – maybe indicates a flaw in the case

· Take aways: control matters a lot and you can accidently form an agency relationship!!

– Jenson Farms v. Cargill [analyzed distinction between creditor-debtor and principal-agent relationship]

· Facts: Warren defaulted on contracts with partners; Cargill financed Warren – Cargill gave Warren a revolving line of credit and had a right of refusal on grain; Warren had grain elevator contracts with farmers; Warren defaults and farmers sue Cargill

· Issue: Whether Cargill, by its course of dealing with Warren, became liable as a principal on contracts made by Warren with farmers

· Analysis:

o Cargill is liable for debts of Warren – how?

o Cargill said the relationship was purely contractual and farmers argue that Cargill had become so involved and that it had become an agency relationship [Cargill also had deep pockets]

o A manifestation of consent by Cargill that Warren act:

§ On Cargill’s behalf by procuring the grain for Cargill as a part of its ordinary operations, which operations were financed by Cargill

§ Subject to Cargill’s control by directing Warren to implement its operations

· Control of the end result, even if only by prescribing the agent’s responsibilities

§ Interfering in Warren’s operations

o Warren’s consent so to act – how?

§ Sort of ignored it

o Look to Restatement § 14 – when does a creditor become a principal?

§ Creditor becomes a principal at the point at which it assumes de facto control over the conduct of the debtor

§ Here, we come out with nine factors that show control:

· (1) Cargill’s constant recommendations to Warren by telephone

· (2) Cargill’s right of first refusal on grain

· (3) Warren’s inability to enter into mortgages, to purchase tock or to pay dividends without Cargill’s approval

· (4) Cargill’s right of entry onto Warren’s premises to carry on periodic checks and audits

· (5) Cargill’s correspondence and criticism regarding Warren’s finances, officers’ salaries and inventory

· (6) Cargill’s determination that Warren needed “strong paternal guidance”

· (7) Provision of drafts and forms to Warren upon which Cargill’s name was imprinted

· (8) Financing of all Warren’s purchases of grain and operating expenses

· (9) Cargill’s power to discontinue the financing of Warren’s operations

o Here, Cargill evolved from a creditor to a principal [this is scary for people who make loans]

o This case is an outlier because very rarely should a creditor become a principal

o So, what a creditor/supplier CAN do”

§ Insist on receiving information and financial reports

§ Provided counseling on discrete matters

§ Advise borrower to hire consultants on larger more systematic problems of its business

o What is likely to put creditor/supplier in jeopardy is:

§ A veto power over most important decisions

§ Coercing the debtor into putting in control a person designed by the creditor

§ Providing other creditors assurance of payment

§ Wearing multiple “hats” (creditor, supplier, customer, landlord, etc.)

o Remember: it is not that you shouldn’t assume control, just be aware of the relationship you are creating [you don’t want to accidently create the relationship, but this is where you add value as an attorney by advising creditor to not exercise too much control]

Authority and Apparent Authority

General Rule: P is liable to third party (T) for a contract that A made with T on P’s behalf if: (1) P and A have an agency relationship, and (2) A had actual or apparent authority to enter into the specific transaction with T.

Three types of authority: Actual, Implied, Apparent

· Actual: “An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent so to act.” § 2.01

o The agent reasonably believes that the principal wishes the agent so to act

· Implied: Authority is implicit within scope of the agency relationship. See § 2.02(1) Scope of Actual Authority (“An agent has actual authority to take action designated or implied in the principal’s manifestations to the agent and acts necessary or incidental to achieving the principal’s objectives, as the agent reasonably understands the principal’s manifestations and objectives when the agent determines how to act.”). This is viewed from the agent’s perspective.

· Express: if P tells A to do it expressly

· Apparent: “Apparent authority is the power held by an agent or other actor to affect a principal’s legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations.” § 2.03. This is viewed from the third-party’s perspective.

o A third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations

A can bind P if A had any of the three types of authority

Custom: Actual authority arising from custom is when there is no communication about the agency relationship but the duties are common and reasonable in relevant industry or community. This is technically implied actual authority.

Actual authority [custom] – agent gives principal no explicit instructions but it is customary for the agent to have certain types of powers unless P directs otherwise [or incidental or necessary to complete the job]

· However, if P hires a broker but say that you do not want him to advertise something on his website but it has become necessary to put real estate online, and P gets a bill from the website [third party] f

nable for third parties to presume Kays had the authority to bind his employer to sell

· Joyce had specifically requested that Kays be the one to communicate with him and Mueller agreed

· Why is Ampex not off the hook?

· Ampex held out Kays as having the authority that a salesperson usually has, which is to sell

· Kays has apparent authority:

· Kays, at the direction of Mueller, submitted the document to Joyce for signature

· Joyce indicated to Kays and Mueller that he wished all communications to be channeled thru Kays

· What could Ampex have done to avoid this?

· Trained K and M better (or as court notes, they could have made a form K with clear indication of the need for approval by the contract manager)

· Also, we may want to encourage Joyce to take steps to protect himself: He could have asked Kays for proof of authority [but at what point do you start looking paranoid rather than prudent?]

Note: you can have actual authority when no apparent authority exists and visa versa

Liability of the Undisclosed Principal

Restatement (Third) § 2.06. Liability of an Undisclosed Principal

· An undisclosed principal is subject to liability for third party who is justifiably induced to make a detrimental change in position by an agent acting on the principal’s behalf and without actual authority if the principal, having notice of the agent’s conduct and that it might induce others to change their positions, did not take reasonable steps to notify them of the facts.

· If you are aware…

· An undisclosed principal may not rely on instructions given an agent that qualify or reduce the agent’s authority to less than the authority a third party would reasonably believe that agent to have under the same circumstances if the principal had been disclosed.

· Even if you are not aware..

OLD TEST: [§ 195 2d] [you look toward what the A is doing and if it was in scope of business]

· A was a general agent for an undisclosed P, and had AEA/AIA to conduct some types of transactions

· The transactions in question were usual or necessary in such a business

· A was acting on P’s account [ie – in P’s interests]

CURRENT TEST: (§ 2.06)

· Instructions given to an agent…

· That qualify or reduce the agent’s authority to less than the authority the third party would reasonably believe the agent has under the same circumstances if the principal had been disclosed

Difference between the two: Under the new test, undisclosed P is subject to liability more often than in old test; under new test, liable if you know even if it not customary]

Watteau v. Fenwick

· Facts: Humble sold the hotel to defendants, a firm of brewers, but remained as manager; the beer license was taken out in Humble’s name and his name was on the door; Humble had no authority to buy any supplies excepted bottled ales and waters; but Humble bought (but did not pay for) cigars and bovril from plaintiff; plaintiff wants to recover the price of goods delivered to the hotel

· Issue: is there an agency relationship here?

· Analysis:

· Plaintiff said defendants are undisclosed principals because they enabled Humble to hold himself out to the world as a proprietor of the business; Defendants say there is no agency

· Did Humble have actual authority to buy the bovril and cigars from plaintiff? NO actual look to the communications between the principal and the agent: what could the agent have reasonably believed the scope of authority to be; in the face of explicit instructions not to do something, an agent has no actual authority to do it

· Did Humble have apparent authority? Apparent authority is the power held by an agent to affect a principal’s legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal and the belief is traceable to the principal’s manifestations