Business Organizations
Spring 2012
Prof. Pollard
Klein, 7th Ed.
I Agency
A Defined
1 P consents that A shall act
a on the P’s behalf and
b subject to the P’s control; and
2 A consents so to act
B Formation
3 There must be
c an agreement
i Can be shown by course of dealing between the parties
ii Can be implied by relationship between the parties
(a) Relationship may be proven by circumstantial evidence
(b) When an agency is to be proven by circumstantial evidence, the principal must be shown to have consented to the agency since one cannot be the agent of another except by consent of the latter
iii A. Gay Jenson Farms v. Cargill
(i)Cargill loaned funds to Warren and also took control of day-to-day operations
(ii)A creditor who assumes control of his debtor’s business may be held liable as Principal for the acts of the debtor in connection with the business;
1. This was a unique relationship; the financing was to establish a source of grain not to make money as a lender or financial agency;
ii) But not necessarily
(1) A contract between the parties
(2) Relationship does not need to be called agency among the parties
(3) Parties do not have to intend the legal consequences of the relationship
b) Test for Agency
i) Gorton v. Doty
(1) Doty loaned her car to Garst to drive football team members;
(2) Where one undertakes to transact some business or manage some affair for another by authority and on account of the latter, the relationship of Principal and Agent arises.
ii) Designation by the Principal
iii) Manifestation of consent
iv) Subject to principal’s control
v) Agent’s consent to act
vi) No contract or consideration necessary
b) What is the liability of the Principal to Third Parties in Contract
vii) For Agency Problems go through all five to see if they apply (do analysis of each)
(1) Was there express Authority?
(2) Was there implied Authority?
(a) (Actual authority includes implied authority?)
(3) Was there Apparent Authority?
(a) Is there reasonable belief on the part of the third party that A had the authority of P?
(4) Was there Ratification?
(a) Was there Knowledge on the part of the P of the actions of the A?
(b) And Intent to Ratify
(i) Was there inaction after the knowledge of A’s action?
(ii) OR was there lack of action to change the course of action of the A?
(5) Was there Inherent Authority?
(a) Is there no other type of Authority?
(b) Is there a hidden or undisclosed P?
(c) Is there no other way for the Third Party to recover?
ii) Five Categories
(1) Actual Express Authority
(a) P tells A to do the following things explicitly
(b) Can be done
(i) In writing
(ii) Orally
(c) Note that 3rd party can enforce the contract against the P even when the 3rd party did not know that A had been acting on behalf of P
(2) Actual Implied Authority
(a) When not everything is written out, but certain things are implied
(b) If P says to A to do something, other parts of the job may be implied
(i) It is not necessary to list all tasks
(ii) No laundry lists required here
(c) Is included in actual express authority if there is express authority, there is implied authority
(d) Implied authority is a derivation of actual authority and often means “actual authority either
(i) To do what is necessary, usual, and proper to accomplish or perform an agent’s express responsibilities or
(ii) To act in a manner in which an agent believes the principal wishes the agent to act based on the agent’s reasonable interpretation of the principal’s manifestation in light of the principal’s objectives and other facts known to the agent
(e) If in order to carry out P’s explicit instructions, A takes some other steps necessary to carry out those instructions, P is bound
(f) In determining whether it exists, it is important to focus upon the agent’s understanding of his authority
(i) A person possesses implied authority as an agent to hire another worker where such implied authority is necessary to implement the agent’s express authority
(g) Mill Street Church of Christ v. Hogan
(i) Church hired Hogan to paint, who hired Sam to help him; Sam broke his leg
(ii) A person possesses implied authority as an agent to hire another worker where such implied authority is necessary to implement the agent’s express authority
(3) Apparent Authority
(a) Dweck v. Nesser
(i) Nasser had a very long standing relationship with his primary attorney, Shiboleth, disputed that he had given the attorney any kind of authority to enter a settlement agreement; Nasser had told him to “get it done” and had informed the attorney of record;
(ii) An attorney who is not the attorney of record has authority to settle where there was a long standing relationship and the attorney has been permitted to speak for him and has informed others of this;
1. Attorney of record is presumed to have authority; otherwise authority must be proved;
2. Nasser had granted express authority;
(b) Three Seventy Leasing v. Ampex
(i) Salesperson for Ampex agreed to sell certain computers to p despite not having authority from Ampex
(ii) A salesperson binds his employer to a sale in he agrees to that sale in a manner that would lead the buyer to believe that a sale had been made;
1. Apparent authority is reasonably inferred from the conduct of the Principal and the agent.
2. Inherent authority is doing those acts usual incidental to the agent’s capacity
(c) Agent appears to have certain authority to bind P even though A may not have actual authority
(d) In certain situations where P has not given either of the above, but to a third party it is reasonable to assume that A has the authority
(e) Importance is on how rationale or reasonable it is for the third party to believe that A has the authority of P
(f) An agent has apparent authority to bind the principal when the principal acts in such a manner as would lead a reasonably prudent person to suppose that the agent had the authority her purports to exercise
(g) Absent knowledge on the part of third parties to the contrary, an agent has the apparent authority to do those things which are usual and proper to the conduct of the business which he is employed to conduct
(h) 3rd party must reasonably or rationally believe that A has the authority
(i) Reasonably believe may be determined by
1. Industry standards
2. Business relationships
(i) Social policy to protect the third party when one is held out as an agent even if that agent is not authorized to bind the P
(i) When one holds another out as an agent, that agent can bind the principal on matters normally incident to such agency, even if he was not authorized for a particular type of transaction
(j) Watteau v. Fenwick
(i) Fenwick authorized Humble as purchasing agent, but only for specific items, and Humble exceeded the authority
1. When one holds out another as an agent, the agent can bind the principal on matters normally incident to such agency, even if not authorized;
2. One dealing with a manager would usually expect such a manager has authority to purchase certain items; case of apparent authority with an undisclosed principal; can also apply to partnerships
(4) Ratification
(a) The affirmation by a person of a prior act which did not bind him but which was done or purportedly done on his account
(b) Requires
(i) Knowledge of A’s action; and
(ii) Lack of action to stop it or
(iii) lack of action after the fact to change it
(iv) Thereby almost creating consent
(c) Agency Relationship not necessarily formed by
(i) Marital status cannot in and of itself prove the agency relationship
(d) Botticello v. Stenfanovicz
(i) Husband sold farm
ipal, but not subject to the principal’s control over how the result is accomplished
(b) Subject to limited control of P regarding result
(c) The physical conduct of the task
(d) More likely to be liable
(2) Non-agents/ Traditional
(e) Independent contract
(f) Enters into arms-length contracts with others
(g) Less control on P’s part, but A has no power to act on P’s behalf
(h) Generally not liable for torts (some gray area)
ii) General Rule
(3) Principal is not liable for the torts committed by an independent contractor or employees thereof
(4) Exceptions
(a) If the principle retains substantial control over the aspect of the work in which the tort occurs
(i)The test to be applied is that of whether the company has retained the right to control the details of the day to day operation of the franchise; control or influence over results alone being viewed as insufficient
(b) Hoover v. Sun Oil Company
(i)Hoover sought to hold franchisor Sun Oil responsible after he was injured in a fire at a service station operated by a franchisee
(ii)A franchisee is considered an independent contractor in the franchise retains control over inventory and operations
(iii)Critical test is the nature and extent of the control agreed upon
(b) Murphy v. Holiday Inns, Inc.
(i)Murphy sought to hold Holiday Inns when she slipped an fell at a motel operated by a franchisee
(ii)If a franchise contract so regulates the activities of a franchisee as to vest the franchisor with control within the definition of agency, a principal-agent relationship arises even if the parties expressly deny it;
(iii)franchise does not necessarily lead to control and principal-agent relationship; doesn’t matter what the parties call it; franchisee retained control over details of operation; hence no agency relationship arose; who has the risk of loss; could have been possible apparent agency
(b) If principle engages an incompetent contractor
(c) If the principle hires someone to perform a non-delegable duty
(d) If the contracted activity is either
(i) A nuisance per se
(ii)Or inherently dangerous
1. One which
a. Necessarily involves a serious risk of harm to the person, land or chattels of others which cannot be eliminated by the exercise of the utmost care; and
b. Is not a matter of common usage
2. Example- Tearing down a building is ultrahazardous and liability is absolute
c. Majestic Realty Associates, Inc. v. Toti Contracting Co.
i. Control not the issue here
ii. p had engaged an incompetent contractor; if the contractor is an independent business, person who engages him is not normally ; is absolute if ultrahazardous as opposed to inherently dangerous; when the independent contractor performs inherently dangerous activity, the principal will be .
(2) Test is control
(e) The nature and extent of the control agreed upon and exercised
3. Murphy v. Holiday Inns, Inc.
(f) The test to be applied is that of whether the company has retained the right to control the details of the day to day operation of the franchise; control or influence over results alone being viewed as insufficient
