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Business Associations/Corporations
University of Illinois School of Law
Hurt, A. Christine

I.               Agency
A.     Agency Relationship Background
               i.      Agency: relationship between 2 people or entities when one (agent) consents to act on behalf of and subject to the control of the other (principal).
              ii.      Consequences of Agency Relationships:
1.       Agent can bind the principal in contract.
2.       Principal may be liable for an agent’s torts (negligence & intentional if w/in the scope).
3.       Knowledge of the agent is imputed to the principal.
4.       Both the principal & agent have fiduciary duties to one another.
            iii.      Agency costs = Costs the principal incurs from monitoring mechanisms & agent’s different decisions.
B.     Creation of an Agency Relationship
               i.      Creation: (1) Principal manifests desire for Agent to act on Principal’s behalf & under Principal’s control, and (2) Agent explicitly or implicitly consents. (2 Restat. of Agency 1, 15)
              ii.      Elements of Agency
1.       Mutual Consent (formal, informal, express or implied)
a.       Objective test; doesn’t require overt meeting of the minds, contract, consideration or label.
2.       Agent undertakes to act on behalf of the principal. 
3.       Agent’s actions are subject to principal’s control. (only goals, not details)
a.       Basile v. H&R Block: Tax preparer was not borrowers’ agent when, after preparing taxes, it offered customers Rapid Refunds with a bank lender b/c customers didn’t control preparer’s filing of tax returns & preparer didn’t have authority to bind customers to loan agreements. Preparer facilitated loan process, and customers freely chose loans. No fiduciary duties.
C.    Agent’s Fiduciary Duties to the Principal
               i.      Principal’s Duties: perform of contract obligations (compensate agent), exercise good faith & care (good conduct), don’t interfere, cooperate, and indemnify agent for losses.
              ii.      Fiduciary Duties of the Agent:
1.      Duty of care
2.       Duty of disclosure (duty to inform Principal of all facts relevant to the transaction that Agent reasonably believes Principal would want to know) (not Basile v. H&R Block)
3.      Duty to obey
4.      Duty to act within the scope of authority
5.       Duty of loyalty: Agent must act solely for the benefit (in the interests) of the Principal in all matters connected with the agency. (2 Restat. of Agency 387)
a.       3 ways for an agent to be disloyal:
                                                                 i.    Compete directly with Principal
                                                                ii.    Misappropriate (steal; usurp) Principal’s profits, property, or business opportunities
                                                              iii.    Breach Principal’s confidences
b.       Food Lion v. ABC: Reporters breached duty of loyalty to grocery employers by secretly videotaping food handling for TV broadcast & deliberately acquiring an adverse interest.
D.    Principles of Attrition & the Agent’s Authority
               i.      Principle of Attrition: Principal may be held liable for Agent’s torts & can be required to fulfill contracts because of control, benefit & consent.
              ii.      Actual Authority: Agent’s express authority to transact specific duties; created when Principal manifests consent to Agent to act on Principal’s behalf in a particular matter.
1.       3rd party does NOT need to know about agency or authority (Principal can be undisclosed).
2.       Implied Authority: Actions that are implied by the original grant of actual authority, even when there is no explicit request. (Giving Agent express authority to undertake a certain act includes implied authority to do all things proper, usual, and necessary to exercise that express authority.)
a.       Determined by industry custom.
b.       Agent with who acts outside of actual authority may be liable to Principal.
c.       Castillo v. Case Farms: Farmer is liable to migrant workers for violating work laws even though he did not directly hire workers b/c he hired recruiter, who had express authority to recruit & implied authority to provide housing & transportation. (industry customs)
            iii.      Apparent Authority: Actor can bind another in a transaction w/ a 3rd person, without actual authority, when 3rd person reasonably believes, based on manifestations of the purported Principal, that the actor is authorized to act on behalf of purported Principal.
1.       Basis for liability when: Person appears to be agent, even when they are not (no authority) OR Agent acts exceeding the scope of his actual authority.
2.       Requirements for apparent agency:

ipal is a business.
                                                              iii.    Right to control (not actual control): An employer does NOT have to control the details of an employee’s tasks in order to be held liable for the employee’s torts.
1.       Dias v. Brigham Med Ass: Physician group is liable to injured party b/c doctor who worked in hospital was group’s employee, not independent contractor, even though group didn’t have the ability to control the specific treatment decisions. (Remanded to find out if doctor was acting w/in scope of employment.)
b.       Agent’s conduct is within the scope of his employment.
                                                                 i.    Within scope factors: Work employed to perform? Substantially w/in authorized time & space? Actuated in part by purpose to serve master? Intentional force expected?
                                                                ii.    Act can be within the scope even if employer forbid the act or act is a tort or crime.
2.       Indemnification: Employer has a right of indemnity against a wrongdoing employee.
3.       Reasons for respondeat superior: (1) Control (employer can prevent torts by hiring, training, & firing employees); (2) Employer is more able to pay damages to injured party; (3) Encourages participation in risky jobs & prevents delegating risk to hazard-prone people; (4) Efficiently spreads risks; (5) Enterprise liability (principal benefits to most, so accepts risks of liability).
             v.      Undisclosed principals: When 3rd party contracts with a party & doesn’t know that party is an agent acting on behalf of a principal, principal OR the agent may be liable on the contract.
1.       Encourages disclosure & minimizes concealment of principal. (ex: Westec v. Lanham)
Termination: Principal can terminate Agent at any time & must give reasonable notice to 3rd parties.