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

Corporations Outline
Professor Tom Smith
Fall 2006
1)   Is the problem btw the Agent and the Principal?
2)   Does it involve a 3rd party trying to hold the Principal to an agmt based on the agent’s conduct or on an express agmt?
3)   Does it involve a 3rd party to hold a principal liable for the agent’s torts?
Creation of the Agency Relationship:
1)   Principal consented to Agency and Agent consented to being the Agent
·         Mutual Consent Required= No K required!
·         Agency Relationship can arise even if parties don’t intend to be agent and principal to each other!
2)   Agent acted on behalf of the principal AND
3)   Principal exercised control over agent
Who is an Agent?
·         Agency: the fiduciary relationship that results from the manifestation of consent that one person (the agent) shall act on behalf of and subject to the control of another person (the principal)
o   Depends on what the agency believed the principal intended= agency power to bind the principal can arise even absent true mutual consent
·         Every agent is a fiduciary= owes a high std of care to her principal
o   Must avoid conflicts of interest, self-dealing, disloyal acts, etc
·         Principal liable for the actions of his agent
o   Gorton v. Doty(Idaho 1937). D a teacher of school who allowed coach to transport football students to a football game by driving her car. Relationship of Principal and Agent existed btw D and Garst. An agency relationship results when 1 person allows another to act on his behalf and subject to his control. D consented to Garst acting on her behalf and subject to his control. She didn’t say anything about loaning Garst the car, and he didn’t say anything about borrowing it.
§ Agent (coach) was negligent and Principal (D) is liable for A’s negligent driving.
o   A creditor who assumes control of his debtor’s business may be held liable as principal for the acts of the debtor in connection w/the business (R2d Agency §140)—A. Gay Jensen Farms
§ Agency Cost: How much does it cost to have someone else do the job other than you? Cargill employees getting commission of the grain Warren buys= will keep extending credit to Warren. Cargill company suffering, but its employees are happy.
Different Degrees of Agencies
1)   General Agency
2)   Servant/ Master & Employee/ Employer
·         Servant: Acts under P’s control AND is subject to the immediate and physical supervisions of the master
·         Masters are liable for the torts of their servants
·         If you set someone up to appear as a servant, even if they are not, you’ll also be held liable for S’s torts
3)   Employer/ Independent Contractor
·         P isn’t liable for torts of their independent contractors
Liability of Principal to 3rd Parties in Contract
·         After establishing that an agency relationship exists, a 3rd party wanting to hold P liable MUST demonstrate the scope of the agent’s authority to act for the P. Party alleging agency and resulting authority has the burden of proving the agency relationship.
 Sources of Authority:
1)   Actual Express Authority
·         Arises out of the manifestations that P makes to A
·         P tells A to do X, and A does X
·         May be expressly conferred on the agent, or reasonably implied by custom, usage, or by the conduct of the principal to the agent (objective)
§ If A can reasonably infer from P’s manifestations that she has authority to do X, then A has actual authority to do X
2)   Actual Implied Authority
·         Arises out of the manifestations that P makes to A
·         P cannot always think that he must authorize A to do X, so if A, in carrying out P’s instructions, A has to take some other steps to do it= Then A has actual implied authority to do these necessary things
·         Q of Fact to what a reasonable person would infer would be implied (objective)
·         R2d of §35
·         Implied from Past Conduct- Mill Street Church of Christ v. Hogan. 
§ Church hired Bill to repair church, who hired his brother to help. Brother fell off a ladder and is seeking worker’s comp. 
                              o   AIA b/c job customarily req assistance= reasonable for Bill to infer the authority to hire an assistant
                              o   AA- reasonable for Sam to infer that Bill had the authority to hire him b/c it was customary to have an assistant and it had been done before- 3rd party is picking up manifestation directly from P
3)   Apparent Authority
·         Arises from manifestations P makes to the 3rd party that an agent is authorized and the 3rd party reasonably relies on the manifestation
§ Q of Fact to what’s reasonable
§ Must be some holding out by the Principal that causes a 3rd party to reasonably believe that the agent has authority and the 3rd party must reasonably rely on the principal’s manifestations
§ Economic Efficiency® Burden to get words right and be careful not to put 3rd party in a position that they’ll think A has authority
·         Legal consequences are the same as if it was actual authority
·         R2d of Agency Sec. 8®Apparent Authority turns on the P’s manifestations
§ An agent can bind a principal despite a lack of authority to do so if it would seem to a reasonable person that the agent possessed such authority—Lind
          §   P promoted to DM and is told by the VP that Kaufman is his immediate boss and to find out his salary through Kaufman. Promised a 1% commission he never received. Apparent Authority to bind corp to higher salary promise b/c Kaufman had apparent authority to bind corp to the K arrangement.
§ Any manifestations from a corporation to a 3rd party is through an agent– 370 Leasing Corp
§ A salesperson binds his employer to a sale if he agrees to that sale in a manner that would lead the buyer to believe that a sale had been consummated—370 Leasing Corp
           § 370 dealing w/ an Ampex salesman to buy computer memory. Ampex policy is that salesmen don’t have authority to finalize b

gent acting w/in the usual boundaries of his role binds his principal even if the details of the transaction to which he agrees were not authorized
·         Kidd v. Thomas A. Edison- AA and IAP mixed together- Fuller (employee of Edison) hired to get singers to advertise phonographs and promised tour to Kidd.
o   Minimum quantum authority (baseline authority that’s created by appointing an agent) required to create agents b/c 3rd parties should be able to rely on promises made by agents in certain positions normally have.
·         R2d of Agency §194– An undisclosed P is liable for acts of an agent done on his account, if usual or necessary in such transactions, although forbidden by the principal.
·         R2d of Agency §195—Makes an undisclosed P who entrusts an A w/the management of his business liable to 3rd persons w/whom the agent enters into transactions in the usual course of business even if the agent’s actions are contrary to the principal’s directions
·         Inherent Authority® A principal can be bound by a general agent based on his position as such, even if he lacks express or apparent authority for the commitment at issue
·         Nogales Service Center v. Atlantic Richfield Company- NSC formed and borrows $ from Arco to build truck stop. Arco’s truck stop manager promised 100K loan and 1% discount on gas. Arco said manager didn’t have authority to promise discount. AA instruction.
·         R2d of Agency §8A—Definition of Inherent Agency Power: IAP is a term used in the restatement of this subject to indicate 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 w/a servant or other agent
·         HYPO: Widow unsophisticated in business relied on bad accountant to manage her business and he steals $ and she goes after partners.
·         No actual or app authority either b/c no reasonable person could infer that an accountant isn’t authorized to run a business, but SC said IAP b/c she was an unsophisticated person. Sympathetic P doesn’t fall w/in AA, but feels that she deserves a remedy. Partnership should’ve monitor partner.
6)   Agency by Estoppel
When P negligently or intentionally causes a 3rd party to believe that his agent has authority to do an act that’s actually beyond his authority, and the 3rd party detrimentally relies on