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Business Associations
University of Illinois School of Law
Aviram, Amitai

Agency relationship
·         Definition
o    R §1.01: An agency relationship is created when A & P manifest assent that A shall act –
§  On P’s behalf
§  Subject to P’s control
o    R §1.02: Parties’ labeling & popular usage do not control
o    R §4.03: An agency relationship may be created retroactively by P’s ratification, if A purported to act as P’s agent
o    Co-agents vs. Sub-agents
§  Co-agents
▫       Agents who have same P
s  If P instructs one agent to direct another, one is a superior co-agent & the other is a subordinate co-agent [Rest. 1.04(1),(9)] ▫       A superior co-agent is not the principal of a subordinate co-agent
s  Therefore, a superior co-agent isn’t vicariously liable for a subordinate co-agent’s tort
§  Sub-agents
▫       Agents have two Ps: the sub-agent’s principal (i.e., the agent) & the agent’s principal [Rest. 1.04(8)] ·         Authority
o    The legal power A binds to B
o    Actual authority
§  Agent reasonably believes, in accordance with the principal's manifestations to the agent, that the principal wishes the agent so to act.
o    Apparent authority
§  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.
·         Creating
o    Factors in Cargill
§  Cargill’s constant recommendations to Warren by telephone
§  Cargill’s right of first refusal on Warren’s grain
§  Warren’s inability to enter into mortgages, to purchase stock or to pay dividends without Cargill’s approval
§  Cargill’s right of entry onto Warren’s premises for periodic audits
§  Cargill’s correspondence & criticism regarding Warren’s finances, officers’ salary & inventory
§  Cargill’s determination that Warren needed “strong paternal guidance”
§  Provision of forms to Warren upon which Cargill’s name was imprinted
▫       FN 7: Warren pays for the grain with drafts (checks) drawn on Cargill
§  Financing all of Warren’s purchases of grain & operating expenses
§  Cargill’s power to discontinue the financing of Warren’s operations
·         Exit (Terminating)
o    Terminating actual authority
§  Agreement between P & A
§  Law
▫       “the occurrence of circumstances specified by statute”
§  Changed circumstances
▫       “the occurrence of circumstances on the basis of which [A] should reasonably conclude that [P] no longer would assent to [A’s] taking action on [P’s] behalf.”
§  A’s or P’s death/cessation of existence/suspension of powers
▫       A’s death/cessation of existence/suspension of power
s  Terminates actual authority
▫       P’s death/cessation of existence/suspension of powers
s  Terminates actual authority:
▻      Immediately (except as provided by law) – if P is not an individual
▻      Only when A has notice of P’s death – if P is an individual
▻      Termination effective vs. T if T has notice of P’s death (even if A doesn’t know)
§  P’s loss of capacity
▫       P’s loss of capacity terminates actual authority:
s  Immediately – if P is not an individual
s  Only when A has notice of P’s permanent/adjudicated loss of capacity – if P is an individual
s  Termination effective vs. T if T has notice of P’s permanent/adjudicated loss of capacity (even if A doesn’t know)
▫       P can agree in writing that actual authority will become effective upon P’s loss of capacity, or not be revoked by loss of capacity
§  P’s and A’s power to terminate
▫       Regardless of any agreement between P&A, actual authority is terminated if:
s  A renounces authority by manifestation to P; or
s  P revokes authority by manifestation to A
▫       Authority is terminated when the other party has notice
▫       If an agreement between P&A does not allow termination of the agency (or specifies a term beyond the time the agency was terminated), the agency is still terminated, but the terminating party might be liable for breach of contract
o    Terminating apparent authority
§  Termination of actual authority does not end any apparent authority held by the agent
§  Apparent authority ends when it is no longer reasonable for T to believe that the agent continues to act with actual authority
Relationship between A\P\T
·         A' duty to P (Agency solution)
o    Fiduciary duty (duty)
§  A & B
▫       A duty that requires an actor (A) to act in the interest of beneficiary (B), beyond what is required of A by contract
s  Agent owes principal a FD: “Agency is the fiduciary relationship…” (Rest. §1.01)
§  T
▫       T as plaintiff
s  Third party cannot sue an actor (or a beneficiary) for breach of FD, since FD is owed to B, not to T
s  Rest. §7.02: A’s breach of duty to P does not make A liable to T
▫       T  as defendant
s  FD is owed by A, not by T, so P has no claim against T for breach of FD
s  However, P has a claim against T for aiding & abetting a breach of FD if P can prove:
▻      A owed a FD to P
▻      A breached the FD to P
▻      Knowing participation in that breach by T; and
▻      Damages proximately caused by the breach
o    B's potential challenge vs. A's acts
§  Authority
▫       A’s acts on behalf of B were not permitted by contractual terms between A&B or by terms mandated by law (contractual & political methods)
§  FD
▫       A’s authorized act had an improper purpose, i.e., was not in B’s interests (agency method)
o    Actor's potential flaws (breach)
§  Lack of authority
▫       Actual authority, not apparent authority
§  Negligence
▫       Breach of the A’s duty of care (“DoC”)
▫       Action/inaction in which A doesn’t employ sufficient effort/care
§  Self-dealing
▫       Breach of the A’s duty of loyalty (“DoL”))
s  Conflict of (self-)interest & duty (“CoI”)
s  Unauthorized benefit from fidu

ehalf A acted or purported to act)
s  Person who is authorized to approve on behalf of B & doesn’t have CoI with B regarding the behavior that is approved
s  Approver must have legal capacity at time of approval [Rest. 4.04] ▫       Act can be approved
s  Appropriate scope
▻      Ratification (not consent) must encompass “the entirety of an act, contract or other single transaction” [Rest. § 4.07] ▻      Approval to cure DoL
▸       It must apply to either
◦       A  specific act/transaction or
◦       To acts/transactions of a specified type that could reasonably be expected to occur in the ordinary course of the agency [Rest. 8.06(1)(b)] s  A's behavior can be attributed to B
▻      A must have acted or purported to act on B’s behalf [Rest. 4.03] ▻      B must exist at the time of the act [Rest. 4.04] ▻      No public policy reasons to prevent B from approving
▫       Appropriate approval
s  Unambiguous
▻      Rest. 4.01(2) – B approves an act by:
▸      Manifesting assent that the act shall affect B’s legal relations; or
▸      Conduct that justifies a reasonable assumption that B consents
▻      Approval requires objective or externally observable indication that B consents to A’s act
▻      Rest. 4.02(2)(b) makes ratification ineffective in favor of A if B ratifies to avoid a loss
▸      So, if B ratifies to avoid a loss, B is liable to T, but A may be liable to B
▸      Not relevant for prior consent
s  Informed
▻      Approval is valid only with “knowledge of [all] material facts involved in the original act” [Rest. 4.06, 8.06(1)(a)(ii)] ▸      Unless B was aware of such lack of knowledge
▸      Material facts: Facts that a reasonable person would consider relevant to the decision whether to approve
▻      Rest. 4.02(2)(a) says ratification is ineffective in favor of a person who causes it by misrepresentation or other conduct that would make a contract voidable (duress, undue influence)
s  Timely
▻      Ratification ineffective if “circumstances that would cause the ratification to have adverse and inequitable effects on the rights of [T] ▸      T withdraws from the transaction
▸      Material change of circumstances that makes it inequitable to bind T
▸      Ratification after rights have crystallized
▻      The timeliness element is irrelevant for prior consent