Business Associations Bradley Spring 2018
The Law of Agency
Formation of the Agency Relationship
Defining Agency
Restatement § 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
Elements
Consent
Consent of both the principal and the agent is necessary to form an agency relationship (Restatement § 1.03)
The principal must manifest (or convey) his consent to the agent
Can be shown through a written contract, orally, or by the conduct of the parties
On Behalf of
The agent must be acting primarily for the benefit of the principal rather than for the benefit of the agent or some other party
Simply acting in a way that benefits another, even when there is control, is insufficient to establish an agency relationship
Control
The agent must act subject to the principal’s control, but the degree of control exercised by the principal need not be significant
The requisite level of control may be found simply by the fact that the principal has specified the task that the agent should perform, even if the principal has not prescribed the details of how the task should be accomplished
Scope of Authority
Kinds of Agency
Actual Authority
Definition
Arises from the manifestation of the principal to an agent that the agent has the power to deal with others as a representative of the principal
General Rule
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
Example
P says to A “you are my agent” (i.e. – in the form of a sports agent contract)
Apparent Authority
Definition
Arises from the manifestation of a principal to a third party that another is authorized to act as an agent for the principal
General Rule
An agent or other actor may 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 manifestations
Example
P says to 3rd party: “deal with A, he is my agent”
If P tells A that he has authority to buy food on credit from 3rd party, and tells 3rd party this, then A has actual and apparent authority
However, if P tells A he no longer has this authority without telling 3rd party, A still has apparent authority to buy food
Inherent Authority
Definition
Arises when it’s inherent in the agent’s task that agent is representing principal (even if principal is unknown)
General Rule
This is an extension of apparent authority where principal is still liable to a third party if the third party has no idea who the principal is
Example
Bartender signs for beers when they are delivered to the bar
It’s reasonable for the 3rd party deliverer to assume the bartender is signing for the beer on behalf of his principal, the bar owner
Types of Agency
Express
Definition
An agent has express authority to take action when the principal specifically states, orally/in writing, that such authority has been granted
Example
An employment agency agrees to recruit/hire temporary employees for a processing plant
Because the PP has made it clear that the EA is authorized to recruit workers, the EA has express authority in a PA relationship
Additionally, the EA would have actual express authority to take actions within the scope of the authority
Implied
Definition
An agent has implied authority to take action that is necessary/customary for carrying out agent’s expressly authorized duties
Example
Bo asks Tom to be his sports agent and says Tom can review contracts from various teams
Tom has express actual authority to review any contracts
Tom also probably has express implied authority to hire a secretary to direct phone calls/deal with the paperwork involved in the contracts
Liability Arising from the Agency Relationship
Contract Liability
Generally
A principal and an agent may be liable to third parties for the agent’s contracts with third parties
This is the case when an agent acts with either express, actual, or inherent authority for the principal
Even if contract is outside the scope of agent’s authority, the principal may ratify and become liable for an unauthorized contract
Liability of the Principal and Agent to the Third Party
Disclosure of Principal
Disclosed Principal (Restatement § 6.01)
When an agent acting with actual or apparent authority makes a contract on behalf of a disclosed principal,
The principal and the third party are parties to the contract, and
The agent is not a party to the contract unless the agent and third party agree otherwise
Partially Disclosed Principal (Restatement § 6.02)
When an agent acting with actual or apparent authority. Makes a contract on behalf of an unidentified principal,
The principal and the third party are parties to the contract, and
The agent is a party to the contract unless the agent and the third party agree otherwise
Undisclosed Principal (Restatement § 6.03)
When an agent acting with actual authority makes a contract on behalf of an undisclosed principal,
Unless excluded by the contract, the principal is a party to the contract,
The agent and the third party are parties to the contract, and
The principal, if a party to the contract, and the third party have the same rights, liabilities, and defenses against each other as if the principal made the contract personally
Agent Relations with Creditors
A principal is liable to third parties for fraud if the P puts an A in a position that enables the A, while apparently acting within his authority (apparent authority), to defraud a third party (Blackburn v. Witter)
Background
Long served as P’s investment adviser and Long was an employee of Walston and then Witter (both Ds)
Long persuaded P to buy stock in a fake company he called ACIC, promising a 10% return
P sued Ds on the theory that Long was an agent of his employers when he defrauded her
Court
By employing Long as an investment advisor, Ds put him in a position in which his advice would be highly influential and in which he could easily defraud third parties
However, A third party may not recover from a P under a theory of apparent authority if the third party didn’t rely on the agent’s capacity to act for the P (Sennott v. Rodman & Renshaw)
Background
J was a securities dealer and an employee of D, a securities trading firm
J began trading on his own account, befriended a fellow tra
his doctrine to protect employees from irrational/opportunistic discharge (Foley v. Interactive Data Corp.)
Background
P worked for D for almost 7 years and consistently received good evaluations and a promotion to branch manager
He told D’s VP that his new supervisor, Kuhne, was being investigated by the FBI for embezzling money from his former employer
D had a seven-step termination process, Kuhne told P he was being fired for performance reasons, but he was eventually asked to resign or be fired
Court
An implied contract may supersede at the at-will presumption here:
P asserts that he was personally assured that he would not be terminated (because of the length of his employment, bonuses/promotions, and company termination policy)
Partnerships
Generally
Types of Partnerships
The General Partnership
Definition
A GP can come into existence by operation of law, with no formal papers signed or filed
Any partnership is “general” unless one of the special requirements for limited partnerships are met
Ownership/Management of Functions
GP norms distribute ownership and management functions equally to either each partner or to the partners as a group
Each partner is a residual claimant and has an equal right to act as an agent of the partnership
Norms also assign to each partner an equal share of profits/responsibility for losses
Personal Liability
The partners are jointly and severally liable for everything – all debts, obligations, punishments, etc.
Therefore, important for partners to put checks on anything that could harm the company in any major way
The Limited Partnership
Definition
A LP is a BA composed of one or more general partners and one or more limited partners
Formed by filing a certificate of LP with the SOS in the jurisdiction chosen by the parties
Ownership/Management of Functions
General Partners
Are the active participants in the firm, empowered to make/carry out the firm’s business policies
Limited Partners
Have essentially no management power/no authority to act as agents in carrying out the partnership’s business
Liability
General partners = jointly/severally liable for the business’s obligations
Limited partners = only liable up to the amount of the capital contribution
But, a limited partner will lose the limit on his liability if he actively participates in the management of the partnership
The Limited Liability Partnership
Definition
All states recognize two new(ish) business entities: the limited liability partnership and the limited liability limited partnership
To become an LLP or an LLLP, the partnership simply registers with the SOS as an LLP/LLLP
