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Business Organizations
West Virginia University School of Law
Cummings, Andre Douglas Pond

Business Associations
Professor cummings – Fall 2006
I. Agency
The basic standard for the existence of an agency relationship is:
(1) a manifestation of consent by one person (the principal) that another person act on the principal’s behalf and (b) subject to the principal’s control
(2) the agent’s consent to so act.
A. Who is an Agent?
Agency Law suits:
          (always gives something to the agent)
Injured Third Party                                     Agent
Normally, agency is not questioned – usually clear and easy to see. Authority is usually the issue.
1. Restatement 2d of Agency §1
Agency – Principal/Agent
1) Agency is the fiduciary relation which results from the (1) manifestation of consent by one person to another that (2) the other shall act on his behalf and subject to his control and (3) consent by the other so to act.
2) The one for whom action is to be taken is the principal.
3) The one who is to act is the agent.
2. Restatement 2d of Agency §2
Master/Servant; Independent Contractor
1) 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.
2) 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.
3) 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 tot he 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.
Three types of agency relationships:
Master/Servant – employee/employer*
Employer/Independent Contractor
*Doctrine of respondent superior – employer responsible for the actions of the employee within the scope of employment
Gordon v. Doty , 57 Idaho 792 (Reckless Driver Coach)
Facts: A father, R.S. Gorton, filed suit for hospital expenses for himself. His son also filed suit with his father as guardian ad litem to recover hospital expenses as the result of an accident in which he was being transported to and from a football game as a member of the team in a private vehicle owned by the appellant but driven by the football coach, Mr. Garst.
Reasoning: The court based its holding on the appellant’s statement:
“I asked him if he had all the cars necessary for his trip to Paris the next day. He said he needed one more. I said that he might use mine if he drove it. That was the extent of it.”
Because she did not say anything to Mr. Garst about loaning her car and he said nothing about borrowing it, the court held that the jury could have concluded that the principal and agent relationship existed.
Dissent – Justice Budge states that agency means more than mere passive permission. It involves request, instruction, or command. He argues that one who borrows a car for his own use is a gratuitous bailee and not an agent of the owner.
Class Notes
The basic standard for examining agency relationship
1) manifestation of consent by principal to the agent
and be subject to the principal’s control
and that the agent consents to the control
Business Law – in business organizations, courts try to find the proper party that can best afford to pay
Often, the parties that can best afford are the ones expected to be able to pay.
It does not matter what is written in contract – it is substance over form
If it appears to be a relationship, the court will find a relationship – it doesn’t matter what is written.
A. Gay Jenson Farms Co. v. Cargill, Inc. , 309 N.W. 2d 285 (Grain Elevator- Share of Profits)
Facts: Plaintiffs were farmers who brought suit against Cargill, Inc., a worldwide dealer in grains, and Warren Grain & Seed Co. when Warren became insolvent and did not pay the farmers for the grain. Cargill was brought into the suit because the farmers saw Warren as an agent of Cargill. Warren had obtained financing from Cargill in 1964, in which Warren issued checks from Cargill with both their names on it and Warren would deposit sales monies into Cargill’s account. Cargill became Warren’s agent with the Commodity Credit Corporation. Cargill was given the right of first refusal for grain Warren brought to market. An updated contract was created in 1967, which increased Cargill’s involvement – it opened Warren’s books to Cargill for inspection and limited improvements and investments subject to Cargill’s approval. In 1970, Warren became an agent of Cargill for the distribution of seeds. Further agreements in 1972 and 1976 increased Cargill’s investment in Warren. Warren’s debt grew and Cargill became involved on a daily basis. In 1977, Warren folded with $3.6 million in debt to Cargill and $2 million in debt to the farmers.
Rule(s): Agency is the fiduciary relationship that results from the manifestation of consent by one preson to another that the other shall act on his behalf and subject to his control, and consent by the other so to act…
Holding: Affirmed. because of the control and influence Cargill had over Warren, it was a principal.
Reasoning: There must be an agreement, but not necessarily a contract. Even if an agency was not intended, circumstantial evidence may show through course of dealing that an agency relationship was formed. Court found all three elements of agency:
1) by directing Warren to implement its recommendations, Cargill gave consent.
2) Warren acted on Cargill’s behalf by buying grain with Cargill money.
3) Cargill’s invovlvement with Warren’s internal affairs gave it de facto control.
Class Notes
Fiduciary Relationships – put the best interests of another party ahead of their own interests
board of directors/shareholders
Control – Courts examine who has the control
In this case, court recognized that Cargill exercised de facto control over Warren.
Fairly clear that Warren became reliant on Cargill – Cargill’s non-commercial lending provisions established the agency relationship
Cargill could more easily bear the cost rather than the farmers
Protecting small consumers vs. Right to have free and open business practices
– balance between these two ebbs and flows
What a creditor can do (without creating agency relationship):
1) insist on receiving info and financial reports
2) provide counselling on discreet matters
3) recommend consultants
Beyond the scope:
1) veto power over important decisions
2) coercing the debtor to put a person from the creditor to be in control
3) providing other creditors assurances of payment
B. Liability of Principal to Third Parties in Contract
1. Authority
Actual Authority – authority given to the agent, expressly or implicitly by the principal
Apparent Authority – when a principal acts in such a manner as to convey the impression to a third party that an agent has certain powers which he may or may not actually possess.
Implied (or Inherent) Authority – actual authority given implicitly (cirumstantial evidence) to an agent
OR – kind of authority arising solely from the designation by the principal of a kind of agent who ordinarily possesses certain powers.
– sometimes viewed as a sub-group of Actual Authority
Topic Class Notes
Communication between the principal, third party, and the agent is key to resolving disputes of authority.
Judges usually primarily motivated by who they want to win and then seek to establish the requisite authority.
Actual Express Authority:
– The agent has Express Authority in that the Principal has directly instructed the Agent to so act and the Agent Acts according to the instruction,
·      The principal tells the agent to do X and the Agent does X. Principal is bound.
Actual Implied Authority:
– If , in order to carry out the Principal’s explicit instructions, Agent takes some other steps necessary to carry out those instru

is case is similar to Lind v. Schenley Industries, Inc., 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.
Class Notes
Ampex argued that the salesmen did not have the authority to execute this agreement.
However, Mueller held out Kays as having the authority
Restatement §8 and §27 Apparent Authority
Clause could have been put into contract listing who has the authority to
3. Inherent Agency Power
A. Restatement 2d of Agency §219
When Master is Liable for Torts of His Servants
(1) A master is subject to liability for the torts of his servants committed while acting in the scope of their employment.
(2) A master is not subject to liability for the torts of his servants acting outside the scope of their employment, unless:
(a) the master intended the conduct or the consequences, or
(b) the master was negligent or reckless, or
(c) the conduct violated a non-delegable duty of the master, or
(d) 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.
Respondeat Superior – Principal is responsible for the subordinate employee’s actions
Agents must act in the best interests of the principal
B. Restatement 2d of Agency §145
Authorized Representations
In actions brought upon a contract or to recind a contract or conveyance to which he is a party, a disclosed or partially disclosed principal is responsible for authorized representations of an agent made in connection with it as if made by himself, subject to the rules as to the effect of knowledge of, and notifications given to, the agent.
C. Restatement 2d of Agency §195
Acts of Manager Appearing to be Owner
An undisclosed principal who entrusts an agent with the management of his business is subject to liability to third persons with whom the agent enters into transactions usual in such businesses and on the principal’s account, although contrary to the directions of the principal.
Watteau v. Fenwick , 1 Queen’s Bench 346 (Humble’s Bar – Undisclosed Principal)
Brief Fact Summary. Plaintiff, Watteau, sold goods to a pub manager, Humble, under the belief that Humble was actually the pub owner. Plaintiff learned that Defendant, Fenwick, was the actual owner and sought to collect from Defendant for the unpaid balance of goods purchased by Humble.
Synopsis of Rule of Law. An undisclosed principal can be held liable for the actions of an agent who is acting with an authority that is reasonable for a person in the agent’s position regardless of whether the agent has the actual authority to do so.
• The decision could not be based on apparent authority because the principal is disclosed under that doctrine.
• The principal is held liable for actions by an agent that are expressly forbidden, but the case limits a principal to actions of an agent that are reasonable under the circumstances.