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Business Associations
University of Kentucky School of Law
Michael, Douglas

Business Associations

Michael

Spring 2016

Agency

General Rule: 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 Third § 1.01)

–the person who is acting for another
– the person for whom the agent is acting for

§ 1.04 Terminology

(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 the government; or
(d) any other entity that has legal capacity to possess rights and incur obligations

I.e., artificial entities such as corporations, trusts, partnerships, or limited liability companies may act as principals or as agents

Three elements of an agency relationship

Consent (assent) by the principal and the agent;

Both the principal and the agent must consent to the agent acting on the principal’s behalf and subject to the principal’s control
A person manifests assent or intention through written or spoken words or other conduct.

The principal must manifest his consent to the agent

May be written, oral, or implied from the parties’ conduct

Action by the agent on behalf of the principal; and

The agent must be acting on the principal’s behalf
The agent must be acting primarily for the benefit of the principal

A court must believe that the agent was acting primarily for the benefit of the principal

by the principal

The agent must act subject to the principal’s control
The agent must be subject to the principal’s control over the result or ultimate objectives of the agency relationship
The principal must have ultimate responsibility to control the end result of his or her agent’s actions

No intent needed: “The relation which the law calls agency does not depend upon the intent of the parties to create it, nor their belief that they have done so.” (Restatement Third § 1.02)

An agency relationship arises only when the elements stated in § 1.01 are present. Whether a relationship is characterized as agency is an agreement between parties or in the context of industry or popular usage is not controlling.

Agency is the fiduciary relationship that results from the manifestation of consent by one person to another that the other shall act on behalf and subject to his control, and consent by the other party.
In order to create an agency there must be an agreement, but not necessarily a contract between the parties.
An agreement may result in the creation of an agency relationship although the parties did not call it an agency and did not intend the legal consequences of the relation to follow.
The existence of the agency may be proved by circumstantial evidence which shows a course of dealing between the two parties.
When an agency relationship is to be proven by circumstantial evidence, the principal must be shown to have consented to the agency since one cannot be the agent for another except by consent of the principal.
Control Element:

Creditor Rule: A creditor who assumes control of his debtor’s business may become liable as principal for the acts of the debtor in connection with the business. (Restatement Second of Agency § 14 O)

A security holder who merely exercises a veto power over the business acts of his debtor by preventing purchases or sale above specified amounts does not thereby become principal. However, if he takes over the management of the debtor’s business either in person or through an agent, and direct what contracts may or may not be made, he becomes a principal, liable as a principal for the obligations incurred thereafter in the normal course of business by the debtor who has now become his general agent. The point at which the creditor becomes a principal is that at which he assumes de facto control over the conduct of his debtor, whatever that terms of the formal contract with his debtor may be.

Rule about the facts of control: All the factors must be viewed in light of all the circumstances surrounding the principal’s aggressive financing of the agent.
Facts that indicate control over the agent (from the case):

The principal’s constant recommendations to the agent by telephone;
The principal’s right of first refusal on grain;
The agent’s inability to enter into mortgages, to purchase stock or to pay dividends without the principal’s approval;
The principal’s right of entry onto the agent’s premises to carry on periodic checks and audits;
The principal’s correspondence and criticism regarding the agent’s finances, officers’ salaries and inventory;
The principal’s determination that the agent needed “strong paternal guidance;”
Provision of drafts and forms to the agent upon which the principal’s name was imprinted;
Financing of all the agent’s purchases of grain and operating expenses; and
The principal’s power to discontinue the financing of the agent’s operations

On behalf of element:

Buyer-seller Relationship: (rather than principal-agent)

One who contracts to acquire property from a third person and convey it to another is the agent of the other only if it is agreed that he is to act primarily for the benefit of the other and not for himself
Factors indicating the one is a supplier, rather than an agent:

(1) that he is to receive a fixed price for the property irrespective of price paid by him –the most important
(2) that he acts in his own name and receives the title to the property which he thereafter is to transfer
(3) that he has an independent business in buying and selling similar property

***It must be shown that the supplier has an independent business before it can be concluded that he is not an agent***

“We deal here with a business enterprise markedly different from an ordinary bank financing, since the principal (Cargill) was an active participant in the agent’s (Warren’s) operations rather than simply a financier. The principal’s (Cargill’s) course of dealing with the agent (Warren) was, by its own admission, a paternalistic relationship in which the principal (Cargill) made the key economic decisions and kept the agent (Warren) in existence.”

The only question is whether the facts and circumstances surrounding the parties’ arrangement (agreement) meet the legal definition of agency.

In Contract

General Rule: The principal is liable on a contract between the agent and a third party when the agent acts with actual authority, apparent authority, or inherent authority
Actual Authority

Arises from the manifestation of the principal to an agent that the agent has power to deal with others as a representative of the principal

Actual authority flows from the principal to the agent.

General Rule for Actual Authority: An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent so to act. (Restatement Third § 2.01)

Put another way: If the principal’s word or conduct would lead a reasonable person in the agent’s position to believe that the agent has authority to act on the principal’s behalf, the agent has actual authority to bind the principal

Creation of Actual Authority: Actual authority, as defined in § 2.01, is created by a principal’s manifestation to an agent that, as reasonably understood by the agent, expresses the principal’s assent that the agent take action on the principal’s behalf. (Restatement Third § 3.01)
Formal Requirements: If the law requires a writing or record signed by the principal to evidence an agent’s authority to bind a principal to a contract or other transaction, the principal is not bound in the absence of such a writing or record. A principal may be estopped to assert the lack of such a writing or record when a third party has been induced to make a detrimental change in position by the reasonable belief that an agent has authority to bind the principal that is traceable to a manifestation made by the principal. (Restatement Third § 3.02)
Scope of Actual Authority (Restatement Third § 2.02)

(1) An agent has actual authority to take action designated or implied in the principal’s manifestations to the agent and acts necessary or incidental to achieving the principal’s objectives, as the agent reasonably understands the principal’s manifestation and objectives when the agent determines how to act.
(2) An agent’s interpretation of the principal’s manifestations is reasonable if it reflects any meaning known by the agent to be ascribed by the principal and, in the absence of any meaning known to the agent, as a reasonable person in the agent’s position would interpret the manifestations in light of the context, including circumstances of which the agent has notice and the agent’s fiduciary duty to the principal.
(3) An agent’s understanding of the principal’s objectives is reasonable if it accords with the principal’s manifestations and the inferences that a reasonable person in the agent’s position would draw from the circumstances creating the agency.

Incidental Implied Actual Authority: authority to do incidental acts that are related to a transaction that is authorized.

Is a principal’s manifestation to an agent expresses the principal’s wish that something be done, it is natural to assume that the principal wishes, as an incidental matter, that the agent take the steps necessary and that the agent proceed in the usual and ordinary way, if such has been established, unless the principal directs otherwise. The underlying assumptions are that the principal does not wish to authorize what cannot be achieved if necessary steps are not taken be the agent, and that the principal’s manifestation often will not specify all steps necessary to translate it into action.

Agent’s title or position: The notion that title or position conveys authority can also be used to establish actual authority to the extent that the agent reasonably believes that he has authority to act based on the title or position given to him by the principal.
Combating actual authority: If the principal clearly expresses to an agent that they

er

The skill required in the agent’s occupation requires a skilled worker

Whether the principal supplies the tools and other instrumentalities required for the work and the place in which to perform it

Whether the agent supplies the tools and other instrumentalities required for the work and the place in which to perform it

If the length of time during which the agent is engaged by a principal is greater

If the length of time during which the agent is engaged by a principal is less

Whether the agent is paid by the time worked

Whether the agent is paid by the job performed

Whether the agent’s work is part of the principal’s regular business

Whether the principal and the agent believe that they are creating an employment relationship

Whether the principal is or is not in business

No single factor is determinative, the language of an agreement will not prevail over the reality of the relationship
Also relevant is the extent of control that the principal has exercised in practice over the details of the agent’s work
Employee (servant in the 2d)– an agent whose principal controls or has the right to control the manner and means of the agent’s performance of work
Nonemployee agent: a person who contracts with another to do something for him but who is not controlled by the other nor subject to the other’s right to control with respect to his physical conduct in the performance of the undertaking (Restatement Second §2(3))
Direct liability (Restatement Third §7.03(1))

General Rule:

(1) A principal is subject to direct liability to a third party harmed by an agent’s conduct when

(a) as stated in § 7.04, the agent acts with actual authority or the principal ratifies the agent’s conduct and

(i) the agent’s conduct is tortious, or
(ii) the agent’s conduct, if that of the principal, would subject the principal to tort liability; or

(b) as stated in § 7.05, the principal is negligent in selecting, supervising, or otherwise controlling the agent; or
(c) as stated in § 7.06, the principal delegates performance of a duty to use care to protect other persons or their property to an agent who fails to perform the duty.

Actual authority
Negligent supervision

Rule: A principal who puts an agent in a position that enables the agent, while apparently acting within his authority, to commit fraud upon third persons is subject to liability to such third persons for the fraud.

Delegation of duty

Vicarious liability (Restatement Third §7.03(2))

General Rule:

(2) A principal is subject to vicarious liability to a third party harmed by an agent’s conduct when

(a) as stated in § 7.07, the agent is an employee who commits a tort while acting within the scope of employment (Respondeat Superior; Restatement Third § 2.04)
(b) as stated in § 7.08, the agent commits a tort when acting with apparent authority in dealing with a third party on or purportedly on behalf of the principal

Respondeat superior (employees only)

General Rule: An employer is subject to liability for torts committed by employees while acting within the scope of their employment (Restatement Third § 2.04)
Employee Acting Within Scope of Employment (Restatement Third § 7.07)

(1) An employer is subject to vicarious liability for a tort committed by its employee acting within the scope of employment.
(2) 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.
(3) For purposes of this section,

(a) an employee is an agent whose principal controls or has the right to control the manner and means of the agent’s performance of work, and
(b) the fact that work is performed gratuitously does not relieve a principal of liability.