O One Who Acts for Another by Authority from Him

Business Organizations

OUTLINE

I. Agency

A. Who is an Agent?

- an agent is:

o one who acts for another by authority from him,

o one who undertakes to transact business or manage some affair for another by authority and on account of the latter

Three Required Elements of an Agency Relationship:

- 1. a manifestation by the principal that the agent will act for him;

o consent by a person (the principal) that the other (the agent) shall act on her/his behalf

o If they consent to each other, then agency results and they are now bound in a relationship that the law recognizes (it now has legal implications)

- 2. acceptance by the agent of the undertaking; and

- 3. an understanding between the parties that the principal will be in control of the undertaking

NOTE: The relationship of principal and agent does not need to involve some matter of business

Legal Implications:

- In order to create an agency, there must be an agreement, but not necessarily a contract between the parties

o there doesn’t have to be a contract between principal and agent

o the agent doesn’t have to promise to act as such

o neither one has to receive compensation

- Agency is its own kind of legal relationship that has its own implications

o Legal implication: the principal is responsible for what the agent does

Responsibility for Acts of Agents

- Principals are responsible for the acts of their agents

- If one is an agent, then his actions are attributable to the principal

o Gorton v. Doty- where teacher loaned her car to football coach and player was injured. The Court found that the coach was acting as the teacher’s agent when he drove her car. She could have driven the players herself, but instead she chose for the coach to drive her car, with the condition precedent that only he drives the car. The court thinks it’s an important fact that she specifically said that only he was supposed to drive the car, nobody else—that is evidence that the coach was acting subject to her control. The court feels that since the coach was the actual driver and was under her control, he consented to the agreement.

RS §161—General agent- an agent authorized to conduct a series of transactions involving a continuity of service

Burden of Proof

- P has the burden to prove agency by a fair preponderance of the evidence

- Agency is a question of fact

- NOTE: agency is traditionally part of state law

Three Principal Forms of Agency

- 1. the relation of principal and agent

- 2. the relation of master and servant; and

- 3. the relation of employer/proprietor and independent contractor

TEST FOR AGENCY:

- Has a party agreed to act on behalf of a second party, subject to the second party’s control?

o If YES, an agency relationship is created

Reality of the Circumstances

- an agreement may result in the creation of an agency relationship even if the parties did not call it an agency and did not intend the legal consequences of the relation to follow

- court looks to the facts and the reality of the actual situation to decide whether there was an agency relationship or a business relationship

o intent of the parties does not matter—only their actions toward each other.

- The existence of the agency may be proved by circumstantial evidence which shows a course of dealing between the two parties

o when an agency relationship is to be proven by circumstantial evidence, the principal have consented to the agency

o one cannot be the agent of another except by consent of the principal

- an agency relationship results when objective criteria are met, regardless of the parties subjective personal beliefs

- when people behave towards each other as principal and agent, the law will hold them to this

- A creditor who assumes control of his debtor’s business may become liable as a principal for the acts of the debtor in connection with the business.

o Gay Jenson Farms Co. v. Cargill, Inc.- where farmers would give Warren grain, and they would give it to Cargill. Farmers (P’s) claim that Warren bought grain as an agent for Cargill, so when Warren fails to pay the farmers for their grain, Cargill should pay their debt. Warren doesn’t have any money so Cargill makes an agreement to help them out—Cargill would loan money to Warren, and then when Warren made money, the money would be deposited with Cargill. Warren had to get Cargill’s permission before doing many things (sell/purchase stocks, making repairs worth over $5000, or become liable on debts). Cargill oversaw all of Warren’s actions and made recommendations that certain actions should be made. As Warren’s financial situation got worse, Cargill began contacting Warren everyday regarding their finances. The Court finds that there is an agency relationship, and that Cargill’s actions were enough to consent to the agency relationship. By its control and influence over Warren, Cargill became a principal with liability for the transactions entered into by its agent Warren. Cargill and Warren did not explicitly consent to an agency relationship, but Cargill (creditor) had sufficient control over Warren (debtor), so they had an agency relationship, where creditor is liable for the actions of the debtor.

§ The court says “we deal here with a business enterprise markedly different from an ordinary bank financing, since Cargill was an active participant in Warren’s operations rather than simply a financier. Cargill’s course of dealing with Warren was a paternalistic relationship, where Cargill made the key economic decisions and kept Warren in existence.”

- NOTE: a security holder who merely exercises a veto power over the business acts of his debtor is not a principal, but if he takes over the management of the business and directs which contracts may or may not be made, he has become the principal and is liable for the agent’s actions

Public Policy

- in our society, when someone is exercising control over someone and doing something for that persons’ benefit, it seems fair that they be responsible for that outcome

o we want fairness and justice

- It is unfair if one party exercises control over another, but takes no responsibility for the other party’s actions

o Ex. Cargill claimed that while they had control over Warren, they were not responsible for what happened to them [this is a recipe for a small pie]

- The principal is not accountable for every act that the agent does, only those that the agent has authority to do

o Ex. of the teacher and the coach—even if the coach was her agent when driving her car, if he goes out and buys property, she is not liable for payment of the land, b/c she only consented to the use of the car.

Pie Analogy:

- Two Views:

o You can be concerned with division of the pie—who gets what in the pie—fairness; OR

o You can be concerned with the growth of the pie—efficiency

- We should be less concerned about the distribution of the pie and more concerned about the size of the pie

- You could say you are more concerned with a fair distribution of the pie than with your own slice of the pie

B. Liability of Principal to Third Parties in Contract

1. Authority

Actual authority

- Authority that the principal, expressly or implicitly, gave the agent

Implied authority

- Under the “actual authority” category

o The actual authority given to the agent by the principal also includes powers that are practically necessary to carry out the duties actually delegated.

- FOCUS: upon the agent’s understanding of his authority.

- the agent must reasonably believe, because of present or past conduct of the principal, that the principal wishes him to act in a certain way or to have certain authority

o Specific conduct by the principal in the past permitting the agent to exercise similar powers is crucial

o Agent can use circumstantial evidence

§ the acts and conduct of the parties such as the continuous course of conduct of the parties covering a number of successive transactions

- the agent has the authority to do anything that a reasonable person would think are necessary to accomplish the task that he was given actual authority to do

o Mill Street Church of Christ v. Hogan- where church hired Bill to paint and he then hired his brother, Sam. Sam believes that Bill had the authority to hire him; Sam was even paid for the half hour of his work. Sam argues that Bill was the Church’s agent when he hired him. The Church says they gave never gave Bill the authority to hire Sam—only gave him authority to paint the Church. The Court found that Sam was an employee b/c Bill Hogan had the implied authority to hire Sam as his helper b/c he needed help paining (he had the actual authority to paint). In the past, the Church had given Bill authority to hire others as need. The church is being held liable for something they did not give the agent something to do, in fact it is something they really didn’t want him to do—they wanted another guy to do it.

Burden of Proof: the person alleging has to prove that he is the agent and has the authority to act as an agent

2. Apparent Authority

Two Main Classifications of Authority:

- 1. actual authority- authority that the principal expressly or implicitly gave the agent

o implied authority is a sub-group of actual authority

§ actual authority given implicitly by a principal to his agent

- 2. 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

Apparent Authority

- the authority that the agent appears to possess

o It is a matter of appearances on which third parties come to rely

- FOCUS: on the perspective of a reasonable third party

- If principal holds out agent as having authority to bind principal then agent will have that authority:

o even if principal never gave the agent authority; AND

o even if principal told agent that he does NOT have the authority.

- Lind v. Schenley Industries, Inc.- where P is suing for compensation that is due to him out of a contract. VP told P he was going to be moved up and told P to report to Kaufman and he would tell him about his new duties and compensation. P was promoted and Kaufman told him that he would get 1% commission on the sales of the men under him. The Court found that Kaufman did have the authority to offer P the 1% commission b/c there is evidence of agency. Although Kaufman was never told that he had the permission to make up Lind’s salary, and was actually told that he did NOT have the authority, the VP held out Kaufman to P as having the authority to tell Lind his salary—therefore there was apparent authority. The court finds that that the company can be held accountable for Kaufman’s promises on the principal of “apparent authority”; as far as Lind was concerned, Kaufman was the spokesman for the company.

NOTE: inherent agency and apparent agency are both theories under which the principal may be held liable for the acts of an agent where there is no actual authority

3. Inherent Agency Power

- If an agent does something contrary to the principal’s instructions, the principal is still liable if he has held the agent out as having the authority to make his decisions

- When an agent is placed in position that generally comes with certain powers to bind principals, then the principal will be liable

- RS §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

- RS §195- An undisclosed principal who entrusts an agent with the management of his business is liable to third persons with whom the agent enters into transactions usual in such business and on the principal’s account, although contrary to the direction of the principal

o Watteau v. Fenwick- Humble used to own the bar and then sold it to D (a firm of brewers). D makes Humble the manager and Humble’s name is still on the front of the bar. Humble only had the authority to buy ales and mineral water—D’s were supposed to do the rest. Humble ends up buying cigars and Bovril from vendors. They ask Humble to pay (whose name is on the door). Humble tells them that he has no money, so P sues Fenwick for the money since he is the real owner. Here, the principal is not holding out his credit and the business is carried on in the agent’s name and the goods are supplied on his credit, agency in fact must be shown to make the principal liable. The real owner of the bar argues that he is not liable on these contracts b/c Humble did not have the authority to buy the goods, and no reasonable person would think that he had the authority. The Court says it is well known in society that general managers of bars have the authority to bind their principals to the sales of cigars and Bovril.

- Once it is established that Fenwick is the principal, then the regular rules apply:

o The principal is liable for all of the acts of the agent which are within the authority usually confided to an agent of that character, notwithstanding limitations (as between the principal and the agent) put upon that authority

- In agency in fact, the principal will only be liable if the act done by the agent is within the scope of his agency—not where there has been an excess of authority

TEST FOR LIABLITY OF THE PRINCIPAL: