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Business Associations
University of Illinois School of Law
Winship, Verity

Business Associations

Professor Winship Spring 2017

University of Illinois College of Law


A.Does an Agency Relationship exist? [Restatement 3d § 1.01]

Manifestation of the consent by the principal that the agent act on the principal’s behalf; AND

Subject to the principal’s control; AND

The agent manifests consent.

Not necessarily a contract between the parties
Evaluate the facts in each particular situation
Look at what the parties said, what they said, how they acted, their course of dealing over time, even silence.
Agent does not need to get paid

Gordon v. Doty (Idaho 1937)

Rule of Law: A principal-agent relationship exists when two persons agree that one person will act on behalf of, and subject to, the control of the other person.

B.Agency Problems Involving Contracts

Want to know whether the principal is bound by the agent’s actions.

1.Is there Actual Authority? [Restatement 3d §§ 2.02(1) & 3.01]

Actual Express Authority: principal explicitly communicates to agent about the activities in which the agent may engage and the obligations the agent may undertake

Actual Implied Authority: mining the principal’s explicit instructions and asking what else might be reasonably included in those instructions (i.e. implied) to accomplish the job

includes actions that are necessary to accomplish the principal’s original instructions to the agent
includes those actions that the agent reasonably believes the principal wishes him to do, based on the agent’s reasonable understanding of the authority granted by the principal.

Castillo v. Case Farms of Ohio

A P may be held liable for the acts of its purported agent based on an actual agency relationship created by the principal’s express or implied delegation of authority to the agent. Evidence of authority: ATC was expressly authorized to recruit workers.

2.Is there Apparent Authority? [Restatement 3d § 2.03]

Does the third party reasonably believe that the agent has authority? AND

Is that belief traceable to the principal’s manifestations?

look at manifestations between the principal and the third party.
Apparent authority is created when a person (principal or apparent principal) does something, says something, or creates a reasonable impression (a “manifestation”) that another person (the apparent agent) has the authority to act on behalf of that apparent principal.

Bethany Pharmarcal v. QVC:

what the principal has expressed to the third party through the agency;
no reasonable person would have thought that Janis had the authority to enter into the contract.

3.Is there Ratification? [Restatement 3d § 4.01(1)]

Did the principal, through word or deed, manifest his assent to (“affirm”) the agreement?

Was the affirmation express?

Was the affirmation implied?

Often implied by principal accepting the benefits of the transaction
“conduct that justifies a reasonable assumption that the person so consents”

Restatement Ratification Requirements:

the act is ratifiable as stated in § 4.03,

the person ratifying has capacity as stated in § 4.04,

the ratification is timely as stated in § 4.05, and

the ratification encompasses the act in its entirety as stated in § 4.07.

Things to watch out for:

If the third party manifests an intention to withdraw from the transaction prior to the ratification, the principal may not then ratify the agreement.
Ratification will be denied when necessary to protect the rights of innocent third parties. (This usually happens when there has been some material change in the circumstances between the time of the transaction and the time of the purported ratification.)
Ratification might also be denied if the passage of time affects the rights or the liability of a third party.
Once a contract has been ratified, it generally creates retroactive authority.
Did the principal know or have reason to know, at the time of the alleged ratification, the material facts relating to the transaction? If not then ratification is not valid.

4.Is there Estoppel?

Are there Intentional, negligent or otherwise culpable acts or omissions by the principal, which

create an appearance of authority in the purported agent? AND

A third party who reasonably, and in good faith, acts in reliance on that appearance of authority; and

The third party changes her position in reliance upon that appearance of authority

Differing factor from Apparent Authority

C.Agency Problems Involving Torts

The question in agency law is whether the principal may be found liable for the torts of an agent, even though the principal was not negligent.

1.Is the agent an “employee”? [Restatement 3d § 7.07]

The question of whether or not a situation involves an employee/employer relationship with regard to agency is a question of fact.

Was the employee acting within the scope of employment?

An employee acts within the scope of employment when performing work assigned by the employer OR

engaging in a course of conduct subject to the employer’s control.

An employee’s act is not within the scope of employment when it occurs within an independent course of conduct not intended by the employee to serve any purpose of the employer.

Factors to be considered: [comment f to Restatement 3d § 7.07]

The extent of control the master has over details of the work.
Whether the agent is engaged in a distinct occupation. 

Whether the work is usually done under direction by employer or w

who is actually acting)

Placards: “independently owned and operated.”
Letterhead, promotional literature, invoices, etc: “independently owned and operated.”

Quality control:

Brand integrity

Quality control: the Franchisee shall purchase all equipment and supplies from Franchisor prior to opening the Business and exclusively use Franchisor equipment and supplies in the operation of the business; permit persons designated by Franchisor, without notice, to inspect the premises and observe the operation of the business; operate the business in strict accord with the provision of the Operating Manual.
The Manual: Divide contents into mandates and suggestions.

Mandates: enforced by franchisor’s field personnel
Suggestions: unenforced supplemental guidance & training
If Manual is incorporated into contract, mandates will be treated as obligatory terms. Suggestions may be less likely to lead to determination of control.

TM protection

Franchise expansion

Prevent vicarious liability:

The franchisee shall

Set its own hours of operation in accordance with generally accepted business practice
Hire its own employee in accordance with the standards specified in the Operating Manual
Be free to fix its own prices notwithstanding that Franchisor may recommend prices;
Indemnify Franchisor against all claims, demands, damages, costs or expenses which may be incurred by Franchisor resulting from any breach of this Agreement on the part of Franchisee
Place the following warning outside of all beverage containers: “Careful, the beverage you are about to enjoy is extremely hot.”

Indemnification: the Franchisee shall indemnify Franchisor against all claims, demands, damages, costs or expenses which may be incurred or received by Franchisor resulting from any finding by any court or regulatory agency that Franchisee is an agent of Franchisor.
Insurance: The Franchisee shall obtain and maintain at its cost and expense such policies of insurance in such amounts and from a domestic insurance policy that is rated not less than A by Best’s Insurance Review or other such accredited rating agency, as may reasonably be required by Franchisor. The Franchisee will provide Franchisor, on an annual basis, a certificate of insurance naming Franchisor as an additional insured and showing proof of coverage.