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Business Associations
University of South Carolina School of Law
Means, Benjamin

Business Associations
Spring 2013
·         Definition: R1 (Restatement): Agency is the fiduciary relation 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.
·         Agency relationships are not fully subject to contractual control
o   The existence of agency relationships can effect 3rd parties that are not involved in the contract.
·         Creation: Is there agency?
o   Elements:
§  Principal’s manifestation of consent to Agent
§  Agent acts on behalf of Principal
§  Subject to Principal’s control
·         Control doesn’t have to be exercised: what matters is that the principal has the right to do so
§  Agent’s manifestation of consent to Principal (both parties must consent!)
o   Agency is what arises out of the court’s interpretation of the facts (legal conclusion), not on anything the parties intended to do.  In this case, the loaner of the car didn’t think about agency at all, yet the court found it to exist: Gorton v. Doty (p. 1)
§  Facts: Father and son sue Doty- Father recovers $870 and son recovers $5000
§  Doty taught at Soda Spring High school and she loaned her car to Garst, the football coach so he could transport the team to the football game.  She said that he could have it if he drove it.
§  Procedure: Motion for a new trial was denied.
§  Issues: Whether the coach is an agent of Doty such that Doty is liable for the car accident.
§  Held: Yes.
·         Doty exercised control by stating that the coach must be the only one to drive the car
·         Counterargument/Dissent (that Means agrees with more): how much control did she really exert? Doty could have specified the route to take, the speed to drive, etc. 
§  Case definition of agency:  the relationship which results from the (1) manifestation of consent by one person to another (2) that the other shall act on his behalf and (3) subject to his control, (4) and consent by the other so to act. 
§  Ownership of the car creates a presumption that the driver is the agent of the car owners
§  Dissenting definition:  agrees with the majority opinion on the test – disagrees to the application of the facts to the test
§  Element:  on behalf of
·         If coach is driving the car on behalf of Doty – creates an agency
·         Have you driven the team before?  If yes, then they would do so on your behalf
·         Previously loaned her car? What would she have done instead that night?
·         What type of relationship does she have with the football team? Big fan, teaching for a long period of time at the school, etc.  
o   A. Gay Jenson Farms v. Cargill (p. 7)
§  Facts: Plaintiff farmers sold their grain crops to Warren.  Warren was a local firm that operated a grain elevator, which stores the grain. Cargill was a worldwide dealer in grain. Warren bought grain from the farms and sold it to Cargill.  Warren became insolvent; P’s sued Cargill. 
·         Cargill loans money (extends credit) to Warren so that Warren can collect grain from a bunch of local farmers, then Warren can give (sell) the collected grain to Cargill so that Cargill can then sell the grain in a large market.
§  Issues: Is Cargill liable as the principal for the Warren & farmer’s contracts?
§  Held: Yes.
·         Warren acted on behalf of Cargill in procuring grain for Cargill as part of its normal operations.  Warren was Cargill’s agent in procuring new type of what from farmers, Warren contracted on Cargill’s behalf for sunflower seeds
·         Warren was subject to Cargill’s control: Cargill’s interference with the internal affairs of Warren; Cargill was mostly in primary control of Warren’s finances, Warren could not make capital improvements or repairs without Cargill’s consent; Warren could not guarantee a loan without Cargill’s prior consent.
o   Policy: If the creditor takes too much control, he ought to be smarter about it and actually remedy the problematic situation.
·         Cargill manifested its consent to the agency by directing Warren to implement its recommendations
·         Case definition: Agency must have 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 consequence of the relationship to follow.  The principal must have consented to the agency
§  Planning: A creditor will assume liability as a principal if he takes on too much control. Always ask if the ability to better ensure being paid back is worth the added liability.
·         Liability to third parties in CONTRACT
o   What authority does the agent have?
§  Actual authority (R7): the power of the agent to affect the legal relations of the principal by acts done in accordance with the principal’s manifestations of consent to him
§  P —–à A         3rd Party
·         Occurs when the principal talks to the agent.
·         Express actual authority (R26): authority to do an act can be created by written or spoken words or other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal’s account
·         Implied actual authority (R35): unless otherwise agreed, authority to conduct a transaction includes authority to do acts which are incidental to it, usually accompany it, or are reasonably necessary to accomplish it
o   What was it reasonable for the agent to believe?  Consider:
§  The agent’s understanding of his authority
§  Past and present conduct of the principal toward the agent
§  The nature of the task or job
§  Prior similar practices
§  Specific conduct by the principal in the past permitting the agent to exercise similar powers
§  Apparent authority (R8): 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 parties
§  P ß–à 3rd Party       A
·         Occurs when the principal talks to the third party. Was it reasonable for the third party to believe that an agency existed?
·         Can exceed actual authority
·         Some disagreement between Second and Third restatement regarding how direct the holding out by the principal has to be.
o   Second Restatement: if there is no statement made by the principal to the third party, there is no authority.
o   Third Restatement: broader view. If the principal puts an agent out there, he holds out to the world that the agent is capable of doing things.
§  Inherent authority (R8A): indicates 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 with a servant or other agent.
·         There is no actual or apparent authority, but it would be inequitable to not allow the 3rd party to recover.  3rd party doesn’t even know the principal.  We barely talked about this, so probably not on exam.
·         Sometimes the law protects third parties in situations where it seems unfair to allow the principal to escape liability.
·         The “dumping ground” if there is a perceived injustice
·         Was it reasonable for the third party to believe that they are dealing with an appropriate person?
o   Ex that would not be reasonable: A car vendor comes into a bar and thinks that the bartender has the authority to buy $1 million worth of cars. 
§  Ratification
§  Estoppel
§  If P tells A- that actual authority
o   Reasonableness of the agent- only thing that matter
o   We stop after we figure out if the agent was acting reasonably, we do NOT care what the 3rd party thought
§  If P tells 3rd party – apparent authority
o   Third party must be reasonable in their belief of the apparent authority
o   Mill Street Church v. Hogan (p. 14) demonstrates IMPLIED ACTUAL AUTHORITY.
§  Facts: The church hires Bill Hogan to paint, and Bill hires his brother Sam to help him.  Sam is injured on a ladder.
§  Issues: Whether Bill had implied authority from the church to hire Sam.
§  Held: Yes.
·         In the past, the church had allowed Bill to hire Sam whenever he needed help.
·         The church treasurer paid Bill for the ½ hour of work that Sam completed.
§  If the church had told Bill that he could hire someone to help but that it could not be his brother and Bill hired Sam anyway, there would be no actual or apparent authority, but there would be an argument for inherent authority because Sam would know that he had been hired in the past without issue.
§  Principal:  Church; Agent:  Bill Hogan; 3rd party:  Sam Hogan
§  Implied authority shown through:  nature of the work, past experiences, some conversations with Bill and paid a portion of his time
§  No apparent authority because no conversations with Sam Hogan
o   Watteau v. Fenwich (p. 20) demonstrates INHERENT AUTHORITY.
§  Facts: Humble transferred a beerhouse within a hotel to D’s but rem

Held: The agent has the duty to disclose and can’t just fabricate a principal. 
o   When an agent acts on behalf of a partially disclosed or disclosed principal, the agent is liable on the contract.
·         Liability to third parties in TORT
·         Don’t use authority analysis because agent never has authority to commit a court
o   Does the principal have sufficient ability to control how the task is performed?
o   Policy behind making masters liable for their servants
§  If the ER has the right to tell the EE what to do in his job and the EE does something wrong that injures someone, the ER himself should take the responsibility.
§  Innocent victims should be compensated from the deep pockets of principals, who should know that they take on liability and that accidents happen. Principals should know to get insurance.
·         Counterargument: If the principal can’t assert a defense that he was overly careful in hiring, training, etc., there will be no incentives for principals to exert this care.
o   Rules
§  Vicarious Liability – Agent injures 3rd Party, and 3P sues because Principal is responsible for Agent’s behavior.  It does not matter that the employee did something the master did not want the employee to do.  The master is vicariously liable.  This is actual agency.
§  R2: Master, servant, independent contractor:
·         A master is a principal who employs an agent to perform service in his affairs and who controls or has the right to control the physical conduct of the other in the performance of the service.
·         A servant is an agent employed by a master to perform service in his affairs whose physical conduct in the performance of the service is controlled or is subject to the right to control by the master.
·         An independent contractor is a person who contracts with another to do something for him but who is not controlled by the other nor subject to the other’s right to control with respect to his physical conduct in the performance of the undertaking. He may or may not be an agent.
§  R220: Definition of servant: In determining whether one acting for another is a servant or an independent contractor, the following matters of fact are considered:
·         The extent of control which, by the agreement, the master may exercise over the details of the work
·         Whether or not the one employed is engaged in a distinct occupation or business
·         The kind of occupation
·         The skill required in the particular occupation
·         Whether the employer or workman supplies the tools
·         The length of time for which the person is employed
·         The method of payment
·         Whether or not the work is part of the regular business
·         Whether or not the parties believe they are creating the master/servant relationship
·         Whether or not the principal is or is not in the business
§  See R5(2): A subservant is a person appointed by a servant empowered to do so, to perform functions undertaken by the servant for the master and subject to the control as to his physical conduct both by the master and by the servant, but for whose conduct the servant agrees with the principal to be primarily responsible
o   If there is a master/servant relationship, the master is liable.  Consider the ultimate financial risk.  Humble Oil v. Martin (p. 36)
o   Oil Company (Humble) ß—Master/servant relationship–à Franchise Operator (Schneider) ß—master/servant relationship–à Local Employee (Manis – actual tortfeasor)
§  Facts: P was struck by a car that rolled off the service station’s lot. P sued the station and Humble Oil.