BUSINESS ORGANIZATIONS
FALL 2011
PROF. BOB DOWNS
I. Agency
Agency = the fiduciary relation which results from the manifestation of consent by one person
to another that the other shall act on his behalf and subject to his control, and consent by the
other so to act
Agent = the person who is acting for another
Principal = the person for whom the agent is acting
– as long as the definition of agency has been met (i.e. one person consenting to act on behalf of
another, and the other person consenting to having that person act on his behalf and under his
control), an agency relationship is present, regardless of whether the parties intended to crate
such a relationship
– intent is irrelevant
– the “belief” between the parties that they’ve created an agency relationship is irrelevant
– requirements for agency relationship:
1) an agreement, but not necessarily a contract, between the two parties; and
2) agreement results in a factual relationship between the parties to which the legal
consequences of agency are attached
Agent’s Duties to Principal
– relationship between principal and agent is fiduciary
– an agent is a fiduciary with respect to matters carried out in the scope of his agency
– this means an agent must act loyally and carefully when carrying out duties in the
scope of his agency
– agent must “use reasonable efforts to give his principal information which is relevant to affairs
entrusted to him and which, as the agent has notice, the principal would desire to have and
which can be communicated without violating a superior duty to a third person”
– EXAMPLES:
1) agent is accountable for any profits made out of any transactions he conducted on the
principal’s behalf
2) agent must act solely for the benefit of the principal
3) agent must refrain from dealing with his principal as an adverse party
4) an agent may not compete with his principal concerning the subject matter of the
agency
5) an agent may not use the principal’s property (including confidential information) for
his own purposes or the purposes of the third party
Principal’s Duties to Agent
– if agent incurs expenses or suffers other losses in carrying out the principal’s instructions, the
principal has a duty to indemnify the agent
– a principal is not a fiduciary to an agent
– fiduciary responsibilities only run from agent to principal, not vice versa
Agency Roles
– because the degree of control a principal may exercise over an agent can vary widely, the
Second Restatement distinguishes between a “master/servant” relationship and an “independent
contractor” relationship
– Master/Servant Relationship (← most employment relationships)
master = a principal who “ employs an agent top perform service in his affairs and who
controls or has the right to control the physical conduct of the other in the performance
of the service”
servant = an agent so employed (see above) by a master
– Independent Contractor Relationship
independent contractor = 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
– vicarious liability = imposition of liability on one person for the actionable conduct of
another
– respondeat superior = “let the master respond”
* masters are generally liable for torts committed by a servant within the scope of his
employment
* masters are generally not liable for torts committed by an independent contractor in
connection with his work
Three Types of Principals
1) Disclosed Principal
– if, at the time of the agent’s transaction, the third party has notice that the agent
is acting for a principal and has notice of the principal’s identity
– if third party does not know the actual identity of the principal, but
should be able to reasonably infer the identity from the
information at hand, it is still a disclosed principal
2) Partially Disclosed Principal
– if, at the time of the agent’s transaction, the third party has notice that the agent
is or may be acting for a principal, but has no notice of the principal’s identity
3) Undisclosed Principal
– if, at the times of the agent’s transaction, the third party has no notice that the
agent is acting for a principal.
– essentially, the third party is
of the agent acting outside the scope of his actual authority
3) Inherent Authority
– the power of an agent which is derived not from authority, apparent authority,
or estoppel, but solely from the agency relation and exists for the protection of
persons harmed by or dealing with a servant or other agent
– often difficult or near impossible to distinguish from apparent authority when
the principal is disclosed or partially disclosed
– inherent authority takes on an independence of its own in cases where the
principal is undisclosed (because apparent authority cannot exist by definition
when the principal is undisclosed)
Liability of the Third Party to the Principal
– basically, as long as the terms of the agreement/contract between agent and third party
do not bar the principal from being a party to the agreement/contract, then the third party
is liable to the principal for the transaction
– EXCEPTION: in cases where the principal is undisclosed, the third party is
bound to act in accordance with the agreement/contract (i.e. is liable to the
principal) so long as the agent did not fraudulently conceal the principal
– in other words, third party will be liable to principal UNLESS:
1) agent affirmatively denies the existence of the principal because he
knows the third party would not agree to the transaction if the true nature
of the principal were made available to the third party
2) agent has no reason to know that the third party would not agree to the
transaction if the true nature of the principal were made available to the
third party, but the principal knows that the third party would not agree to
the transaction if his identity were known and therefore expressly adopts
an agent to conceal his interest in the transaction from the third party
