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Business Associations/Corporations
Villanova University School of Law
Miller, Robert T.

Proving Agency
–          Burden to prove: the person asserting that there is a principal/agent relationship has the burden to prove it. 
–          Rule: Agency is defined as the fiduciary relationship that results from the manifestation of consent that one person, the agent, shall act on behalf and subject to the control of another person, the principal. 
o        The term “manifestation of consent” is objective, meaning it doesn’t matter what the principal truly intended, but rather, the agency relationship depends on what the agent believed the principal intended – based on what a reasonable person in the totality of the circumstances would think the principal intended (including course of dealing, trade usage, past conduct, nature of job.  
–          Apparent Authority: apparent authority results when a principal manifests to a third party that an agent is authorized, and the third party reasonably relies on the manifestation (can be from trade usage)
o        Salesperson: an agent has apparent authority to do those things which are usual and proper to the conduct of the business he is employed to conduct..
–          Ratification: ratification requires acceptance of the results of a prior act with an intent to ratify, and with full knowledge of all of the material circumstances. 
–          Estoppel: when a principal negligently or intentionally causes a third party to believe that his agent has authority to do an act that is actually beyond his authority, and the third party detrimentally relies on the principal’s conduct, the principal is estopped from denying the agent’s authority – only get reliance, not expectation
–          Undisclosed/Partially disclosed: to avoid personal liability on contracts, the agent must disclose that he is acting in a representative capacity and the identity of his principal – doesn’t matter how easy it would be for the other side to figure it out
–          Master/Servant – physical control
o        E.g., you send your agent to the store to buy wood for you with your money to come back and build you a house
–          Principal/Agent – control, but no physical control
o        You tell your agent you need them to go buy wood
–          Principal/Agent Independent Contractor
o        You tell your agent to build you a house, he goes and buys the wood on his own credit and builds you the house (he gets the wood from wherever he wants)
–          Definition of Agency, Restatement of Agency § 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 à the agreement (manifestation) is to act both on behalf and subject to control
§         Elements:
·         Manifestation of consent – completely objective
·         Agent acts on principal’s behalf
·         Agent is subject to principal’s control
o        Broad sense of control, football coach loaned his car Gorton v Doty
§         3 main types of agency (Gorton v Doty)
·         Principal – Agent
·         Master – Servant
·         Employer/Proprietor (Principal) – Agent/Independent Contractor
§         Notes:
·         Every Agent is a fiduciary §13 à owes the highest standard of care to the principal
·         Agency is created by agreement, but not a K (no consideration for gratuitous agents, e.g.)
·         Default agency rules apply unless stipulated otherwise (lots of rules), even if you never heard of them à you have to actually agree to vary rules
–          Proving Agency
o        Depends on existence of certain factual elements
§         Must be an agreement between the parties 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
§         The relationship of principal and agent doesn’t have to necessarily involve some matter of business, but is “where one undertakes to transact some business or manage some affair for another by authority and on account of the latter.” Gorton v Doty
o        Notes:
§         Every agent is a fiduciary – see restatement obligations below
§         Conclusion of law, not dependent on intent of the parties (court can find agency relationship when not intended and can find no agency relationship when intended)
§         Burden is on party asserting agency relationship
–          3 types of Agency Questions (discussed in detail below)
o        (1) Third party trying to hold principal to agreement based on the agent’s conduct or an express agreement
§         (a) Authority – agent could have authority to bind principal
·         Actual, apparent (express or implied), inherent
§         (b) Creditor can become liable for debts when assumes de facto control
·         E.g., A. Gay Jenson, Creditor of company became liable to debtors of company as principle and company as agent because creditor assumed de facto control of the company through its lending agreement. Whenever a creditor assumes de facto control of debtor he becomes principal for third party debtors. Consent by the principal is shown by directing the agent to carry out operations in a certain way.
o        (2)  Third party trying to hold a principal liable for agent’s torts
§         (a) Agency arising from use of motor vehicle
·         E.g., Gorton v Doty, Doty lets Coach use car to transport students to game with condition that only he drive it. Condition that only coach could drive car was agreement to act on behalf (instead of Doty driving, Coach drives) and subject to control (that Coach had to drive not someone else) à case decided incorrectly, wanted Doty to be liable for insurance reasons so court stretched the reasoning (control is not really present, Doty didn’t retain right to tell Coach how to drive, only that he had to drive).
o        (3) Problem between Principal and Agent
–          “Agency Problem” – Agency Costs, economic costs of agency, 3 distinct groups
o        (1) Monitoring Costs – costs incurred by the principal in order to make sure the agents are doing their jobs
§         E.g. salaries, commissions, stock options à entire compensation package is a type of monitoring cost
§         Also, hiring other agents to monitor agents, security guards, auditing firms, etc
o        (2) Bonding Costs – Costs agent incurs to prove to principal that he is living up to obligations
§         Called “bonding costs” from construction industry, people actually take out insurance policies that guarantee that they will perform what they agree, some people actually required bonds
§         E.g. participating in trade organizations, better business bureau, proving they comply with certain voluntary standards, etc
o        (3) Residual Loss – all the loss that falls primarily on the principal from the agent not doing what the agent is supposed to do – costs that are not preempted by monitoring or bonding
(1) Principal’s Liability for Agent’s Contracts
–          After demonstrating 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. 
–          Sources of Authority
o        (1) Actual Authority
§         Express Authority – actual authority contained within the agency agreement
·         E.g., “I agree to do ____”
§         Implied Authority – comes from the words or conduct between the principal and the agent, circumstantially proven which the principal actually intended the agent to possess and includes such powers as are practically necessary to carry out the duties actually delegated
·         Totality of circumstances test à includes course of dealing, other facts
·         Focuses on whether agent reasonably believes because of present or past conduct of principal that the principal wishes him to act in a certain way or to have certain authority
·         E.g., Mill Street Church, Hogan reasonably believed he had authority from Church to hire P, who was injured on the job and sued for workers comp, because totality of circumstances indicated prior similar arrangements and the nature of the task required him to hire someone. 
o        (2) Apparent Authority §8 – when the principal manifests to a third party that an agent is authorized, and the third party reasonably relies on the manifestation. 
§         There must be some holding out by the principal that causes a third party to reasonably believe that the agent has authority, and the third party must reasonably rely on the principal’s manifestations. 
·         1) holding out by the principal that the third party has authority
·         2) third party must reasonably rely on the principal’s manifestations
§         E.g., Lind v Schenley, company VP tells employee to go see Ps boss about promotion who told P that he would get commission from now on, but boss didn’t have actual authority from Company. D (company), however, caused P to believe that boss had authority to offer the commission, and P was justified in assuming that boss had such authority because company held out to P that boss had authority and P reasonably relied on it.
§         Apparent Authority based on employment
·         E.g., 370 Leasing, Job in company can constitute apparent authority to contract with the company.

master, or
§         The servant purported to act or to speak on behalf of the principal and there was reliance upon apparent authority, or he was aided in accomplishing the tort by the existence of the agency relation
–          Restatement of Agency § 220 – Definition of Servant
o        (1) A servant is a person employed to perform services in the affairs of another and who with respect to the physical conduct in the performance of the services is subject to the other’s control or right to control.
o        (2) see non-exhaustive list of relevant factors on p 7-8 statutory supplement
–          Two Possibilities
o        (1) Agency – Servant or Independent Contractor
§         Master/Servant
·         Form of agency where servant is under control of a master and renders that master a service
·         Control is essential feature – policy is that if master is in control of the way the servant performs their task then they should be responsible for torts arising out of those acts à principal tells agent what to do and how to do it
§         Principal/“Agent Independent Contractor”
·         Principal’s right of control does not extend to agent’s physical conduct
·         Principal is not liable for torts of agent because torts are generally products of physical conduct à here, principal tells agent what to do and agent decides how to do it
o        (2) No Agency – Non Agent Independent Contractor
§         No notes on this, no authority so probably not liable for anything
o        Issue of Fact – Issue of whether master/servant or independent contractor is issue of fact
§         Doesn’t matter what the relationship is contractually called, contract itself can spell out relationship that is indicative of master/servant even if it explicitly says it is not one, Humble Oil Refining
§         If agent assumes risk of profits or loss in venture, that is BIG indication of independent contractor, E.g. Hoover v Sun Oil Co., Sun couldn’t tell Barrone what to do, only could offer suggestions, Barrone had risk of profit and loss.
o        Franchises
§         Control Test
·         Agency relationship exists only if parties’ agreement vests control with the franchisor over the operation of the franchisee. à control over day to day operations
o        Issue is control of day to day operations, not regulatory control
§         E.g., Murphy v Holiday Inn, agreement said franchisor had control because (1) had to construct hotel according to plans, (2) pay a fee for use of trade name, (3) conduct business under Holiday Inn system, (4) observe rules of operation, (5) make quarterly reports, (6) submit periodic inspections of facilities à court said all regulatory and not day to day functions,no control over room rates and importantly did not demand share of profits à no agency relationship
·         Also important who bears the risk of loss and profit
§         Why are there franchises?
·         Some businesses (food establishments, e.g.) need to be perfect to succeed à to make people fanatical you don’t give salaries, you give profit interest in franchise
·         When a company needs everything to be perfect to succeed, franchise is good way to go because the individual owner will have an interest in keeping everything perfect, won’t have shirking, lazy management – owner will be on premises at McDonald’s making sure everything is perfect
·         Franchisor provides
o        Trade names – well known as making certain kind of product
o        Proven Business Plan, e.g. hard to open McDonalds and fail – location is only issue
o        National Advertising
o        Mass Purchasing Power
·         Franchisee provides
o        Profit interest in the business, risk on franchisor
§         Franchisor Control