Matheson
Buisness Associtions
Fall 2010
BUSINESS ASSOCIATIONS & CORPORATIONS I
Chapter 1
AGENCY LAW
I. Elements of an Agency
a. Restatement (Second) of Agency §1: Agency is the label the law applies to a relationship in which:
i. By mutual consent (formal or informal, express or implied)
ii. One person or entity (called the “agent”)
iii. Undertakes to act on behalf of another person or entity (called the “principal”)
iv. Subject to the principal’s control
b. More on Element One: By Mutual Consent:
i. The Manifestation of Consent: Restatement Agency §15
1. The principal’s manifestation must reach the agent and that agent must then consent
2. Objective Standard: To determine whether a would-be principal and would-be agent have consented, the law looks to their outward manifestations (not inner, subjective thoughts). Has the principal and the agent done something that caused the other to reasonably interpret as a manifestation or consent?
3. The words and conduct can be interpreted as a manifestation or consent
4. Gratuitous agents: Agency law is NOT contract law; therefore consideration is not required to form an agency relationship Restatement Agency §16
5. Agency Contracts: While agency law is not contractual, the principal and agent can still enter contractual agreements such as pay, term of the relationship, and limitations on the principal’s right to control, etc.
a. Limited Impact of Contracts: A contract can change the rights and duties between the agency and principal, but they cannot abrogate the powers that agency status confers on each party:
i. The principal always has the power to control every detail of the agent’s
performance
ii. The agent may have certain powers to bind the principal
iii. Both the principal and agent have the power to end the agency at any time
b. When a contractual provision is breached the injured party can bring an action for damages, but the exercise of power cannot be undone or enjoined
ii. Formalities:
1. Generally consent can be given formally (writing) or informally (oral or conduct). However, some
jurisdictions apply the “equal dignities” rule.
2. “Equal Dignities” Rule: If a particular type of contract requires it to be in writing then the agency relationship must also have been created in writing.
c. More on Element Four: Subject to the principal’s control
i. There must be an understanding between the agent and the principal that the principal is in control of the
relationship (“Since the whole purpose of the relation of agency is that the agent shall carry out the will of the principal,”)
ii. Total and continuous control is not required, but at the minimum, the principal must have the right to control the goal of the relationship
II. The Agent’s Power to Bind the Principal to Third Parties and Vice Versa.
a. Generally:
i. Power: The ability…to produce change in a given legal relation (between the principal and third parties) by
doing or not doing a given act. Restatement Agency §6
ii. Qui facit per alium facit per se: “Who acts through another acts himself”
iii. Attribution: Can the acts of the Agent be attributed to either the principal or a third party?
iv. Under Agency Law, did X have the power to bind Y through his act or omission?
b. The Agent’s Conduct will Bind the Principal When the Agent has:
i. Actual Authority (express or implied):
1. Creation: Restatement Agency §26
a. An objective manifestation by the principal
i. Can reach agent directly or indirectly
b. Followed by the agent’s reasonable interpretation of that manifestation
i. Restatement §33: An agent is authorized to do, and to do only, what it is reasonable
for him to infer that the principal desires him to do in the light of the principal’s manifestations and the facts as he [i.e., the agent] knows or should know them at the time he acts.
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ii. “All other matters throwing light upon what a reasonable person in the position of
the agent at the time of acting would consider are to be given due weight.”
iii. See Restatement §34 for a non-exhaustive list of factors that figure into determining
the reasonableness of an agent’s interpretation
c. Which leads the agent to believe that it is authorized to act for the principal
2. Principal can always cut back or countermand previously granted authority simply by making a
manifestation to the agent and seeing that the manifestation reaches the agent
3. Implied Actual Authority:
a. Restatement §35: “Unless otherwise agreed, authority to conduct a transaction includes authority to do acts which are incidental to it, usually accompany it, or are reasonably necessary to accomplish it.”
b. Intended to cover the things a principal may forget to express, but are necessary to carry out the express actual authority
4. Undisclosed Principal:
a. A third party can escape liability to an undisclosed principal only if either:
i. The contract between the third party and the agent provides that it is inoperative if the agent is representing someone, or
ii. The agent fraudulently represents that the agent is not acting for the principal, the third party would not have entered into the contract knowing the principal was a
party, and the agent or undisclosed principal knows or should know that the third party would not have made the contract with the principal.
5. Information Possessed or conveyed by the agent with actual authority is imputed to the principal
a. Exception: When the agent should know the information but does not, the information is not attributable to the principal, however if the agent has an independent duty to use reasonable care to discover the information, the agent’s failure to use such care is attributable
ii. Apparent Authority:
1. Creation: Restatement Agency §27
a. An objective manifestation form one party (“apparent principal”),
i. Statements by the apparent agent cannot give rise to apparent authority. However,
an apparent agent can supply the necessary manifestation if:
1. The Apparent Agent is actually authorized to act for the principal and
2. While actually authorized, accurately describes the extent of its authority. ii. Never applies to undisclosed principals and rarely to partially disclosed principals iii. Noteworthy Modes of Manifestation:
1. Intermediaries: It may be that the intermediary was an agent of the apparent principal or that the intermediary was not an agent
2. Position: The sole manifestation by the principal may be to simply put an agent in a particular position. In light of local custom and standard business practices, that placement by itself may cause a third party to reasonably believe that the agent has certain authority.
3. Acquiescence: Previous action by the apparent principal may indicate to a third party that the agent does have the necessary authority to conduct business on behalf of the apparent principal.
4. Inaction: In order for an apparent principal’s inaction to give rise to apparent authority, the following criteria must be met:
a. Someone (including the apparent agent) must assert that the apparent agent has actual authority
b. The apparent principal must be aware of those assertions and fail to do anything to contradict them
c. The third party claimant must be aware of: (1) the assertions
themselves, (2) the apparent principal’s knowledge of the assertions, and (3) the apparent principal’s failure to contradict the assertions
d. It must be the apparent principal’s failure to contradict the assertions that causes the third party to believe that the apparent agent is authorized
b. Which somehow reaches a third party, and
c. Which causes the third party to reasonably believe that another party (“apparent agent”) is indeed authorized to act for the first party (i.e., for the apparent principal)
i. The third party may have a duty of inquiry if the manifestation itself is ambiguous or
the apparent agent’s conduct is sufficiently unusual
2. Apparent authority can coexist with actual authority, see pg. 27 for example
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3. In order for a Third Party to bind an apparent principal the Restatement requires that the Third Party relied on the principal’s manifestation, but in some jurisdictions it is required that the Third Party relied to its detriment.
a. May have little practical significance because a claim probably won’t arise if no detriment
was suffered.
4. Policy Reasons for Apparent Authority:
a. So long as the third party has not been careless or silly, any loss form the confusion should be imposed on the party who could have prevented the confusion in the first place
b. Any loss should be imposed so as not to disrupt normal commercial operations
5. Information possessed or conveyed by the apparent agent is imputed to the principal except when:
a. The information is known by the apparent agent for some other reason than notification by the third party
b. The apparent agent should have known of the information
iii. Estoppel:
1. Restatement §8B (1): Estoppel imposes liability on a person for “a transaction purported to be done on
his account…to persons who have changed their positions because of their belief that the transaction
was entered into by or for him, if
xcluded:
1. Knowledge of the legal effect of ratification
2. Knowledge about the value of the transaction or the transaction’s desirability, other than knowledge of important representations made by the agent or third party as they entered into the transaction.
ii. Ignorance cannot be claimed if:
1. Principal knows information that would cause a reasonable person to infer the missing information
2. Principal faces a situation in which a reasonable person would first inquire, and the principal affirms without inquiry, then principal has assumed and risk of knowledge
g. A third party’s escape from the effects of ratification
i. Preclude ratification by giving notice of withdrawal from the transaction before the purported principal affirms
ii. Third Party can avoid ratification after the affirmance in two ways:
1. Changed Circumstances: A third party can avoid ratification if (a) after the purported agent and the third party make some arrangement but before the purported principal ratifies, (b) circumstances change so materially that holding the third party to the arrangement would be unfair. The third party must inform the purported principal at some time but it does not have to happen before affirmance
2. Conflicting Arrangements: A third party can avoid ratification if the third party:
3. Learns that the purported agent acted without authority,
4. Relies on the apparent lack of authority, and
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c. Chains of Authority:
5. Makes substitute, conflicting arrangements or takes some other action, which will cause prejudice to the third party if the original transaction is enforced.
h. Ratification v. Adoption & Novation
i. Ratification: binds both the purported principal and the third party to the original
undertaking and discharges the purported agent form any liability on that undertaking
ii. Adoption:
1. Elements:
a. A purported agent has purported to bind a purported principal to an agreement while lacking the power to do so;
b. The purported principal cannot ratify the purported agent’s unauthorized act, typically because at the time of the act the purported principal either did not exist or lacked capacity to authorize the act;
c. The original agreement made by the purported agent and the third
party expressly or impliedly empowers the purported principal to choose to receive the benefits and assume the obligations of the agreement; and
d. The purported principal manifests-either expressly or through a course of conduct-its desire to receive the benefits and assume the obligations of the agreement
2. Adoption binds both the principal and the third party to the original agreement, but adoption does not relate back in time to the unauthorized act.
3. Adoption does not release the purported agent from any liability it may have to the third party on account of the original agreement, unless the original agreement contemplates the principal’s adoption will indeed release the agent
iii. Novation:
1. A new, independent agreement between the principal and the third party.
2. Novations arise from the same circumstances that give rise to adoptions, and it is often the original, unauthorized contract that causes the purported principal and the third party to consider doing business with each other.
3. The novation contract completely displaces the original, unauthorized contract and relieves the purported agent from any liability it may have had to the third party
