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

Since most Businesses act through third parties regularly, it is necessary to determine:
1)       When an agent can bind his principals,
2)       When the principal is liable for the wrongful acts of the agent.
3)       What the Duties are from an agent to a principal and vice-a-versa.
Analyzing Agency Problems: 3 Types of Problems
1)       Problem btw the Agent and the Principal?
2)       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?
Common Questions:
·         Does an agency relationship exist between Principal & Agent?
·         What consequences follow to Principal from interaction between Agent and Third Party?
Person Asserting that there is a Principal / Agent Relationship Has the Burden of Proving It.
·         Note: Intent of the parties has no bearing on whether an agency relationship has been formed!!
o        Can arise even if the parties do not intend to be agent and principal to one another. – Gordon v. Doty
o        Can not arise even if the parties so intend if certain conditions are not met.
§         Must have an agreement that the agent will undertake some act on behalf of the principal with the understanding that the principal is to remain in control of the undertaking.
Who Is An Agent?
Agency is defined as a 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).
·         Legal Standard: § 1(1) of the Restatement of Agency
·         Agency relationship result from:
·         The manifestation of consent*by Principal to Agent that Agent shall act
o        On Principal’s behalf
o        Subject to Principal’s control
·         Agent has to consent to so act
o        A reasonable person must infer that the agent has manifested consent.  
o        *Manifestation of Consent requirement is objective.
§         Agent does not have to expressly say “I consent.”
§         Does not matter what the principal truly intended.
·         Rather, Agency relationship depends on what the agent believes the agent intended.
·         Thus, Agency Relationship can arise even where the principal subjectively intended no such relationship. – Mill Street Church: Hiring Brother Case
·         Agency power to bind relationship can arise even absent mutual consent.
Capacity To Be Principal / Agent:
–          Capacity to Be a Principal: Test: Does the principal have the capacity to do the act for which the agent was appointed?
o        Generally any person having capacity to contract can appoint an agent (Minors and incompetents cannot appoint an agent if they could not themselves do the act in question.)
–          Capacity to Be an Agent: Anyone can be an agent.
Gorton (P) was injured in an automobile accident after Doty (D) loaned her vehicle to Garst to transport Gorton (P) and others to a football game.
RULE: An agency relationship results from one person’s consent that another will act on his behalf and subject to his control, and the other person’s consent to so act. 
·   Court held that Garst was acting on Doty’s behalf and was subject to Doty’s control because: Doty made Garst’s driving the car a condition precedent to its use. 
o Control established by a condition precedent
·   Lame argument, doesn’t necessarily make sense. But the default rule is that if someone borrows your car, they are acting as your agent. 
**Don’t need a formal contract for an agency relationship to exist!
A. Gay Jenson Farms Co. v. Cargill, Inc CREDITOR TAKES CONTROL OF DEBTOR
The P’s entered into grain contracts with Warren Grain and Seed Co., which was financed and controlled by Cargill (D), a separate entity. P’s sue Warren and Warren defaults, so they go after Cargill.
Court held that an agency relationship did exist between the defendants, the web of contracts between Cargill and Warren had become so strong that their relationship had evolved into an agency relationship comparable to a sole proprietorship.
1. A manifestation of consent by Cargill that Warren act:
–          On Cargill’s behalf: By procuring the grain for Cargill as part of its ordinary operations, which operations were financed by Cargill
–          Subject to Cargill’s control: How?
o        “By directing Warren to implement its operations.”
§         Control is established by the end result, even if only by prescribing the agent’s responsibilities
o        Interfering in Warren’s operations
2. Warren’s consent to so act: Wasn’t really addressed
RULE: A creditor that assumes control of its debtor’s business may become liable as principal for the debtor’s acts in connection with the business.
–          Must be an agreement, but not necessarily a contract!
Controlling Creditor: R2d of Agency § 14 When does a creditor become a principal?
–          Creditor becomes a principal at that point at which it assumes de facto control over the conduct of the debtor.
o        9 Factors in Cargill RE Control:
§         1.Cargill’s constant recommendations to Warren by telephone;
§         2.Cargill’s right of first refusal on grain;
§         3.Warren’s inability to enter into mortgages, to purchase stock or to pay dividends without Cargill’s approval;
§         4.Cargill’s right of entry onto Warren’s premises to carry on periodic checks and audits;
§         5.Cargill’s correspondence and criticism regarding Warren’s finances, officers salaries and inventory;
§         6.Cargill’s determination that Warren needed “strong paternal guidance”;
§         7.Provision of drafts and forms to Warren upon which Cargill’s name was imprinted;
§         8.Financing of all Warren’s purchases of grain and operating expenses;
§         9.Cargill’s power to discontinue the financing of Warren’s operations.
Termination of an Agency Relationship
1.       Agreement of parties:
a.       The contract between principal and agent states when it will end.
2.       Agency at will:
a.       At common law, agency relationships presumed to be “at will” and thus terminable at any time by either party after notice.
                                                               i.      Revocation:
1.       Principal revoked authority of agent to act
                                                              ii.      Renunciation:
1.       Agent notifies principal they quit
3.       Fulfillment of the purpose of the agency relationship:
a.       I.e., completion of task.
4.       By operation of law:
a.       Termination occurs automatically; e.g., upon death of either agent or principal
Agency Costs:
Defined as the sum of three sets of costs incurred to prevent shirking (Any action by a member of a production team that diverges from the interests of the team as a whole)
Monitoring expenditures by P
Bonding expenditures by A
Residual loss (shirking that was not prevented)
Liabilities of Principals to Third Parties in Contract
After establishing that an agency relationship exists, a third party wanting to hold the principal liable, must demonstrate the scope of the agent’s authority to act for the principal.
·         Contractual Liability that is created by agents:
1. Agency relationship between P and A
2. A’s dealing with T
3. Create legal liability of P to T (and vice versa)
R2d of Agency § 144:
A principal “is subject to liability upon contracts made by an agent acting within his authority if made in proper form and with the understanding that the principal is a party”
“Ways That An Agency Relationship Can Be Formed” / (Types of Authority):
·         Actual Authority
·         Apparent Authority
·         Inherent Agency Power
·         Ratification
·         Estoppel
**Legal consequences of an agent’s acts do NOT depend on the type of authority the agent possessed!
A.    Actual Authority (Express or Implied): Actual Authority may be expressly conferred on the agent, or reasonably implied bycustom, usage, or the conduct of the principal of the agent. Such authority can be express or implied.
·         Express Authority: Actual authority contained within the agency agreement (i.e. expressly granted by principal).
·         Implied Actual Authority: Agent has authority if the agent had reasonable belief that she has the authority to do the act; that it was within the scope of her authority.
·         Actual authority looks to the communications between the P and the A,
·         Incidental Authority: Agent’s belief that she had authority can be reasonable if the act is incidental to the agent’s job.
o        An agent will not have implied authority if the principal has given the agent clear instructions not to use some particular means of accomplishing the task.
o        Lot of times this can Incidental to Express Authority.
·         Customary Actual Authority
o        Customary in a certain trade that a certain type of agent has certain authority unless principal directly expresses otherwise
R2d of Agency § 26 Manifestation of Consent:
“Authority to do an act can be created by written or spoken words or other conduct o

or a particular type of transaction.  
Watteau v. Fenwick:
Watteau owned a beerhouse but kept ownership a secret (undisclosed P) and kept the prior owner working there (appeared to be the current owner). Plaintiff sues Watteau (principal) to collect on cigar and Bovril payments for purchases made by the prior owner, even though he was forbid to make those types of purchases.
–          No actual authority because was expressly forbid.
–          No apparent authority b/c owners are undisclosed so 3rd party doesn’t know P, no “holding out” of P to 3rd party
RULE: When a principal is undisclosed to 3rd parties, the actions taken by an agent in furtherance of the principal’s usual and ordinary business binds the principal.
Agent Exceeds Authority (Actions Customary/Incidental)
Authority Inferred from Customary Powers of Similar Agents® An agent 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: Fuller (employee of Edison) hired to get singers to advertise phonographs and promised tour to Kidd, but Fuller was told by his supervisor that he had no authority to promise a tour. Kidd sues. 
–          No apparent authority because no holding out by Edison
–          Court holds that Fuller had inherent authority because it was customary in the industry to give tours by people such as Fuller. 
RULE: If a conduct custom is established in an industry, an agent acting within that industry possesses inherent authority to act on all such matters.
Incidental 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.
General Agent and Incidental transactions
R2d of Agency § 161 “A general agent for a disclosed or partially disclosed principal subjects his principal to liability for acts done on his account which usually accompany or are incidental to transactions which the agent is authorized to conduct if, although they are forbidden by the principal, the other party reasonably believes that the agent is authorized to do them and has no notice that he is not so authorized.”
                MUST PROVE:
–          Agent was a “general agent” pursuant to R2d of Agency §3 “ a general agent is an agent authorized to conduct a series of transactions involving a continuity of service.”
–          Transaction was the sort of thing that would “usually accompany or are incidental to transactions which the agent is authorized to conduct”
–          3rd party reasonably believed Agent had authority
Nogales: 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, even thought NSC wanted implied authority instruction. Court holds that implied authority instruction should have been given because it is different than AA and it applies in this case. 
RULE: Inherent authority exists if a general agent, as one authorized to conduct a series of transactions involving a continuity of service, does something similar to what he is authorized to do, even if he was not actually authorized to do it. 
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 is 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 monitored partner.