Business Organizations Outline
Harper Ho, Virginia; University of Kansas School of Law; Fall 2015 Semester
The Law of Agency: Chapter 1
Creation of the Agency Relationship
S&W pp. 1-6, Nears v. Holiday Hospitality Franchising, Inc. (skip Prob. 1-1) Stat.: Rstmt (3d) of Agency §§ 1.01-1.03, 1.04(5) :
I. Definitions & Concepts:
a. Fiduciary Relationship: Agency is the 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. Restatement of Agency §1.01. A fiduciary has a position of trust.
b. Tripartite Relationship: Agency is a tripartite relationship because:
i. Principal — Agent = Inward looking consequences
ii. Principal — Third Party = Outward looking consequences
iii. Agent — Third Party = Outward Looking Consequences
c. Sources of Law:
i. Common Law – Agency This is the foundation of the duty of loyalty.
ii. Statutory Law – State Corporate Law and Federal Securities Law
iii. Contract Law
II. Forming Agency Relationship: (3) Elements Need to be Met
1. Control: This is the key issue.
2. Benefit: There must be some benefit to the principal from the actions of the agent. This is not always helpful by itself, but it is an essential element of agency.
3. Mutual Assent: Both the Principal and the agent must have manifested assent. This relates to §1.02 and §1.03.
a. Look at what the parties are doing objectively. The parties don’t have to realize there is an agency relationship.
b. Agency is by and large mandatory because third parties (T) need protected. Sometimes, the principal and agent may dictate the agreement, but only the inward looking consequence—not outward looking consequence (relating to T’s).
Always go through the 3 Elements. And look to §1.01-1.04.
III. Statutes “Zoomed In”
a. §1.01: Agency is the 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.
i. A fiduciary has the position of trust. The agent is the person acting on behalf of the principal.
b. § 1.02: Parties’ Labeling and Popular Usage Not Controlling: An agency relationship arises only when the elements stated in § 1.01 are present. Whether a relationship is characterized as agency in an agreement between parties or in the context of industry or popular usage is not controlling.
i. A written contract is not needed to determine if there is an agency relationship. There need not be conscious intent to create the agency relationship. As long as intent is present where a principal exercises control over an agent, and the agent works to benefit the principle = intent.
c. § 1.03 Manifestation: A person manifests assent or intention through written or spoken words or other conduct.
i. Nothing needs to be in writing. An agent could be an entity, business organization, individual, independent contractor, etc.
d. § 1.04(5): Person. A person is (a) an individual; (b) an organization or association that has legal capacity to possess rights and incur obligations; (c) a government, political subdivision, or instrumentality or entity created by government; or (d) any other entity that has legal capacity to possess rights and incur obligations.
IV. Case/Examples Covered:
i. Nears believed she was wrongfully terminated by Marshall (hotel manager) and needed to show that her employer (ETEX) was an agent of (HHFI: Holiday Inn) for vicarious liability purposes. She could not do so. She pointed to the required management training course; the standards manual given. HHFI pointed out there was no ownership/financial control between the two; no comingling funds; no employment decisions; no compensation to employees of ETEX. [This would be easy if there was a contract. There is no need for a contract. If Marshall was an employee of HHFI, this would be no problem—there would clearly be an agency relationship. ] ii. The court went through the (3) elements: Control, Benefit, and Mutual Assent.
iii. Rule: Setting standards in agreement for acceptable service quality does not itself create a right of control. §1.01 comment f.
Fiduciary Duties of Principal and Agent
I. Basic Agency Concepts:
a. Double Agents: The fiduciary duties in a double agent context are exactly the same as the fiduciary duties an agent would have to one principal. Just apply the fiduciary duties separately. §3.14-3.16
b. Duty of Agents: Duty & Care. The primary duty is the duty of loyalty. Performance of contract obligations, care, competence, diligence, obedience and disclosure. Most important duty in the law of agency is the agents’ duty of loyalty to the principal. The agent must act “loyally for the principal’s benefit in all matters connected with the agency relationship. Can’t use/communicate confidential information for agent’s own purpose or 3rd party. Duty not to compete with principal. Duty not to act as adverse party to the principal in a transaction connected with the agency relationship.
i. Disloyal when: Inconsistent with promoting the best interests of the employer at time when on payroll; deliberately acquires an interest adverse to employer.
ii. Agent’s Own Conduct: Remember that an agent is always liable for their own conduct. An agent that commits a tort is still considered a tortfeasor.
c. Duty of Principals: Performance of contract obligations, good faith and fair dealings, and indemnification under certain circumstances.
d. Modifying the Duty “Agents” Duty: Modification of the agents’ duty may occur, only between the Principal and the Agent, thus, inward-looking consequences. Generally, the duty is loyalty and care; but the rules set forth the default can be modified if it pertains to inward-looking consequences… Modification can occur only through contract.
i. Examples: Confidentiality Agreements & Non-Competition Agreements
ii. Non-Competition Agreements: default rule: Cannot compete with Principal during the scope of agency.
wishes the agent to act based on the agent’s reasonable interpretation of the principal’s manifestation in light of the principal’s objectives and other facts known to the agent.
b. Elements of Implied Authority: 1) Proper; 2) Usual; 3) Necessary to exercise that express authority.
c. Apparent Authority:
i. ELEMENTS OF APPARENT AUTHORITY: 1) Manifestations by the principle [any type]; 2) A third party who reasonably believes that the agent OR another actor has the ability to act on the principals behalf; 3) The belief needs to be traceable to the manifestations of the principal.
ii. What it is: Apparent authority is power held by 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 manifestation (§2.03) This refers to the communication between Principal to the Third Party PàT. It focuses on what the third party thinks.
1. Traceable: This means direct or indirect communication.
iii. How it Arises:
1. Non-Agent: When one person appears or purports to be an agent but they are actually not an agent. (This often occurs after termination of the agency relationship).
2. Case of Overreach by Legitimate Agent: When an agent is authorized to do something but is not authorized to do what they did, meaning, they have neither express nor implied authority to do what they are doing. (Marking Manager exceeding scope of money).
a. Implied Warranty of Authority §6.10: Agent purporting to make contract, representation, conveyance to a third party without the power to bind must give an implied warranty of authority to the third party and is subject to liability to the 3rd parry for damages cased for loss, including loss of the benefit expected from performance by the principal. (Doesn’t apply if principal ratified the act; agent gave noticed to 3rd party that no warranty of authority is given; or 3rd party knows person acted w/o actual authority).
iv. Examples of Apparent Authority:
1. Hyvee Post Office employee working the Post Office section. The postal service has allowed a Hyvee employee to be in a position that “I” can believe Hyvee employee’s take “my” package on behalf of the postal service, even though I had no direct communication from the post office.
2. Marketing Manager who is allowed to take contracts for their company, contracts with home depot for a contract that was over the marketing manager spending amount. The third party reasonably believes the marketing manager has authority to act on behalf of their employer and the belief is traceable.