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Business Associations
University of Iowa School of Law
Yockey, Joseph W.



Principles of Agency and Authority

Economic Agency
– The interests of the principal and agent DO NOT align
o Monitoring costs – PèA
o Bonding costs – PçA
§ Forces A to prove to P he committed, honest, loyal

Legal Agency
Who is an Agent?
Gordon v. Doty – Women lends car to football coach
– AGENCY exists – she set condition precedent by requiring him to drive
o No contract is required
– Hold Doty liable to increase monitoring costs

Rest. 3rd § 1.01 – Three Part Agency Test
– Manifestation of consent
– Another acts on principal’s behalf and subject to principal’s control; and
– Agent consents to act

Joe Hypos:
– Quinn asks for help, Joe agrees, injures someone è agent
– Joe asks Quinn if he can leave the room, injures someone outside è not agent

Jenson v. Cargill
– Grain elevator case è Warren is agent
o Cargill had a lot of control over Warren
§ Name on bag, could check financial reports, financing, etc.
§ Paternal guidance
§ C had control
– IRRELEVANT what the parties claim they are

Rest. 3rd § 1.02 – Parties’ Labeling and Popular Usage Not Controlling
– Whether a relationship is characterized as an agency in an agreement between parties or in the context of industry or popular usage is not controlling

The Agent’s Authority
Mill Street Church v. Hogan
– Church hired B to paint– discussed him getting a partner – he hires his brother
– Both are agents
– Actual authority to hire
o Express – told B to hire someone
o Implied – circumstances show it was necessary to hire someone
§ Had previously hired his brother

Rest. 3rd § 2.01 – Actual Authority – Express or Implied
– An agent acts with actual authority when, at time of taking action that has legal consequences for the principal, agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent to so act
o Focus on what A reasonably believes è
§ What P thinks means nothing

Dweck v. Nasser
– Family lawyer settles case è He is an agent
– Actual Authority
o Express – told he could “talk in his name”, “do what he wanted”
o Implied – course of dealings
§ Do what is necessary, usual, and proper to do the task
§ Act in a manner in which an agent believes the principal wishes the agent to act based on A’s reasonable interpretation of P’s manifestation in light of P’s objectives and other facts know to A
– Apparent Authority
o Nasser made statement to third parties about lawyer’s power to settle
§ Held lawyer out as having this power

Rest. 3rd § 2.03: Apparent Authority
– the power held by an agent or other actor to affect a principal’s legal relationship with third parties when a third party reasonably believes the actor has the authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations.
o Depends on what third party would reasonably believe A’s authority is based on è some action, traceable to P, which would create this inference

Three-Seventy Leasing Corp. v. Ampex Corp.
– Agent is sole employee – no actual authority but negotiated and made K anyway
– Principal is liable – did nothing to refute third party’s belief
– Did P act in such a way as would lead a reasonably prudent person to suppose that the agent had the authority he exercises?
o Third party cannot have knowledge to the contrary
– Principal did not refute it – everything seemed normal, like Kay had authority

Undisclosed Principal
Watteau v. Fenwick
– Humble owned bar, now just manages
– Buys things he isn’t authorized to buy è Undisclosed P gets sued
o No actual authority
o No apparent – 3rd party didn’t even know there was a P
– Bar is liable – incentivizes principal to check on his assets – monitoring

Rest. 3rd § 2.06 Liability of Undisclosed Principal
– An undisclosed principal is liable to a 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 … did not take reasonable steps to notify third parties of the facts

Botticello v. Stefanovicz
– Married couple selling farm – husband contracts without wife
– NO implied agency
o Wife had always signed documents
o Being married is NOT dispositive
o Husband never said he was an agent for wife
– No ratification by wife – need acceptance of the alleged A’s conduct with an intent to ratify and full knowledge of material facts
o Accepting payment not sufficient – needed to know WHY

Rest. 3rd § 4.01: Ratification
(1) Ratification is the affirmance of a prior act done by another, whereby the act is given effect as if done by an agent acting with actual authority
(2) A person ratifies an act by:
a. manifesting assent that the act shall affect the person’s legal relations, or
b. conduct justifying a reasonable assumption that the person so consents

Rest. 3rd § 4.06: Knowledge Requisite to Ratification
– A person is not bound by a ratification made without knowledge of material facts

Rest. 3rd § 4.07: No partial ratification
– A ratification is not effective unless it encompasses the entirety of the act, contract or other single transaction

HYPO: Pam, accepts checks from publisher after her husband, unknown to her, enters into a contract with the publisher for her next book. Pam tries to sell her book to another publisher arguing her husband acted without authority.
– depends on circumstances
o if checks says “book advance” on the bottom, Pam knows the facts
§ intent and knowledge
o if it doesn’t say that, and she has a long relationship with the publisher and had been getting royalties for other books, acceptance of check doesn’t show she knew and intended to ratify

HYPO – you seen men cutting your lawn, wave, bill comes weeks later
– No opportunity to say no, action is already done, forced to accept benefits
– Can’t ratify the act by accepting the benefits, no act left to be ratified
o Accepting benefits is forced, can’t be said to show intent

Rest. 3rd § 4.05 – Timing of Ratification
– A ratification of a transaction is not effective unless it precedes the occurrence of circumstances that would cause the ratification to have adverse and inequitable effects on the rights of third parties.

HYPO: Give your money to a broker dealer to put in safe Treasury Bonds. Instead, your broker invests it in his Ponzi scheme.
– If you just received statements, can’t ratify by passive acceptance
o Can’t show in

harmed by an agent’s conduct….

Turns on whether agent was an employee or an independent contractor
– Comes from respondeat superior (master is liable for the torts of his servants)
– Master-Servant relationship exists where the servant has agreed:
o (a) to work on behalf of the master and
o (b) to be subject to the master’s control or right to control the physical conduct of the servant
– Independent Contractor—two types:
o Agent-type—one who has agreed to act on behalf of anther, but not subject to the principal’s control of how to accomplish his work
o Non-agent-Type—operates independently and at arm’s length

Servant vs. Independent Contractor
Humble Oil v. Martin
– Woman’s car rolled across street and into family while they were in their yard
– Sue gas station owner or Humble, oil company owner contracts with
o Depends on whether owner is an independent contractor or “employee”
– Look at control over day-to-day operations of establishment—question of fact
– View/agreement of parties not controlling, though specifics in agreement relevant to determining who has control

o Look at: Humble is liable – Humble had a lot of Control
§ Who pays rent and utilities – H paid 75%
§ Who sets hours – H did this
§ Who hires/fires employees
§ Who determines prices and compensation
§ How much reporting to the oil company – lots
§ Who owns the actual product
§ Duration of contract between the parties
§ Who owns equipment
§ Who assumes risk of loss?

Hoover v. Sun Oil Co. – Similar to Humble
– P injured at gas station by a fire, sues the oil company
– Sunoco argues it is not liable because the owner is independent contractor
– Court finds owner was an independent contractor
o More discretion given to owner
o Owner assumed risk of loss/gain è Includes liabilities
§ Owner owned the products, no reports made to Sunoco, set his own hours, didn’t have to follow Sun’s advice
· Ran own day-to-day operations

The Case of the Franchise:
Murphy v. Holiday Inns, Inc.
– P sued Holiday Inn – NOT the franchisee – after slipping and falling at hotel
o Disclaimer gave all liability to franchisee
– Disclaimer in franchise agreement not controlling—question is one of fact:
– Control was weak, risk of loss lies with the franchisee
– HI couldn’t fix rates or control business expenditures
o Franchisee is LIABLE è HI had no role in day-to-day – little control

How would you structure a franchise agreement to avoid liability?
– Should include:
o Standards for look and feel of business – uniformity
§ Want to make business identifiable with “the brand”
o Let rate pricing decisions be up to franchisee
o Have franchisee get liability insur. to indemnify you or get own insurance
– Should not include: