AGENCY
Principles of Agency
· What is an Agent?
o Definitions
Agency—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
· Essential elements
o Consent that the person will be subject to the control of the
other
Either express or implied
o Control of one person over the other—usually the key issue
to determine whether there is an agency relationship
It is not essential that the right of control be
exercised, so long as the right actually exists
o Acting on behalf of the principal
Principal—the one for whom action is to be taken
Agent—the one who is to act
o General rule
The principal is liable for the acts of the agent so long as the agent is
acting with authority
· Is there a principal/agent relationship?
· Is the agent acting within his authority?
· This language is used for contract, not tort
o Special rules
A travel agent is a special agent of the traveler for the purposes of that one
transaction between the parties and all usual duties go with this
relationship
A real estate agent is primarily the agent of the party who first employs
him
An independent insurance agent is the agent of the insured, not of the
insurance company, and the insured can sue him for breach of contract,
etc.
Proof of the agency relationship cannot be shown by the statements of the
agent alone
· Whoever makes the allegation that an agency relationship exists
has the burden of proving the relationship
· A party who deals with an agent is held to a duty of reasonable
investigation regarding that agent’s authority
o Buyer-Seller relationships
If a person buys from another with the intention of turning around and
selling it to someone else, there is not an agency relationship—it is a
buyer-seller relationship
· Whether the buyer fixes his resale price
· Whether title passes from seller to buyer
· Whether the buyer is acting primarily for the benefit of the seller or
for his own benefit
· How the parties have labeled the relationship (relevant but not
determinative)
· The amount of control reserved to the seller
· Whether the buyer has an independent business
· Whether the buyer gets to negotiate the quantity he buys
· Whether the buyer always gets all of the seller’s goods
· The extent to which a middle man is free to negotiate for himself
with the end buyer
Only when a manufacturer controls the day-to-day or operative details of
the dealer’s business is an agency relationship potentially created
o Distinguished from trusts
A trust cannot be terminated at the will of the donor, but an agency
relationship can be terminated at the will of either party
A person can be both an agent and a trustee
When the donor party retains control of the property, an agency
relationship is created, not a trust
A trustee has title to the trust property, but an agent does not have title to
the property of his principal
A trustee is not subject to the control of the beneficiary, but an agent is
subject to the control of his principal
An agency is created by the consent of the principal and the agent, but a
trust may be created without the knowledge or consent of the beneficiary
or of the trustee
· General Versus Special Agents
o General rules
The third party has the duty to obtain information of the nature of the
agent’s authority
The third party must ascertain the nature and authority of the agent and he
cannot rely solely on the statement of the agent
o Definitions
General agent—an agent authorized to conduct a series of transactions
involving a continuity of service
· Broader apparent authority than the special agent
· More inherent agency powers than the special agent
Special agent—an agent authorized to conduct a single transaction or a
finite series of transactions not involving continuity of service
o Rules for special agents
A special agent can bind an undisclosed principal only to contracts made
within the scope of his authority
A special agent for an undisclosed principal has no power to bind his
principal, by contract or conveyances, which he is not authorized to make
unless:
· The agent’s only departure from his authority is
o In not disclosing his principal, or
o In having an improper motive, or
o In being negligent in determining the facts upon which his
authority is based, or
o In making misrepresentations (if he had the authority to
make representations)
· The agent is given possession of goods or commercial documents
with authority to deal with them (like the bona fide purchaser for
value rule in property—the bfp wins over the principal)
o General agents
Can bind the principal through his representations/misrepresentations if he
is authorized to make representations
Has full power to bind the insurer to the agent’s contract of insurance or to
issue policies or to accept risks
· Soliciting agents are special agents and do not have this power
Powers are coextensive with the business entrusted to him, and his
fraudulent act is that of the company’s as well
· A special agent’s fraud will be based on vicarious liability, not
agency theory
· Sub-Agents
o Definitions
Person appointed by an agent empowered to do so to perform functions
undertaken by the agent for the principal, but for whose conduct the agent
agrees with the principal to be primarily responsible
Person whom the agent delegates as his agent to perform an act for the
principal which the agent has been empowered to perform through his
own representative
o Examples
Real estate broker operating under an exclusive listing contract with the
seller of the property stands in an agency relationship with the seller and
the authority given to the broker by the listing agreement will generally
include the implied authority to appoint a salesperson as a sub-agent to
perform the task assigned to the broker by the listing agent
When you hire a general contractor, it is implied that he will hire
subcontractors, which are sub-agents whom he has the implied authority to
hire on your behalf
o Patterns of intent possible with sub-agency
P could intend that A2 is acting independently of A1 and directly under the
control of P, despite the fact that A1 hired A2
· A2 is really a co-agent and not a sub-agent
A2 could be acting under A1’s control only, and A1 is responsible for his
actions
· A2 is then an agent of both A1 and P and A1 would be liable to P for
A2’s actions, and both A1 and P would be liable to third parties for
A2’s actions
· This is the definition of sub-agent under the Restatement
A2 could be strictly A1’s agent if P never manifested any intention to A1 to
appoint either a sub-agent or a co-agent
· P is then generally not responsible for the acts of A2
Vicarious Liability
· Introduction
o General rule
A master is subject to liability for the torts of his servants committed while
acting in the scope of their employment
o Justifications for vicarious liability
Compensatory—deep pocket theory, to ensure that the victim will be fully
compensated and the master more likely has the ability to pay
Fairness—since the servant is generally furthering the business of the
master, it is generally foreseeable as the inevitable result of doing business
and is seen as a business expense, based on the privilege of doing business
Loss spreading—risk distribution theory, the employer is in the best
position to insure itself against the losses from tortious conduct
Efficiency—will avoid the necessity for detailed and costly judicial
analysis into whether the employer was negligent in hiring, etc. of his
employees, encouraging careful choice of employees
· Employee Versus Independent Contractor
o Definitions
Master—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
Servant—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
Independent contractor—a person who contracts with another to do
something for him but who is not controlled by the other, nor subject to
the 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
o Factors to determine if someone acting for another is a servant or an independent
contractor
Extent of control which by the agreement the master may exercise over the
details of the work and the degree of supervision
· The more control over the details, the more likely he is a servant
· Key test is whether the employer has the right of control and
supervision over the work of the alleged employee, and the right to
direct the manner in which the work is done, as well as the result
which is to be accomplished—not the actual interference but the
right to do so
· ICs are not subject to the control of the employer except as to the
results or product of his work
Whether or not the one employed is engaged in a distinct occupation or
business
· The more specialized and distinct, the more likely he is an IC
The kind of occupation with reference to whether in the locality the work
is usually done under the direction of the employer or by a specialist
without supervision
The skill required in a particular occupation
· The more specialized/skilled, the more likely he is an IC
Whether the employer or the workman supplies the tools and place of
work for the person doing the work
· ICs supply their own tools
The length of time for which the person is employed
· The longer the time, the more likely he is an employee
The method of payment, whether by time or by job
· ICs are paid by the job and employees are paid by time
Whether or not the work is part of the regular business of the employer
· If regular business, more likely to be an employee
Belief of the parties
· Not determinative except that it indicates an assumption of control
by one party and submission in the other
· Custom in the community is also important
Whether it furthers the principal’s business or the other’s business
· ICs have their own business
o Special situation: doctors in hospitals
Where a hospital holds itself out to the public as providing a given service
and where the hospital enters into a contractual agreement with one or
more physicians to direct and provide the service and where the patient
engages the services of the hospital without regard to the identity of a
particular physician, and where as a matter of fact the patient is relying on
the hospital to deliver the desired health care and treatment, the doctrine of
respondeat superior applies and the hospital is vicariously liable for the
damages proximately resulting from the negligence of any physicians
Traditional analysis would result in the physicians being independent
contractors, but in these cases the courts move to an apparent authority
theory
· Limitations on the Independent Contractor Exception
o Negligent Selection
General rule is that no vicarious liability attaches when a physician is an
independent contractor and not an employee or servant of the hospital if
the patient goes to the hospital specifically for the services of this doctor
· Hospital has no right of control
· Patient picks the doctor
· The doctor is not an employee
Doctrine of corporate responsibility for the quality of medical care has
been adopted by many courts—a hospital owes a duty to its patients to
exercise reasonable care in the selection of its medical staff and in
granting specialized privileges and to periodically monitor and review
their competency
· This is not a vicarious liability theory—it is a negligence theory
o Punitive Damages
Approaches to liability of the employer
· Always fault rule—recovery is permitted against an employer
whenever he is liable for the same conduct in compensatory
damages
· Complicity rule—punitive damages can be properly awarded
against a master or other principal because of an act by an agent if,
but only if
o The principal or a managerial agent authorized the doing
and the manner of the act, or
o The agent was unfit and the principal or managerial agent
was reckless in employing or retaining him, or
o The agent was employed in a managerial capacity and was
acting within the scope of his employment, or
o The principal or a managerial agent of the principal ratified
or approved the act
· Some fault rule—before an employer may be held vicariously
liable for punitive damages under the doctrine of respondeat
superior, there must be some fault on his part; although the
misconduct of the employee must be willful and wanton, it is not
necessary that the fault of the employer, independent of his
employee’s conduct, also be willful and wanton—it is sufficient
that the plaintiff allege some fault on the part of the employer
which foreseeably contributed to the plaintiff’s injury to make the
employer vicariously liable for punitive damages
· No fault rule—a few states prohibit vicarious punitive damages
altogether
· Statutory Inroads on the Common Law Definition of Employee
o Right of Control test—common law test
Used by ERISA
General characteristics of employers
· Select and engage the employee
· Pay the wages
· Power of dismissal
· Power and control over the employee’s conduct
o Economic Realities test—employees are those who as a matter of economic
reality are dependent on the business to which they render service
Used by FLSA and SSA
o Hybrid test—right of control and economic realities—it is the economic realities
of the relationship viewed in light of the common law principles of agency and
the right of the employer to control the employee that are determinative
Used by Title VII
o Relative Nature of the Work test—in determining the existence of an employee-
employer relationship, one examines the nature of the claimant’s work in relation
to the regular business of the employer, focusing on
The nature of the claimant’s work
· Skills required to do the work
· The degree to which the work constitutes a separate calling or
enterprise
· The extent to which the work might be expected to carry its own
accident burden
The relation of that work to the alleged employer’s regular business
· Whether the claimant’s work is continuous or intermittent
· Whether the duration of the claimant’s work is sufficient to amount
to the hiring of continuous services as distinguished from the
contracting for completion of a particular job
Bases of Authority
· Express Authority
o Definition—expressed either orally or in writing (some require a writing like
powers of attorney)
o Equal dignity rule—if the underlying contract is required to be in writing, then the
authority to do it must also be in writing
· Implied Authority
o Definition—the authority that an has and/or needs in order to carry out express
authority (a recognition that we can never say everything that we intend)
Actual authority that is circumstantially proven from the facts and
circumstances attending the transaction in question and may be implied
from the words used, from customs, and from relations of the parties
If there is no express authority, then there is no implied authority
o Secret limitations on authority
If not communicated to the third party, will not be binding on the third
party—true with implied/inherent authority and apparent authority
o Examples
Attorney’s authority to negotiate with opposing counsel (not to settle)
Presidents of corporations
Managers of stores
· Apparent Authority and Estoppel
o Definition—the authority that the agent has because the principal has done or
taken some action that leads a reasonable third party to believe that the agent had
that authority
A type of circumstantial authority—not actual
The principal is only liable to those third parties who have no notice of the
secret limitations on the agent’s authority and who are relying in good
faith on the apparent authority
Can never have apparent authority when the principal is wholly
undisclosed
The principal’s manifestation is given to the third party, either directly or
indirectly, by words or acts, and not given to the agent, as with express
authority
o Acts to Focus on to Determine Apparent Authority
If the principal created the appearance of authority by providing business
cards, office space, etc.
Principal neglects to inform the third party that the agent no longer has the
authority and the principal’s actions in the past create a course of conduct
The actual words of the principal may give the agent apparent authority
beyond what he originally intended—“give him what he wants and I will
pay”
Failure of the principal to do something when a reasonably prudent person
would do something—failing to take back POA papers
o Differences between apparent authority and estoppel
Don’t have to show a change of position with apparent authority
Apparent authority is real authority and will get you expectation damages
for a breach of contract
In an apparent authority situation, the principal has rights to enforce the
contract, but not in an estoppel situation
Courts may not find enough for apparent authority and still be able to use
estoppel argument
· Inherent Agency Power/Inherent Authority
o Definition—the authority that an agent has simply because of the position that he
occupies, based on what this type of agent usually does
Designed to protect innocent third parties
A third party must reasonably believe that an agent of this type would
have this type of authority based on customary practice
Based on what agents of this kind can typically do
A term used in the restatement to indicate the power of an agent which is
derived not from authority, apparent authority, or estoppel, but solely from
the agency relation itself and exists solely for the protection of persons
harmed by or dealing with a servant or other agent
o 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 to such businesses and on the principal’s
account, although contrary to the direction of the principal
o Unauthorized Acts of General Agents
A general agent for a disclosed or partially disclosed principal subjects his
principal to liability for acts done on his account which usually
accompany or are incidental to transactions which the agent is authorized
to conduct, if although they are forbidden by the principal, the other party
reasonably believes that the agent is authorized to do them and has no
notice that he is not so authorized
· The Equal Dignity Rule
o If the underlying contract has to be in writing, then the agent’s authority to
negotiate the contract has to be in writing as well
o The act creating the agency shall be executed with the same formality (and need
have no more) as the law prescribes for the execution of the act for which the
agency shall be created
· Ratification and Adoption
o Definitions
Ratification—the affirmance by a person of a prior act which did not bind
him but which was done or professedly done on his account whereby the
act as to some or all persons is given effect as if originally authorized by
him
· Relates back to the time the unauthorized act occurred and is
sufficient to create the relationship of principal and agent
· Requires the principal to have knowledge of all the material facts
and an intent to ratify
· Cannot later be revoked or recalled—it is binding
· When an agent exceeds his authority, a principal is not bound
unless he ratifies the act committed
· When this conflicts with the equal dignity rule, the equal dignity
rule wins
Affirmance—either
· A manifestation of an election by one on whose account an
unauthorized act has been done, to treat the act as authorized, or
o Express conduct
· Conduct by him justifiable only if there were such an election
o Implied conduct—when the principal takes a position
inconsistent with non-affirmation, with full knowledge of
the material facts
o What Acts Can be Ratified
An act which, when done, could have been authorized by a purported
principal, or if an act of service by an intended principal, can be ratified if,
at the time of affirmance, he could authorize such an act
An act which, when done, the purported or intended principal could not
have authorized, he cannot ratify, except an act affirmed by a legal
representative whose appointment relates back to or before the time of
such act
o Purporting to Act as Agent as a Requisite for Ratification
Ratification does not result from the affirmance of a transaction with a
third person unless the one acting purported to be acting for the ratifier
· Cannot have ratification if the principal is wholly undisclosed
An act of service not involving a transaction with a third person is subject
to ratification if, but only if, the one doing the act intends or purports to
perform it as the servant of another
o Who Can Affirm
To become effective as ratification, the affirmance must be by the person
identified as the principal at the time of the original act, or, if no person
was then identified, by the one for whom the agent intended to act
o Adoption
When a corporation comes into existence, it can treat the actions of the
promoter of its own, but this is technically not ratification because the
principal did not exist at the time the acts were done
o Methods and Formalities of Affirmance
Except as below, affirmance can be established by any conduct of the
purported principal manifesting that he consents to be a party to the
transaction, or by conduct justifiable only if there is ratification
Where formalities are requisite for the authorization of an act, its
affirmance must be by the same formality in order to constitute a
ratification (the equal dignity rule)
The affirmance may be made by an agent authorized to do so
o Failure to Act as Affirmance
An affirmance of an unauthorized transaction can be inferred from a
failure to repudiate it
PARTNERSHIP
Principles of Partnership
· Definition
o Partnership Defined (UPA § 6)
Association of 2 or more people who carry on as co-owners a business for
profit
Factors
· 2 or more people acting together
· Contribution of money—as opposed to a loan
o Contribution of services can be the capital contribution if
the agreement says so
· How decisions are made—control
· Sharing of profits—prima facie evidence that it is a partnership
· Sharing of losses
· Intent of the parties to do those things that look and act like a
partnership
· Right to review the books and records
· Entitlement to get accounting of activity
Things that do not make a partnership
· Joint tenancy, tenancy in common, joint property
· Sharing of gross returns
· Repayment of debts, payment of wages
· Sharing of profits as compensation for services does not make you
a partner
o Partner Agent of Partnership as to Partnership Business (UPA § 9)
Every partner is an agent of the partnership for the purpose of its business
and he binds the business unless he had no authority and the third party
knew he had no authority
o Nature of partner’s liability (UPA § 15)
All partners are liable in tort and in contract jointly for everything
chargeable to the partnership
If the liability is from the wrongful act or breach of trust by a partner, then
the partners are jointly and severally liable
· The Uniform Partnership Act
o Enacted to regulate the rights and duties of partners against third parties more
precisely than at common law
o UPA applies in the absence of an agreement to the contrary (the partnership
agreement)
· Entity Versus Aggregate Theories
o Entity—sees the partnership as a separate entity that can sue and be sued
o Aggregate—bases everything on the separate partners (still do this for taxes)
LIMITED PARTNERSHIPS
In General
· Definition
o A partnership composed of one or more people who control the business and who
are personally liable for partnership debts (the general partners), and one or more
people who contribute capital and share profits but who cannot manage the
business and who are liable only for the amount of their contribution
· Liability to Third Parties
o Limited partner is not liable for the obligations of a limited partnership unless he
is also a general partner or participates in the control of the business (but then
only liable to persons who transact business with him reasonably believing he is a
general partner)
CORPORATIONS
Formation
· Incorporators
o One or more people may act as incorporator by delivering the articles of
incorporation to the secretary of state for filing
· Articles of Incorporations
o Must include
Name, number of shares, address, and name and address of incorporators
o May include
Directors, bylaws, etc.
· Incorporation
o Corp is formed upon filing of the articles unless delay is specified
· Liability for Preincorporation Transactions
o Everyone purporting to act as or on behalf of a corporation, knowing there was no
corporation under this Act, is jointly and severally liable for all liabilities created
Existence of Corporation
· Doctrine of de facto corporation gives the officer limited liability and is used when there
are elements showing
o Existence of laws authorizing incorporation
o Effort in good faith to incorporate under existing laws
o Actual use or exercise of corporate powers
· Doctrine of estoppel is used when the third party thought it was dealing with a
corporation and gives the officers limited liability
· Promoters are liable for their actions unless they have an agreement saying that they are
not liable
· Alter Ego Doctrine—whether a parent company is liable for its subsidiary’s liabilities
o Must show that the parent and subsidiary act as a single economic entity
Whether the corporation was adequately capitalized for the corporate
undertaking
Whether the corporation was solvent
Whether dividends were paid, corporate records were kept, officers and
directors functioned properly, and other corporate formalities were
observed
Whether the dominant shareholder siphoned corporate funds
Whether in general the corporation simply functioned as a façade for the
corporate shareholder
o Must show that an overall element of injustice or unfairness is present
· Corporate veil
o General rule
Courts will disregard the corporate form or pierce the corporate veil
whenever necessary to prevent fraud or to achieve equity
· Can do this to a parent corporation as well as to a human owner
· This holds the owner responsible despite legislature saying there is
limited liability
o When the corporate veil will be pierced
Such unity of interest and ownership that the separate personalities of the
corporation and the individual no longer exist, AND
· The failure to maintain adequate corporate records and to comply
with corporate formalities
· The commingling of funds or assets
· Undercapitalization
· One corporation treating the assets of another corporation as its
own
Such that adherence to the fiction of separate corporate existence would
sanction a fraud or promote injustice
· Must show unjust enrichment—some wrong beyond a creditor’s
inability to collect
LIMITED LIABILITY COMPANIES
In General
· Definitions
o Limited Liability Company as Legal Entity
A LLC is a legal entity distinct from its members
o Organization
By one or more persons
By delivery of articles to the Secretary of State
Begins when the articles are filed
· Intent—to permit individuals to operate a business entity somewhere between a
partnership and a corporation and still maintain limited liability for the members of the
LLC
o All of the corporate structure without the limitations (don’t have to have board of
directors)
o All of the freedom of a partnership without the liability
· The LLC constitutes a separate legal entity that cannot represent itself in court, but must
act through its agents
UNINCORPORATED ASSOCIATIONS
In General
· A candidate or other member of an unincorporated political association or committee is
not personally liable simply by virtue of his membership
o Unless he actually authorized, assented to, or ratified the obligation
· Unless you are in a state that allows you to sue an unincorporated association, you cannot
sue it because it is a nonentity
· Members suing the association
o Old common law rule—a member of an unincorporated association cannot sue the
association for the negligence of another member
Suing other members is like suing yourself because of the co-principal
theory
o New rule—unincorporated associations are amenable to suits by their members,
subject to the principals of comparative fault
· Third parties suing
o At common law and in the majority of jurisdictions today, an unincorporated
association is not a legal entity, so cannot sue or be sued, so the agent is
personally liable because you cannot be an agent for a nonexistent entity