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Business Associations
Valparaiso University School of Law
Huss, Rebecca J.

BUSINESS ASSOCIATIONS

Fall 2011

Professor Huss

A. DEFINITION

a. “Agency is the fiduciary relationship that 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 indicates the relation which exists where one person acts for another) – Restatement § 1

b. Three major players in an agent relationship:

i. Principal – The one for whom the action is taken

ii. Agent – The one who acts – generally expected to be paid

iii. Third Party – The one usually initiating the lawsuit – Seeking a deeper pocket than the agent

c. Misc. Notes

i. For a principal/agent relationship to exist, there must be an agreement, doesn’t necessarily have to be a contract.

B. WHO IS AN AGENT?

a. Agency relationship

i. agency relationship can exist without the parties even knowing it. (existence of an agency can be proved by circumstantial evidence). The agency relationship can be inferred from the conduct of the parties.

1. doesn’t need to be a contract. Ex. driving someone else’s car.

b. Businesses/Creditors

i. Generally, a creditor is not liable for the debts of those it extended credit, however a creditor that assumes control of his debtor’s business may become liable as principal for the acts of the debtor in connection w/ the business. Also could use the term “active participant”

ii. The point at which the creditor becomes a principal is that which he assumes de facto control over the conduct of his debtor

1. This is fact dependent so use totality of the circumstances test

iii. Test/Legal Standard:

1. Agency is the relationship that results from:

a. The manifestation of consent by the principal to the agent that the agent shall act:

i. On the Principal’s behalf, and

ii. Subject to the Principal’s control

iv. Factors in favor of a supplier relationship instead of an agent:

1. Fixed price, regardless of cost

2. Acts in his own name and receives title in it

3. Independent business in buying and selling similar property

C. LIABILITY OF PRINCIPAL TO 3RD PARTIES IN CONTRACT

a. Authority

i. Authority is the power of an agent to affect the legal relations of the principal by acts done in accordance with the principal’s manifestations of consent.

ii. 3 types of authority

1. Actual, Apparent, Inherent

iii. Actual Authority

1. Definition

a. Authority from Principal à Agent.

b. May be expressed or implied

i. Expressed – “Go and do X”

ii. Implied – highly contextual; depends on prior practices or industry customs. Ex – “Do what you need to accomplish X”

1. Cases

a. Hired to paint church – authority can be created by things other than written or spoken words. Often use prior similar practices

iv. Apparent Authority (What the outside world sees)

1. Principal à 3rd party

2. Need reasonable belief of authority based on present or past conduct of the principal.

3. Minor deviations from actual authority

a. The principal is bound by an agent’s minor deviations from his actual authority if third parties were unaware that the agent exceeded his authority in entering into contracts on the principal’s behalf.

4. Can have apparent authority w/o actual authority.

5. If don’t want to have apparent authority

a. Put language in contracts that they don’t have this authority—or put it into the drafts of sales contracts

6. Cases

a. $ raise by immediate supervisor. No actual authority. Needed to reasonable believe that supervisor had authority.

b. Salesmen – certainly reasonable for third parties to presume that one employed as salesman has the authority to bind his employer to sell

c. Thomas Edison employee entered into an agreement. – industry custom

v. Inherent Authority

1. Rule

a. a general agent (someone who has the ability to do different things on behalf of the principal) AND an undisclosed principal AND the agent is doing something that general agents in the same situation do, but he does not have the actual authority to do

2. Elements

a. Undisclosed Principal

i. third party does not know that there is an agency relationship

ii. Both principal and agent are liable

b. General Agent

i. must be doing something within the normal scope of activity for general agents

c. Exceptions

i. Ratification – occurs when somebody acts on my behalf, reportedly, but does not and after full disclosure and the principal accepts, they are bound by ratification.

ii. Estoppel

iii. Partially Disclosed principal

1. Both principal and agent are liable if third party knows agent is acting for principal but does not know principal’s identity

a. Agent is treated as though a party to the contract

b. Agent has duty to disclose principal

c. Third party has no duty to inquire

iv. Disclosed principal

1. Only the principal is liable third party knows that agent is acting for principal and knows the principal’s identity

2. Exceptions

a. Clear intent of all parties that agent by bound;

b. Agent made contract but without authority – recovery on a different basis

i. Party to the contract (minority view)

ii. Recovery in tort for deceit (minority view)

iii. Implied warranty of authority (majority view)

3. Policy

a. Principals are in a better position to control the agents. Agents are fiduciaries acting generally in the principal’s interests, and are trusted and controlled by him, it is fairer that the risk of loss caused by disobedience of agents should fall upon the principal rather than upon third persons.

4. Usual inherent authority situations

a. Undisclosed principals

b. General agents

c. Agent exceeds authority

5. Cases

a. Beerhouse / cigars – transferred the ownership but remained as manager.

Authority Hypos:

1. L tells assistant G to hire a camera person. G has actual authority to hire camera person and actual implied authority to set out the terms.

2. X wants to be hired as the camera person. L tells X that she turned the authority to hire over to G. L tells G not to hire X. G offers X the job and X accepts. X ca

aster, and (2) to be subject to the master’s control or right to control the “physical conduct” of the servant (master can tell the servant how to perform particular tasks)

iii. Independent Contractor (non-servant agent) – A person who contracts to do something for another but who is NOT controlled by the other and the other can’t control the independent contractor’s physical conduct (independent contractor is not subject to control over how the task is to be performed)

1. An Independent Contractor may or may not be an agent

a. Agent Independent Contractor – Independent Contractor has agreed to act on behalf of the principal but is not subject to principal’s control over how the result is accomplished (the physical conduct of the task)

i. Subject to limited control by principal with respect to the chosen result

ii. Agent has power to act on principal’s behalf

b. Non-Agent Independent Contractor – Independent Contractor who operates independently and at arm length transactions

i. Perhaps less control on principal’s part, but

ii. Agent has no power to act on principal’s behalf

iv. Example

1. Carpenter is hired to build a garage. If parties agree that carpenter is responsible for getting the garage built – then non-agent Independent Contractor. But if carpenter agrees to buy lumber on the credit account of the homeowner – then agent Independent Contractor.

v. Cases

1. Oil shop – oil company ran day-to-day operations.

e. Franchises

i. Rule

1. A franchiser/franchisee relationship is not enough for an agency relationship.

2. Whether a franchiser/franchisee relationship is an agency relationship depends on the amount of CONTROL

3. Looks at day-to-day operations

ii. Elements

1. Franchise contract – franchise contract does not insulate the contracting parties from an agency relationship (Holiday Inn)

2. Subject of lawsuit – who has control over the aspect of the business that is responsible for the lawsuit.

3. May be enough for agency

a. Operating manual / records / right to enter premises

4. Apparent agency

a. agency relationship may be created between a franchiser and franchisee based on apparent agency if the third person relied on the indicia of authority

iii. Cases

1. Holiday Inn – no agency relationship because didn’t control day-to-day. Court looked to who has control over the aspect of the business that is responsible for the lawsuit.

2. Hilton – enough day-to-day control. Records/Control plus 3rd party relied on Hilton logo / brand name.