Business Corporations—Means Fall 2013
Law of Agency
· The reciprocal rights and liabilities between a principal and an agent reflect commercial and legal realities. A business owner often relies on an employee or another person to conduct a business. In the case of a corporation, since a corporation is a fictitious legal person, it can only act through human agents. The principal is bound by the contract entered into by the agent, so long as the agent performs within the scope of the agency.
· A third party may rely in good faith on the representation by a person who identifies himself as an agent for another. It is not always cost effective to check whether someone who is represented as having the authority to act for another actually has such authority. If it is subsequently found that the alleged agent was acting without necessary authority, the agent will generally be held liable.
· Agency can multiply your ability to work/run a business; want a legal structure that allows for the maximum benefit of agency with minimal cost.
· Agency is not just the black letter law—courts take an overall look at the elements and try to determine the relationship.
· Agency/Principal/Agent (RS §1):
o “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.”
§ The one for whom the action is taken is the principal.
§ The one who is to act is the agent.
I. Who is An Agent?
· Agency Creation Test:
1. Manifestation of consent by Principal to Agent.
2. Agent acts on behalf of Principal.
3. Subject to Principal’s control.
4. Consent by Agent.
o Look at party’s agreement to see if a party is an agency relationship but you can still have one even if your agreement says otherwise.
o Signing an agreement does not defeat one of the elements—what matters is what has been formed/the substance of what has been formed.
· Gorton v. Doty
§ Respondent’s son was a member of the football team and was riding in the car with the coach of the football team. Appellant owned the car that the coach drove. They got into an accident where the Respondent’s son was injured and the coach was deemed to have been negligent in the operation of the car. Respondents claimed that the Appellant was liable for damages because a principal-agent relationship was formed when she lent the car to the coach.
§ Whether the coach was acting as an agent of the Appellant when he drove her car.
§ An agency relationship is created once a party agrees to act on behalf of a second party subject to the second party’s control.
§ Court says that the coach was an agent of the Appellant because he was the only one who could drive her car so there is some control. There was also no discussion about loaning/borrowing the car.
§ This case is about a car and the law in this state creates a presumption of an agency relationship because a car is dangerous and the owner should be responsible for it.
o Doty did not want the boys to drive so she asked the coach to drive as a precaution (not as much control as required by the agency relationship). It was simply a nice gesture on her part. Agency means more than passive permission—involves a request/instruction/command. The dissent disagreed with the majority as to the application of the test. A loan would require a common sense restriction but does it rise to the level of control.
· A. Gay Jensen Farms v. Cargill Co.
§ Ps brought a lawsuit against Warren (D) when D defaulted on contracts with the farmers to sell grain. D has grain storage and also sells supplies to farmers. D collects the grains and pays the farmers. Farmers sell to D on credit. Warren entered into a security agreement with Cargill. Cargill lent money to D for “working capital.” Cargill was given the right of first refusal to purchase marker grain.
· Context of this case—a creditor is exercising control over its debtors after the debtor has experienced financial difficulties
§ Whether Cargill was the principal and thus, was Cargill liable for the contracts made by D with the Ps?
§ A creditor who assumes control of his debtor’s business may become liable as principal for the acts of the debtor in connection with the business.
§ Court ruled yes based on the control and influence that Cargill exerted over D. By directing D to implement its recommendations, Cargill manifested control and the consent that D was the agent. D procured grains on Cargill’s behalf, which was financed by Cargill.
§ The fraud did not defeat the elements.
§ Understandable that Cargill would want to protect its investment but at some point, they step into a role that controls D.
§ Some principals might accept the cost of liability for the benefit of control. A business decision will increase the cost of legal implications—fact intensive analysis; no right answer
II. Liability of Principal to Third Party in Contract
· “Authority is the power of the agent to affect the legal relations of the principal by acts done in accordance with the principal’s manifestation of consent to him.”
· Until the principal tells the agent what the agent’s authority is, agent has no authority—cannot have an implication from nothing.
· The only authority that an agent has is what’s given.
· Principal’s Liability—In General (§ 7.03)
o (1) A principal is subject to direct liability to a third party harmed by an agent’s conduct when:
§ (a) as stated in § 7.04, the agent acts with actual authority or the principal ratifies the agent’s conduct and
· (i) the agent’s conduct is tortious, or
· (ii) the agent’s conduct, if that of the principal, would subject the principal to tort liability; or
§ (b) as stated in § 7.05, the principal is negligent in selecting, supervising, or otherwise controlling the agent; or,
§ (c) as stated in § 7.06, the principal delegates performance of a duty to use care to protect other persons or their property to an agent who fails to perform the duty.
o (2) A principal is subject to vicarious liability to a third party harmed by an agent’s conduct when:
A. The Agent’s Authority
· Creation of Authority (RS §26)
o Except for the execution of instruments under seal or for the conduct of transactions required by the statutes to be authorized in a particular way, 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.
· Actual (express or implied)—
o Actual authority flows directly from principal to the agent. The principal manifests to an agent that the agent has the power to deal with others as a representative of the principal. The agent’s actions therefore bind the principal. When an agent acts within the scope of his actual authority, he is not personally liable to third parties.
§ This can be contractually modified.
· Actual Authority (RS §7.04)
o A principal is subject to liability to a third party harmed by an agent’s conduct when the agent’s conduct is within the scope of the agent’s actual authority or ratified by the principal; and
§ (1) the agent’s conduct is tortious; or
§ (2) the agent’s conduct, if that of the principal, would subject the principal to tort liability.
Express authority: “You go and do X.”
Telling an Agent what to do OR knowingly acquiescing to an Agent’s actions.
· Express Authority (RS §26)
o “Except for the execution of instruments under seal or for the performance of transactions required by statute to be authorized in a particular way, 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 authority: “You can do what you need to do to accomplish X.”
This flows from express authority. It is the power to act in ways reasonably necessary to accomplish the purpose for which the express authority was granted. Custom and relations between the parties is relevant.
· Implied Authority (RS § 35)
o “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.”
· Apparent Authority
o Apparent Authority (RS §8)
§ 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 per
etting in touch with Petty and hired his brother, Sam Hogan. Sam broke his arm and a church elder told Hogan that the church had insurance. The church paid Hogan for the hours worked and the church paid for the tools and supplies.
§ Did Hogan, the agent of MSC, possess the implied authority to hire Sam?
§ Implied authority is actual authority that is proven circumstantially to indicate that the principal intended to delegate powers to the agent that are necessary for carrying out the agent’s duties, and one major circumstantial factor is prior work performed by agent for principal.
§ There is implied authority—actual authority circumstantially proven by which the principals actually intended the agent to possess and includes such powers as are practically necessary to carry out the duties actually delegated.
§ Focus on A’s reasonable understanding of his authority
· Three Seventy Leasing Corp. v. Ampex Corp.
Plaintiff was a leasing company that approached Defendant company’s representative, Thomas Kays, to purchase computer hardware. Plaintiff was going to act as a middle-man between Defendant and a second purchaser of the hardware that Plaintiff found. Defendants submitted an unsigned purchasing agreement to Plaintiff, and Plaintiff signed the agreement. Kays followed the exchange with a letter indicating that part of Plaintiff’s order would be shipped directly to the second purchaser.
Whether Kays entered Defendant into a contract with Plaintiff under an apparent authority to act in that capacity.
An agent has the apparent authority to act in a manner that is reasonable for a person in the agent’s position, and a third party can rely on those actions when a principal indicates through its actions that an agent had the appropriate authority.
The United States Court of Appeals for the Fifth Circuit held that Kays had apparent authority to act on behalf of Defendant in contractual matters with Plaintiff, and that Kays did enter into an agreement when he promised shipment of the hardware. It was reasonable for Plaintiff to rely on Kays, a salesman, to conduct a sales transaction with Plaintiff. Defendant agreed to continue negotiations through Kays, and any evidence to demonstrate that Kays did not have that authority was never relayed to Plaintiff.
In that the plaintiffs relied upon a representative of the principal that acted as the face of the principal in dealings with the plaintiffs. In both cases, the courts could not justify forcing the plaintiffs to comply with the actual authority established by the principals that was unknown to the plaintiffs.
· Watteau v. Fenwick
§ D owned a hotel-pub that employed Humble to manage the establishment. Humble was the exclusive face of the business; Humble’s name was on the bar and the license of the pub. D explicitly instructed Humble to not make any purchases outside of bottled ales and mineral waters but Humble still entered into an agreement with P for the exclusive purchase of cigars. P discovered that D was the actual owner and brought an action to collect from D.
§ Whether D is liable for damages resulting from an agreement between P and Humble, who knowingly acted outside of his actual authority as an agent for D.
§ An undisclosed principal can be liable for the actions of an agent who is acting with authority that is reasonable for a person in the agent’s position regardless of whether the agent has actual authority to do so.