Select Page

Business Associations/Corporations
University of San Diego School of Law
Smith, Thomas A.

Corporations Smith Spring 2017
The Agency Relationship
I.Creating an Agency Relationship
Ancient roots
Likely rooted in ancient roman law and its treatment of slaves
Unlike a contract, there is no need for consideration; just some sort of agreement between parties
Slaves didn’t necessarily agree to be bound, but they were nonetheless bound without any consideration.
And their master was liable to any third party for their actions.
An agency exists when one person (the principal)…
Consents that another, the agent
Shall act on the Principal’s behalf; AND
Subject to the Principal’s control; AND
The Agent consents to act accordingly
May manifest in actions of the agent and inferred from facts.
Principal tells agent to buy widgets, and the agent says okay.
That is consent to be an agent, and the agency relationship exists.
The CEO of General Motors consents to be the agent of GM.
The employee of a corner bodega is the agent of the bodega’s owner
II.Defining Agency
Restatement Second § 1
Agency is the fiduciary relationship that result from
The manifestation of consent by one person to another that the other
Shall act on his behalf; AND
Subjected to his control
And consent by the other to act
Consent manifests in a lot of different ways
Actual, express consent
An appearance of consent as seen in the circumstances
The manifestation of consent through action
Express Agency
An agency that occurs when a principal and agent both expressly agree to enter into an agency agreement with each other
Not necessarily a contract; just an agreement
Express agency can be oral OR written; unless there is a statute of frauds problem, in which case it must be written.
Exists when the agent and principal expressly agree to enter a relationship
You do not have to expressly agree to be an agent – just agree to do the things that make you an agent
Acting on P’s behalf, and subject to P’s control
Implied Agency
Principal and agent do not expressly create any agency relationship, but rather their conduct IMPLIES an agency relationship
The extent of this relationship is determined by facts and circumstances
Frequently, express agency relationship come with a bunch of implied agency relationships
You may agree to act on one person’s behalf, but as it turns out your conduct is manifesting an agency relationship with multiple principals – managers, the business itself, the shareholders, etc.
III.Legal Liability
Gorton v. Doty
RULE: The principal is liable for any of the agent’s conduct that harms a third party.
F: Idaho high school with a football program; the team needs a ride to a game but does not have enough cars; Doty agrees to loan coach Garst her ride, but tell him he MUST drive; they are in an accident, and they third party sues everybody.
If the third-party can sue Doty, he has access to the deep-pockets of the school.
However, there must be an agent-principal relationship between Doty and Garst to open-up liability.
Agency requires (1) an agreement between the P and the A that; (2) the A will act on behalf of P; and (3) under P’s control.
Here, Doty agreed to lend Garst her car, with the express condition that Garst drive. Garst took the keys and drove, manifesting his consent.
Thus, it seems prongs (1) and (2) are met.
But is Garst acting on behalf of Doty?
Depends on why Doty was lending the car; she could have just driven the team herself, but it appears she is allowing Garst to act in her stead.
That satisfies prong 3.
As there is a Principal-Agent relationship, the third party could sue Doty.
Suppose you are Doty’s attorney, and a few months aftert his case, she tells you the new football coach wants to use her car to take some players to another game. She asks for your advice on how to avoid liability – what do you say?
Either say no, or don’t attach any conditions on the use of the car so there is no element of control (prong two).
Smith is wrestling in High School, and asks the coach to borrow his car to gets some food; coach says sure and hands them the keys; Smith crashes the car; is the coach liable?
Depends whether Smith was acting on the Coach’s behalf
Did Coach have an interest in thus such that he would have done the driving himself?
Probably not – Smith was hungry and wanted food.
P owns a shopping mall; A rents a sotre in it under a lease in which A promise to pay P a percentage of A’s monthly gross sales revenue as rent; lease gives P the right to approve, or disapprove, A’s operational plans for the store. Is A P’s Agent?
Probably not. P certainly exerts control, but A is not a

it that is, nonetheless, an agent
Ex. Fisher Auto-Body only makes parts for GM. If GM goes out of business, so does Fisher.
Under the Restatement, Fisher is a supplier with one customer.
But under a test like Cargill, Fisher is an agent.
The UCC has an “exclusive relational contract” clause
Basically recognizes one business is the exclusive customer of another business, without creating a principal-agent relationship.
Fairly common and holds up in court.
Gay Jenson Farms v. Cargill
F: Cargill has a relationship with Warren, which independently owns and operates a grain elevator; Cargill finances the operation and acts as a creditor; basically, Warren would ask for money, buy grain, and then sell Cargill the rights to that grain and, as grain elevators are expensive to maintain, that gave Cargill the rights to a mini-local monopoly.
Warren is forbidden from selling grain for a better price than it is willing to sell to Cargill, so Cargill buys most of the grain.
As time wears on, Warren has financial problems and is eventually forced to close, leaving $2 Million in unpaid debt for grain it bought from farmers.
Farmers thus sued Cargill, claiming Cargill was a principal of Warren and owed them money.
Cargill is a gigantic agri-business with mucho bucks.
Issue in this case comes down to control
Cargill made constant recommendations to Warren; had a right of first refusal; would regularly correspond and criticize how Warren was run; told Warren it needed strong guidance; imprinted its own name on forms; and financed all of Warren’s expenses.
More importantly…
Warren could not enter mortgages, purchase stock, or pay dividends without Cargill’s approval
Cargill had a right of entry onto Warren’s premises to do periodic checks and audits
Cargill could completely discontinue financing Warren’s operations if Warren stepped out of line.