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Business Associations/Corporations
University of Pennsylvania School of Law
Katz, Leo

 
 
 
 
 
 
 
 
 
 
 
 
Corporations
Katz – Fall 2005
 
 
 
 
 
 
I.       AGENCY
 
A.    Generally – Agency is the label the law applies to a relationship which…
 
(1)   by MUTUAL CONSENT (formal or informal, express or implied),
 
(2)   one person or entity (called the “agent), undertakes to ACT ON BEHALF of another person or entity (called the “principal”),
 
(3)   subject to the PRINCIPAL’S CONTROL.
 
1.      Restatement Definition – Agency is the fiduciary relationship 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 (§ 1)
 
B.     Creation of the Agency Relationship – The creation of an agency relationship involves two steps: (1) manifestation by the principal, and (2) consent by the agent. 
 
1.      Manifestation AND Consent Required – The principal must in some manner INDICATE that the agent is to act for him, and the agent must ACT OR AGREE to act on his behalf and subject to his control.
 
i)        Knowledge – Manifestation by or attributable to the principal must somehow reach the agent; otherwise the agent has not to consent to. When the agent then manifests consent, an agency exists – even though the principal may initially be unaware of the consent.
 
Ex: A professor asks his research assistant whether she knows anyone who is good at cite checking. The assistant answers that M is great at that stuff. The professor then replies “If you see her, ask her if she will cite check this chapter within the next couple of days.” Later the assistant sees M and communicates the message. M then telephones the professor and says “Yes.” An agency relationship exists. Even thought principal did not communicate the manifestation directly, the manifestation reached the agent and the agent directly communicated consent.
 
2.      Objective Standard – To decide whether an act constituted consent (by either principal or agent), the courts ask whether the would-be party has done or said something that the other party would have reasonably interpreted as consent.
 
Ex: Rachel, owner of Blackacre, writes to Sam: “Please act as my broker to sell Blackacre.” Sam puts a “For Sale” sign on Blackacre. By beginning the requested task, Sam has given necessary manifestation of consent; agency relationship exists.
 
i)        Subjective Intent NOT Necessary – It is not necessary that the parties intend to create the legal relationship or to subject themselves to the liabilities which the law imposes upon them as a result of it. On the other hand, there is not necessarily an agency relationship because the parties to a transaction say that there is, or contract that the relationship shall exist, or believe it does exist
 
Ex: P and A enter into an agreement which is stated to be a “contract of sale.” It provides that A shall purchase specified goods from P; that the risk of loss of such goods after purchase is upon P, if A uses care in their custody; that A is to sell them at prices to be fixed by P from time to time and is to keep the proceeds as a separate account, remitting monthly 90 per cent; that unsold goods may be returned to P; and that P will pay A one-half of A’s selling expenses. A is P’s agent.
 
Ex: B, wishing to borrow money, goes to A, the local representative of an insurance company employed by it to lend money and collect interest, and signs a document which states that A is B’s agent for the purpose of borrowing money from the company, for which B is to pay A one per cent of the money borrowed. Both B and A understand that A is primarily to protect the interests of the company. A is not B’s agent, and payment of interest by B to A is payment to insurance company.
 
ii)      Agency Labels in Contracts – Sometimes when parties form a relationship they expressly claim or disclaim the agency label. Courts do consider such statements when trying to determine what relationship actually existed. However, the parties’ self-selected label is never dispositive.
 
Ex: Franchise agreements often include a statement to the effect that “this agreement does not create an agency relationship”
 
3.      Control by Principal is Required – To create an agency relationship, the reciprocal consents of the principal and agent must include an understanding that the principal is in control of the relationship.
 
i)        Total Control Not Required – The control need not be total or continuous or extend to the way the agent physically performs, but there must be some control by principal. 
 
Ex: a hospital patient caught hepatitis from contaminated blood and sought to sue the blood supplier for breach of warranty. The patent claimed that he was in privity with the blood manufacturer b/c the hospital was acting as his agent when it obtained the blood. Held: the court rejected the patient’s claim, noting that there was no indication that the hospital was in any way subject to the patient’s control.
 
 
C.    Freedom of Contract in Agency Context – Although agency is not a contractual relationship, the parties to an agency can make contracts regarding their agency relationship. 
 
Ex: Parties can agree that the principal will pay the agent for the agent’s services, or, the parties can by agreement set a definite term to the relationship or limit the principal’s right to control the agent with regard to matters connected with agency.
 
II.    AUTHORITY & BINDING PRINCIPALS TO THIRD PARTIES
 
A.    Power to Bind Principal – The most important consequence of an agency relationship is the agent’s power to bind the principal to third parties and to bind third parties to principal. An agent can bind a principal through: (1) actual authority; (2) apparent authority; (3) estoppel; (4) inherent power, and (5) ratification.
 
1.      Power v. Right to Bind – An agent has the right to bind the principal only to the extent that the principal has authorized the agent to do so. Thus, it is possible for the agent to have the power to bind the principal while lacking the right. In such circumstances, the agent wrongs the principal and the agent is liable to the principal for the wrongful conduct. However, the principal is nonetheless bound to the third party.
 
B.     ACTUAL Authority – If the principal’s authorization creates “actual authority” in the agent, the agent has the power to bind the principal through any act or omission within the agent’s actual authority.
 
1.      Creation – The creation of actual authority involves an…
 
(1)   OBJECTIVE MANIFESTATION (words or conduct) by the principal followed by
 
(2)   the agent’s REASONABLE INTERPRETATION of that manifestation which leads the agent to believe that it is authorized to act for the principal
 
i)        Silence or Inaction – The principal’s inaction can constitute a manifestation when silence, reasonably interpreted, indicates consent.
 
ii)      Extent of Actual Authority: Reasonable Belief from Principal’s Manifestations – For an agent to have actual authority, the agent must believe the authority exists, that belief must be based on some manifestation of principal, and that belief must be reasonable.
 
a.       Restatement re: Extent – 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 knows or should know them at the time he acts (§ 33)
 
iii)    Third Party Knowledge Irrelevant – An agent can have actual authority even though the third party to the transaction neither knew nor has reason to know the extent of the agent’s authority.
 
Ex: A power company authorizes a coal broker to buy coal for it. The broker contracts to buy the coal in its own name. When the coal seller later prepares to deliver the coal to the broker, the seller discovers that the broker has gone out of business. Then the seller discovers that the broker was making the purchase on the power company’s behalf and had actual authority to do so. By asserting actual authority, the seller can hold the undisclosed principal (power company) to the contract. Because there was actual authority, it is irrelevant at the time of the contract whether the seller was ignorant of the underlying agency relationship.
 
2.      IMPLIED Actual Authority – In addition to the authority expressly indicated by the principal’s words and other conduct, an agent may also have implied authority. Unless otherwise agreed, implied actual authority includes authority to do acts which are…
 
(1)   INCIDENTAL to it,
 
(2)   usually ACCOMPANY IT, or
 
(3)   are REASONABLY NECESSARY to accomplish it (§ 35)
 
a.       Rationale – It is seldom that the words of a principal are sufficiently specific to include or exclude all the acts which he expects the agent to do or not to do. Almost all directions are ambiguous and all include by implication authorization to do what is necessary in order to accomplish the end.
 
C.    APPARENT Authority – Apparent authority is the power to affect the legal relations of another person by transactions with third persons, professedly as agent for the other, arising from and in accordance with the other’s manifestations to such third persons (Restatement § 8)
 
1.      Generally – Apparent authority is a doctrine that exists to protect third parties who are misled by the appearance of legitimate authority for an agent to act. 
 
i)        Harmful Intent of Agent Irrelevant – An apparent agent’s intent is therefore immaterial A person with apparent authority can bind the principal to a contract even if the person does not intend to benefit the principal and even if the person is lying about being authorized.
 
ii)      Extends Beyond Scope of Agent’s Authority – Apparent authority can also extend an actual agent’s power to bind the principal beyond the scope of the agent’s actual authority.
 
Ex: A broker is sent to an art auction to represent an art collector. The broker is given the express actual authority to make bids up to $25K. However, at the auction, the broker bids $50K for a piece of artwork. Liability for the bid is covered under the apparent authority of the agent although not authorized under actual authority
 
2.      Creation – Creation of apparent authority involves an objective manifestation from one party which somehow reaches a third party and which causes that THIRD PARTY to REASONABLY BELIEVE that another party is indeed authorized to act for the first party.
 
i)        Restatement – Apparent authority to do an act is created by written or spoken words or any other cond

misstatements, and, arguably at least, nothing in the principal’s manifestation to the third party created an appearance of such authority. Nonetheless, agency law will attribute the misstatement to the principal.
 
F.     RATIFICATION – Occurs when a principal affirms a previously unauthorized act. Ratification validates the original unauthorized act and produces the same legal consequences as if the original act had been authorized.
 
1.      Restatement Definition – Ratification is the affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account, whereby the act, as to some or all persons, is given effect as if originally authorized by him. (§ 82)
 
i)        Affirmance as Ratification – A purported principal affirms by either…
 
(1)   MAKING A MANIFESTATION that, viewed objectively, indicates a choice to treat the unauthorized act as if it had been authorized; or
 
(2)   ENGAGING IN CONDUCT that is justifiable only if the purported principal has made such a choice.
 
ii)      Inaction as Ratification – A purported principal can also affirm through inaction by…
 
(1)   FAILING TO REPUDIATE the act…
 
(2)   Under such circumstances that, according to the ordinary experience and habits of men, one would NORMALLY BE EXPECTED TO SPEAK if he did not consent.
 
iii)    Notice Not Required – Affirmance occurs when the manifestation occurs, and this manifestation need not reach the third party to become effective.
 
iv)    Ratification is usually All or Nothing – Ratification occurs on an “all or nothing” basis. If a purported principal attempts to ratify only part of a single transaction, then either the entire transaction is ratified or there is no ratification at all.
 
III.TORT LIABILITY OF PRINCIPAL TO THIRD PARTIES
 
A.    Respondeat Superior – Respondeat superior is a venerable doctrine which imposes strict, vicarious liability on a principal when:
 
(1)   an agent’s tort has caused physical injury to a person or property,
 
(2)   the tortfeaser agent meets the criteria to be considered a “servant” of the principal, and
 
(3)   the tortious conduct occurred within the servant’s “scope of employment.”
 
1.      Broad Application – When triggered respondeat superior automatically renders the principal liable for the agent’s misconduct regardless of whether the master (i) authorized the misconduct; (ii) forbade the misconduct; or (iii) even used all reasonable means to prevent the misconduct.
 
2.      Servant Status – Under Restatement § 220(1), an agent is a servant if the principal controls or has the right to control the agent’s “physical conduct in the performance of [agency] services.” The opposite of a servant is an independent contractor.
 
3.      Scope of Employment – To be within the scope of the employment, conduct must be of the same general nature as that authorized, or incidental to the conduct authorized. Under Restatement § 228(1), conduct is within the scope of employment if, but only if:
 
(a)     it is of the KIND he is employed to perform;
 
(b)    it occurs substantially within the AUTHORIZED TIME AND SPACE LIMITS;
 
(c)     it is actuated, at least in part, by a PURPOSE TO SERVE THE MASTER, and
 
(d)    if force is intentionally used by the servant against another, the USE OF FORCE IS NOT UNEXPECTABLE by the master.
 
i)        Broad Application – An act can be within the scope of employment even though (i) the master has expressly forbid the act; (ii) the act is tortious; and (iii) the act constitutes a crime.
 
Ex: A bar owner instructs a bouncer never to use a certain chokehold in restraining obstreperous customers. One night the bouncer overreacts to an especially troublesome person and uses the hold. The patron subsequently files a civil suit against the bar owner and seeks to press criminal charges. Nonetheless, the bouncer acted within the scope of employment; the relevant conduct fits within the general guidelines of § 228(1)
 
ii)      Commuting – In general, a servant’s trips to and from work are not within the scope of employment. However, if at the master’s request the servant undertakes an errand while going to or from work, the entire trip may become part of the scope of employment.