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

Business Corporations


Fall 2008


A. Who is an Agent

1. Benefits of Agency

a. Specialization – agent knows more than principal

b. Diversification – do more b/c principal can only do a little

2. Costs of Agency

a. Agent may not do work

b. Agent is spending money so benefit must outweigh cost

3. Agency Defined: Agency is a (1) fiduciary relation which results from the (2) manifestation of consent by one person [principal] to another [agent] that the other (3) shall act on his/her behalf and (4) subject to his/her control, and (5) consent by the [agent] to so act. Rest. 2d Agency § 1(1)

4. Elements of Agency

a. Fiduciary relationship

b. Ps manifestation of consent to A –

c. To a relationship in which A to act on behalf of P

d. Subject to P’s control

e. A’s manifestation of consent to P

5. Forms of Agency:

a. Principal and agent

b. Master and servant

c. Employer and independent contractor

6. Example: if you ask someone to sell your car and you expressly say, “you are not my agent,” are they an agent? Actions dictate the agency relationship more than words.

7. Vicarious Liability: “the act of a servant is the act of his master, where he acts by authority of the Master.” Jones v. Hart, 1698.

8. Power to Act – agent’s power to act is confined to the types of acts agreed upon. It must be of the same subject matter

a. Example: P wants A to sell his car. A has the power to do what is reasonably necessary to sell the car.

9. Burden of Proof – person asserting agency has burden of proof, and agency cannot be proven by mere statement, but can be est. by circumstantial evidence

10. Rules of Agency (taken from Gordon v. Doty & Gay Jenson Farms)

a. To create, must be an agreement b/n parties, but no need for a contract. Rest. §§ 15, 16

b. Must be a benefit to the principal and the principal must have the ability to exercise control over the agent

c. No promise needed by agent to act for principal

d. Not essential that agent be compensated Rest. § 16

e. It is more than passive permission, it involves a request, instruction, or demand

f. Principal does not need to intend the legal consequences

g. Agency may be proved by circumstantial evidence that shows course of dealing between 2 parties

h. Creditor who assumes control over his debtor’s business may become liable as principal for acts of the debtor in connection with the business Rest. 2d Agency § 14

– Point at which creditor becomes principal is after de facto control over conduct of debtor

11. Policy – reasons to put liability on principal

a. If principal getting benefit, then it should also bear liability

b. The act of the agent is the act of the principal

12. Agent v. supplier

a. Supplier-

i. Receives fixed price from buyer regardless of how much supplier paid to procure. This is important!!!

ii. acts in own name and receives title to property and then transfers to buyer

iii. has independent business in buying and selling similar property

b. Agent- one who contracts to acquire property from a third person and convey it to another (principal) is agent if acting primarily for benefit of buyer, not for self.

B. Liability of Principal to Third Parties in Contract

1. Types of Authority

a. Actual

i. Express (Rest. § 8) – manifestations from P to A à”sell my car”

ii. Implied/Incidental(Rest. § 35) – actual authority circumstantially proved which the principal actually intended the agent to possess and includes powers as are practically and reasonably necessary to carry out the duties actually delegated.

– This is viewed from perspective of the Agent (what power is reasonable to have to effectuate original power).

– When determining implied authority, court will look at whether the agent reasonably believes b/c of present or past conduct of the principal that the principal wishes him to act in a certain way or have certain authority. Existence of prior similar tasks is highly probative.

– Authority may be implied if it is necessary to carry out express authority

– The fact that a 3rd party knew the principal did not intend the agent to possess such power is of no consequence. Implied agency is viewed from the perspective of the agent.

b. Apparent – (Rest. §8) manifestation from P à 3rd party that A has authority. Third party reasonably believes that P gave authority to A.

i. P says to third party “A has authority to sell my car”

ii. Viewed from perspective of third party

iii. General rule- apparency and appearance of authority must be shown to have been created by the manifestations of the alleged principal, and not solely by proof of those of the supposed agent.

c. Inherent – kind of authority arising solely from the designation by the principal of a kind of agent who ordinarily possesses certain powers. This is the type of authority that’s “left over.” Used if no other authority fits and it is equitable to impose liability on the principal.

1. Term used to indicate the power of an agent which is not derived from authority, apparent authority or estoppel, but solely from the agency relation and exists for the protection of persons harm by or dealing with a servant or another agent.

i. Rest. 2d Agency § 194 – an undisclosed principal is liable for acts of an agent done on his account, if usual or necessary in such transactions, although forbidden by the principal.

ii. Rest. 2d Agency § 195 – an undisclosed principal who entrusts an agent w/ the mgmt of his business is subject to liability to 3rd persons w/ whom the agent enters into transactions usual in such business and on the principal’s account, although contrary to the directions of the principal.

iii. Agent possesses authority that normally resides with such person, irrespective of secret limitations placed by dormant partner [principal].

iv. Many times the court will look to inherent authority when the principal does not want to be disclosed.

v. Partnerships – a partner cannot escape liability for partnership debts by concealing his or her membership in the partnership and any partner can incur debts for which the other partners will be liable, even if forbidden by the partnership agreement to do so.

vi. How do you distinguish inherent agency from apparent authority – both have reasonableness test, so they overlap

– Inherent agency – focuses on what’s customary for being an agent, certain thing incidental to being an agent. For ex. a car dealership, customers wouldn’t need specific direction from the dealer that the employees could trade in their car (but there’s an argument that this could be apparent authority. Clear example of this is when there is an undisclosed principle so look out for that on the exam.

– 3rd Rest. does away w/ inherent agency; apparent authority is a more important doctrine

d. Ratification (Rest. § 83) the affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account. Key is that it’s voluntary and retroactive.

i. Elements:

(1) Acceptance of results with intent to ratify

(2) Full knowledge of circumstances

ii. Two critical questions w/ ratification:

(1) What types of acts constitute an affirmation by the principal?

(2) What effect should we give to that affirmation?

iii. Before the receipt of benefits may constitute ratification, the other requisites for ratification must first be present.

e. Estoppel (Rest. § 8B) – principles of fairness and justice allow for recovery from principal.

i. apparency and appearance of authority must be shown to have been created by the manifestations of the alleged principal, and not solely by proof of those of the supposed agent

ii. 3 Elements that Must be Present for Estoppel:

(1) Principal must do something or omit to do something which creates the appearance of agency

(2) 3rd party must be reasonable in their belief

(3) 3rd party must detrimentally rely on the representation by the supposed agent

iii. Difference b/n estoppel and apparent authority – apparent agency is sometimes called agency by estoppel so there is a lot of overlap.

f. Agent’s Liability on the Contract

i. “if the other party [to a transaction] has notice that the agent is or may be acting for a principal but has no notice of the principal’s identity, the principal for whom the agent is acting is a partially disclosed principal.” Rest. § 4(2)

ii. A pe


v. whether the master would reasonably expect such act be performed.

c. Employers should be held to expect risks which arise out of and in the course of his employment and labor

d. Foreseeability Test: if the event is something that the employer could have foreseen would happen, regardless of the motive or purpose of the action that caused it, then principal should be liable.

e. Motive test: the event was actuated, at least in part, by a purpose to serve the master

f. Criminal Activity: Rest. § 231 – π can be liable even for intentional torts and criminal activity if w/in the scope of employment

i. To recover damages from employee’s assault, π must show that employee’s assault was in response to the π’s conduct which was presently interfering w/ the employee’s ability to perform his duties successfully.

ii. Rest. § 228 (1)(d) – If force is intentionally used by the servant against another, the use of force is not unexpectable by the master

4. Statutory Claims

a. In order to impose liability on a defendant under § 1981 for the discriminatory actions of a third party, the plaintiff must demonstrate that there is an agency relationship between the defendant and third party.

5. Liability for Torts of Independent Contractors

a. General Rule: where a person engages a contractor, who conducts an independent business by means of his own employees, to do work not in itself a nuisance, he is not liable for the negligent acts of the contractor in the performance of the contract.

b. Exceptions

i. Where the landowner retains control of the manner and means of doing the work which is subject of the contract

ii. Where he engages an incompetent contractor, or

iii. Where the activity contracted for constitutes a nuisance per se [an inherently dangerous activity]

c. Policy –

i. we don’t want principals to bring in someone incompetent and then escape liability.

ii. Other hand, IC is in the best position to prevent problems and if you put liability on principal, you disincentivize them from hiring ICs

D. Fiduciary Obligation of Agents

1. Fiduciary – agent must act for the benefit of the principal in matters connected w/ the undertaking

2. Fiduciary Duties During Agency

a. Care and Skill (Rest. §§ 379 & 382)

b. Obedience (Rest. § 385)

c. Loyalty (Rest. § 387)

d. Note – these are default rules, not mandatory. However, it’s more efficient to have standardized rules of fiduciary duties

3. General Fiduciary Rules

i. Rest. 396(b) – (fill in!)

ii. If the servant has unjustly enriched himself by virtue of his service w/o his master’s sanction, the law says that he ought not be allowed to keep the money, and it should be given to master, b/c he got the money solely by reason of the position which he occupied as a servant of his master

iii. Disclosure: An employee must only disclose things that are “material”, or what a reasonable person would attach accordance to.

iv. Public Policy:

4. Duties During and After Termination of Agency: “Grabbing and Leaving”

a. To terminate agency relationship:

i. Communicate – easy to do. If this has been communicated, there is no longer implied, or apparent agency. However, to a 3rd party, agency is not over. The 3rd party must be reasonably aware of the termination.

ii. Purpose of agency is accomplished

iii. Passage of time –