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Business Associations/Corporations
University of Pennsylvania School of Law
Booth, Richard A.

Richard Booth
Fall 2010
Agency Law
2.2 Agency Formation, Termination, and Principal’s Liability
2.2.1 Formation
v Agency is the fiduciary relation that results when one person (the principle or P) manifests assent to another person (the agent or A) that the agent shall act on the principal’s behalf and subject to the principal’s control and the agent manifests assent or otherwise to consent so to act.  Restatement 3rd Agency Law § 1.01
Ø Agency arises out of CONSENT.
§ A person manifests assent or intention through written or spoken words or other conduct. Restatement 3rd Agency Law § 1.03 (objective theory of consent)
§ Terminable at will of either party and thus unstable.  
Ø An agent is a holder of power to affect legal relations of the principal within the scope of the agents agreed on appointment (or employment) and beyond this scope in certain circumstances.
Ø Whether a relationship is characterized as agency is not controlling the above definition is. Restatement 3rd Agency Law § 1.02
2.2.2 Termination
v Either principal or agent can terminate an agency at any time.
Ø Rule that either party can terminate is equivalent to restricting an agent or principal to monetary damages for breach of contract.
v Restatement 3rd Agency Law § 3.10(1): Manifestation Terminating Actual Authority
Ø Notwithstanding any agreement between principal and agent, an agent’s actual authority terminates if the agent renounces it by manifestation to the principal or if the principal revokes the agent’s actual authority by a manifestation to the agent. A revocation or a renunciation is effective when the other party has notice of it.
Ø Restatement 3rd Agency Law § 1.04(4)
§ Notice: a person has notice of a fact if the person knows the fact, has reason to know the fact, has received an effective notification of the fact, or should know the fact to fulfill a duty owed to another person. (See also §§ 5.02 – 5.04)
v Restatement 3rd Agency Law § 3.11: Termination of Apparent Authority
Ø The termination of actual authority does not by itself end any apparent authority held by an agent.
Ø Apparent authority ends when it is no longer reasonable for the third party with whom an agent deals to believe that the agent continues to act with actual authority.
2.2.3 Parties Conception Does Not Control: Implied Agency
v Agency relations can exist even when the parties have not explicitly agreed to an agency relationship
v The parties intent does not control (see Restatement 3rd Agency Law § 1.02)
v Agency relationships can be implied where creditors assume too much control in relationships that are ostensibly debtor-creditor relationships
v Jenson Farm Co. v. Cargill, Inc. (p.18) (General class of case – if you get tentacles too far into the D, then you can become a P). 
Ø Facts:
§ Warren defaults on its loans made to plaintiffs (other farmers) and the court finds that Cargill is the principal.
§ Cargill was an active participant in Warren’s operations rather than simply a financier because:
·         Cargill was Warren’s grain agent, Cargill had a right of first refusal, Warren provided Cargill with annual financial statements, Cargill had a right of access to Warren’s books, Warren could not make capital improvements greater than $5K without Cargill approval, Warren could not become liable as a guarantor, Cargill said Warren needed paternal guidance, Warren entered into contracts for Cargill, Cargill needed Warren for grain shipments, Cargill contacted Warren daily about its financials, Cargill told Warren it had the right to make some critical decisions regarding the use of funds.
Ø Reasoning:
§ “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 an agency may be proved by circumstantial evidence which shows a course of dealing between the two parties…” BUT did Warren fulfill is duty of obedience? 
2.2.4 Liability in Contract
v Agent is not a party to the contract unless: specified by the agreement, there is an undisclosed principal, or the agent knows or has reason to know that the principal does not exists or lacks the capacity to enter the contract. Restatement 3rd Agency Law §§ 6.01 – 6.04
v Sources of authority by which principal can be bound to agents acts:
Ø Actual Authority
§ Actual Authority is when a reasonable person in the agent’s position would infer from the conduct or speech of the principal that the agent has been authorized to act on the principal’s behalf. (the judgment is made at the time when the agent’s actions have legal consequences for the principal) Restatement 3rd Agency Law § 2.01 & § 2.02(2)-(3)
§ Actual authority includes Incidental Authority, the authority to do those implementary steps ordinarily done in connection with facilitating the authorized act. Restatement 3rd Agency Law § 2.02(1)
§ Actual authority also includes Implied Authority, where agency relations can exist even when the parties have not explicitly agreed to it. Restatement 3rd Agency Law § 2.02(1)
Ø Apparent Authority
§ Apparent Authority: authority that a reasonable 3rd party would infer from the actions or statement of the principal. Restatement 3rd Agency Law § 2.03    
·         This is true even if principal has explicitly limited agent’s authority unbeknownst to the 3rd party, Restatement (3rd) Agency §2.03.
§ White v. Thomas (p.22)
·         Facts:
¨       White employs Simpson to bid on a piece of land at a maximum price of $250,000.
¨       Simpson buys the property for $327,500 and realizing her mistake enters into a purchase agreement for 42 acres with the Thomas’. 
¨       Simpson said that she had a power of attorney, and she had a check from White to pay for the purchase.
·         Reasoning:
¨       The fact that Simpson had the apparent authority to purchase the land does not suggest that she had the apparent authority to sell part of it since buying and selling are not that closely related.
¨       “While the declarations of an alleged agent may be used to corroborate other evidence of the scope of agency, neither agency nor the extent of the agent’s authority can be shown solely by his own declarations or actions in the absence of the party to be affected.”
Ø The Thomas’ could have contacted White, or demanded to see the written power of attorney.
Ø Inherent Authority (Loose Cannon A)
§ Inherent Authority: generally an agent can bind the principal (whether disclosed or undisclosed) to an unauthorized contract, if the agent would ordinarily have the power to enter such a contract and 3rd party doesn’t know that matters stand differently, Restatement (2nd) Agency §§8A, 161, 194
·         The 2006 Restatement 3rd Agency no longer conceptualizes the field in this way. “Other doctrines stated in this restatement encompass the justification underpinning §8A, including the importance of interpretation by the agent in the agent’s relationship with the principal, as well as the doctrine of apparent authority, estoppel, and restitution.” See Restatement 3rd Agency § 2.01 comment b
¨       Restatement 3rd Agency Law § 2.05: Estoppel to Deny Existence of Agency Relationship
Ø A person who has not manifested authority the actor (supposed agent) and who is not otherwise liable for the transaction, is subject to liability to a third party who is justifiably induced to make a detrimental change in position because the transaction is believed to be on the person’s account if:
§ The person intentionally or carelessly caused such belief, or
§ Having notice of such belief and that it might induce others to change their positions, the person did not take reasonable steps to notify them of the facts.
¨       Restatement 3rd Agency Law § 2.06: Liability of Undisclosed Principal
Ø An undisclosed principal is subject to liability to a third party who is justifiably induced to make a detrimental change in position by an agent acting on the principal’s behalf though without actual authority if:
§ The principal has notice of the agent’s conduct, and
§ The principal did not take reasonable steps to notify the third party of the facts.
Ø An undisclosed principal may not rely on instructions given an agent that qualify or reduce the agent’s authority to less than the authority a third party would reasonably believe the agent to have under the same circumstances if the principal had been disclosed.
¨       Restatement 3rd Agency Law § 2.07: Restitution of Benefit
Ø If a principal is unjustly enriched at the expense of another person by the action of an agent or a person who appears to be an agent, the principal is subject to a claim for restitution by that person.
¨       The Restatement 3rd seems to provide the same result for the particular case of an undisclosed principal. See Restatement 3rd Agency § 2.06
§ In the case of apparent authority the 3rd party knows of the existence of the principal and in inherent authority he does not.
§  Gallant Ins. Co. v. Isaac (pg. 26)
·         Facts:
¨       Isaac calls on Friday to have her insurance coverage that is up on Saturday transferred to her new car. The independent insurance agent at Thomas Harris says that she will “bind” coverage now and that Isaac can come in on Monday to make the payment.
¨       Gallant was bound by Thomas Harris once they faxed or called the required information to Gallant although no written agreement existed between them.
¨       Isaac has a wreck over the weekend.
¨       Gallant says that because the premium had not been paid prior to the wreck there was no coverage according to the policy.
¨       Thomas Harris had a common practice of telling its insured they were “bound” prior to premiums being paid.
·         Holding:
¨       The common practice was is similar to Thompson Harris’s authorized conduct by Gallant to bind by fax or phone.
¨       Isaac could reasonably believe Thomas Harris had the authority to “bind” over the phone because Isaac’s dealing was all with Thomas Harris. Thomas Harris completed the necessary paperwork and faxed it to Gallant on the correct day.
·         Rule:
¨       “A court looks to the agent’s direct and indirect manifestation and determines whether the third party could have reasonably believed that the agent had authority to conduct the act in question.
Ø Ratification: Accepting the benefits under an unauthorized contract will constitute acceptance of its obligations as well as its benefits
§ Restatement (3rd) Agency §4.01
·         A Person ratifies an act by:
¨       Manifesting assent that the act shall affect the person’s legal relations, or
¨       Conduct that justifies

he principal or assist his competitors. Restatement 3rd Agency Law § 8.04
§ Legal power over property held by the fiduciary is held for the sole purpose of advancing the aim of the relationship pursuant to which she came to control that property.
·         Can’t use property or confidential information for the agent’s own purposes or those of a third party. Restatement 3rd Agency Law § 8.05
§ The fiduciary is bound to exercise her good-faith judgment in an effort to pursue, under future circumstances, the purpose established at the time of creation of the relationship.
Ø Restatement 3rd Agency § 8.06: Consent
§ Conduct by the agent that would otherwise constitute a breach of duty as stated in §§8.01-8.05 does not constitute a breach of duty if the principal consents to the conduct, provided that
·         In obtaining the principal’s consent, the agent
¨       Acts in good faith
¨       Discloses all material facts that the agent knows, has reason to know, or should know would reasonably affect the principal’s judgment unless the principal has manifested that such facts are already known by the principal or that the principal does not wish to know them, and
¨       Otherwise deals fairly with the principal
·         The principal’s consent concerns either a specific act or transaction, or acts or transactions of a specified type that could reasonably be expected to occur in the ordinary course of the agency relationship.
v Remedies for Breach of Agent’s Duty of Loyalty
Ø Tarnowski v. Resop (p.36)
§ Facts:
·         Principal wants to buy a business—jukeboxes. He hires an agent who didn’t really research and says he found a great one- but really it’s a bust and the agent is taking a secret commission ($2,000) from the business owners to sell their bad business. (But the agent was not committing fraud- he probably didn’t know that the principal was getting a bad business. If he did, he wouldn’t have stuck around. The agent hasn’t moved to another jurisdiction, so he was probably just lazy and negligent).
§ Holding and Decision:
§ Principal recovers a lot: the costs (atty fees, collection costs, etc.) and the secret commission, and his own payment to the bad business sellers, as well as rescinding the contract.
§ Rules:
·         “The principle that all profits made by an agent in the course of an agency belong to the principal, whether they are the fruits of performance or the violation of an agent duty, is firmly established and universally recognized.”
·         “The right to recover profits made by the agent in the course of the agency is not affected by the fact that the principal, upon discovering a fraud, has rescinded the contract and recovered that with which he parted.”
§ Tarnowski ends up better off than when he began the transaction. Is there overcompensation?
·         Rationale:
¨       The principal isn’t really overcompensated; b/c in back of the doctrinal concepts, there is something punitive going on. We want to deter agents from profiting off their relationships. (Deter agents from cheating). Court uses deterrence talk: “…the need to secure fidelity by the agent.”
§ Note: it isn’t the rule that you can always void the K against a 3rd party when there is a breach in fiduciary duty.
2.3.3 Trustee’s Duty to Trust Beneficiaries
v Accountable for Profits in the Absence of a Breach of Trust, Restatement 2nd of Trusts 203
Ø Trustee is accountable for any profit made by him through or arising out of the administration of the trust, although the profit does not result form a breach of trust.
Ø Per se rule: Even if there’s no breach of loyalty, any profit a trustee makes from the trust is illegal.
v Liability in Case of Breach, Restatement 2nd of Trusts 205
Ø If the trustee commits a breach of trust he is chargeable with
§ Any loss or depreciation in the value of the estate resulting from any breach of trust, or
§ Any profits made by him through breach of trust, or
§ Any profits which would have accrued to the trust estate if there had been no such breach.
v Liability for Breach of Loyalty, Restatement 2nd of Trusts 206
Ø The rule stated in 205 is applicable where the trustee in breach of trust sells trust property to himself individually, or sells his individual property to himself as trustee, or otherwise violates his trust duty.
v In re Gleeson (p.38)