Agency law can simply be summarized as laws governing the relationships of parties. The only question becomes, how is a proper relationship formed?
An agent is somebody who does something for another person (a principal) with that person’s authority. A common example of an agency relationship is an employer and an employee. The employer (principal) asks the employee (agent) to engage in certain activities. The employee is then bound to follow those instructions on behalf of the employer.
Creating an Agency Relationship
There are three elements that must be satisfied to establish an agency relationship:
- Assent by the principal that the agent will act for him/her (e.g. an employer providing a new hire with their list of responsibilities).
- Acceptance by the agent of that undertaking (e.g. an employee agreeing to do those responsibilities).
- An understanding between the two that the principal remains in control of the undertaking.
The order of these elements do not matter so much, just as long as they are present. We see an example of this principle in the case below:
Johnson v. Priceline.com, Inc.
711 F.3d 271 (2d Cir. 2013).
Johnson was the plaintiff (along with others in this class action lawsuit) against Priceline.com. The plaintiffs lost and appealed.
Question
Was there an agency relationship created between the parties?
Rule
An agency relationship is created when three elements are satisfied:
- Assent by the principal that the agent will act for him/her (e.g. an employer providing a new hire with their list of responsibilities).
- Acceptance by the agent of that undertaking (e.g. an employee agreeing to do those responsibilities).
- An understanding between the two that the principal remains in control of the undertaking.
Holding
No agency relationship exists, which means no agent fiduciary duty exists, which means that there can be no claim. Affirmed.
Facts
Priceline.com is a hotel booking website where parties can look up available hotels and make bookings. One of Priceline’s booking options was a “Name Your Own Price” feature. This feature allowed users to input the date, quality, location, and a bidding price for a desired booking. Once they clicked “book now” they agreed that if their bid was accepted by Priceline, they would pay the bid price mentioned. However, Priceline retained all control about finding hotels that were lower than the bid price, and the bidder was required to accept a reservation at that hotel.
The issue arose when Priceline would often find hotels that were priced lower than the bid. When they paid the hotel, Priceline would keep the remaining bid for a profit. Priceline did not inform the bidder of the discounted hotel or that they were retaining a profit. For these reasons, the plaintiffs sued.
Analysis
The plaintiffs argue that there is an agency relationship between the bidder (principal) and Priceline (agent). That is, they argue that the bidder essentially hires Priceline to find hotels and Priceline agrees to find those hotels in accordance with the bidder’s request.
However, the court rejects this argument. Why? Because only two of the three elements are satisfied. There is an agreement that Priceline will act in behalf of the bidder, and the bidder understands that Priceline is looking for hotels on their behalf. However, the bidder retains no control. For example, the bidder cannot reject a hotel reservation (the bid is final). Nor can the bidder reject the hotel that is selected (Priceline’s selection is final). Although the bidder provides the date, location, and quality of the hotel, these are simply parameters that help Priceline make the final selection.
Because the bidder has no control, there is no agency relationship. Instead, this is a simple contractual relationship between the two parties.
Additional Notes
An interesting thing to know about agency law is that only the agent owes a fiduciary duty to the principal. In other words, the agent is required to tell the principal about their dealings and the principal has no requirement to reciprocate. Everything in this case depended on the existence of an agency relationship. If there is no agency relationship, then there is no fiduciary duty. If there is no requirement to disclose.
When is the Principal Bound to a Contract?
If an agent makes a contract in behalf of the principal, the principal may be bound to fulfill those contractual obligations. For the principal to be bound, there must be actual or apparent authority.
Authority
Actual authority is simply a manifestation by that principal to the agent that they have authority to act for them. This can be express or implied. Express actual authority is a direct communication from the principal to the agent authorizing actions. Implied actual authority is where the agent is may be acting under the impression of authority based on the principal’s actions (e.g. buying a product for the principal, notifying the principal, and the principal consents to the purchase).
Apparent authority arises when a third-party has reason to believe that the agent is acting in behalf of the principal. Notice here that it is the communication between the principal and third-party that matters in this situation, not the communication between the agent and principal. A simple way of summarizing apparent authority is through two elements:
- The third-party reasonably believes the agent or other actor has the authority to act, and
- That belief is traceable to the principal’s manifestations.
H.H. Taylor, C.A. v. Ramsay-Gerding Construction Co.
196 P.3d 532 (Or. 2008).
The plaintiffs (H.H. Taylor) won at trial against a defendant (ChemRex) and lost on appeal.
Question
Whether the principal (ChemRex) has apparent authority.
Rule
“Apparent authority requires that the principal engage in some conduct that the principal ‘should realize’ is likely to cause a third person to believe that the agent has authority to act on the principal’s behalf.”
Holding
There was apparent authority. Reversed and remanded.
Facts
Taylor was in the process of building a hotel and hired Ramsay-Gerding as the general contractor. Ramsay hired a stucco installer as a subcontractor. Taylor became concerned that the stucco would rust, so there was a meeting with Ramsay, the stucco installer, and an individual named “McDonald” who was a “representative” of ChemRex. During the meeting McDonald promised that the stucco was rust proof and that there was a five-year warranty. Later, he sent a letter with the ChemRex letterhead and signed with his title, to Taylor. This letter confirmed the warranty existed.
A year after the stucco was installed, rust appeared. So, Taylor sued Ramsay who in turn sued ChemRex. Later, Taylor added ChemRex as a defendant. The issue of the warranty became a sole issue before the jury who found that McDonald had apparent authority from ChemRex and that the warranty had been breached.
Analysis
There is no need for the apparent authority to come directly from the principal to the third party. The third party can learn about the authority through word-of-mouth or other actions as well. Here, McDonald was a representative of ChemRex with the title of “territory manager” which gave the appearance that he ran the business in the area. Indeed, the third party believed that all questions needed to be addressed specifically by McDonald. Additionally, McDonald worked primarily in providing warranties which gave the perception that he had the authority to create warranties.
Additional Notes
The analysis always begins with whether there was actual authority. If there is actual authority, then there is no need to explore further, the principal is bound. However, if there is no actual authority, the next step is to determine if there was any apparent authority.
Here apparent authority can be found simply because the third-party perceives that the agent has the authority. This perception came because of the job title, work responsibilities, communication, etc.
Estoppel
Even if there is no authority (there is no manifestation), a principal may still be bound to fulfill the contract. There are three requirements for estoppel to be found:
- Justifiable belief that the individual is an agent,
- Reliance on that belief by the third-party to their detriment,
- The reliance comes because of the principal’s actions.
Inherent Agency Power
This is really a legal fiction. Ultimately, the idea is that agencies have the requirement to be fair to the general public. Regardless of authority, estoppel, the principal may still be bound to the contract. This was covered in the 2nd Restatement of Agency, but has not been included in the 3rd Restatement of Agency.
Ratification
If the agent acts in behalf of the principal without any authority (actual or apparent), the principal can later approve the agent’s actions. In this instance, the agent’s actions are ratified and the principal is bound to the agreement.
Entity-Specific Rules
Partnerships
Under RUPA § 301(a), unless a third-party has notice, it is assumed that a partner has apparent authority. In other words, the partnership automatically acts as the manifestation of authority. This is true as long as it is within the ordinary course of events of the business. If the actions are outside the ordinary course of events, then the regular common law rules apply.
Elting v. Elting
849 N.W.2d 444 (Neb. 2014).
Kerwin Elting was the defendant who lost and appealed.
Question
Did Kerwin have authority to act for the partnership? If not, were his actions ratified by the other managing partners?
Rules
First, all managing partners are agents for the partnership, who has authority to act in behalf of the partnership unless the partnership agreement states otherwise. Second, ratification requires the actual knowledge (not constructive) of the partners.
Holding
Kerwin had no authority to enter into the contracts he made and the other managing partners did not ratify the agreements. Affirmed.
Facts
The Elting family owned a farm and several were partners within that business. At all times of the dispute, there were four managing partners. According to the partnership agreement, if there were ever more than two partners, then any large business decisions needed to be made by a majority of the managing partners. In this case, that required three out of the four partners for approval. Any actions taken outside of this majority lacked authority.
In 2008, Kerwin entered into several focal point agreements with one of their customers (without consulting the other partners). The agreements allowed the price of corn to be variable and thus fluctuate with the market during a specified period of time. As a result of these contracts, the farm lost over $1,000,000.
At a meeting in January of 2009, the rest of the partners met with the bank and signed off on the accounts sheet which reflected the change in price of the corn (signed without reading).
Later, the other managing partners became aware (by the bank) that their reported numbers did not match. At this point, they learned of the several focal point agreements entered into by Kerwin. Consequently, they sued for the loss.
Analysis
First, the court agrees that Kerwin had no authority to enter into the contract. The partnership agreement clearly states that an agent required a partnership majority to alter business dealings. Because there was a lack of discussion and approval between the managing partners, Kerwin lacked that authority.
Second, the actions taken by Kerwin were not ratified by the other managing partners. Although the signing of the accounts sheet at the 2009 meeting could serve as constructive notice, the other managing partners had no actual knowledge of Kerwin’s actions. Because actual knowledge is the requirement before ratification can occur, there was no ratification provided.
Corporations
Unlike partnerships, corporation owners are not automatically endued with authority. As such, owners are not automatically agents of the company. Instead, the decision making process is governed by a board of directors (which must act collectively) in determining which individuals have authority to make decisions for the corporation. Usually, this means appointing a CEO, who has authority to bind the corporation and also has the authority to appoint other agents with authority to act in certain capacities.
LLCs
LLCs are tricky when it comes to authority. Some jurisdictions follow the partnership standard where LLC members are automatically agents with authority to bind. Other jurisdictions follow corporations, where LLC members are not automatically agents.
In re Nothlake Development L.L.C.
60 So. 3d 792 (Miss. 2011).
The bank lost and appealed.
Question
Did Earwood, as a minority member of Kinwood, have authority to transfer property interests to Northlake Development? If not, is that action voidable or void?
Rule
Under Mississippi law, a member of an LLC is an agent with authority to bind the LLC in the ordinary course of business events (unless the operating agreement alters that authority). As such, any unauthorized and unratified actions are void.
Holding
Earwood had no authority and his actions were not ratified. The transfer is thus void and not voidable. Affirmed.
Facts
Earwood was a minority member of Kinwood development. Secretly, he started his own business called Northlake Development and transferred some of Kinwood’s property to Northlake. Later, he secured a loan using the property (which was primarily used for personal enjoyment). After defaulting on the loan, Northlake declared bankruptcy and listed the transferred property as an asset.
The current dispute is between Kinwood and the bank who secured the loan. If Earwood had no authority, the bank argues that the transfer should be voidable, and as a bonfide purchaser with no notice, they would retain rights to the property. However, if the transfer was void, Kinwood would retain interest in the property.
Analysis
First, Earwood clearly had no actual authority. Although a member as an agent, he only has the capacity to act within the normal business dealings of Kinwood. This is certainly a situation where he was not acting in normal business dealings. As such, there is no actual authority.
Second, there is no apparent authority. Earwood, as the sole owner of Northlake, had knowledge that he did not have the authority to transfer the property of Kinwood to Northlake. As such, there is no apparent authority.
Because Earwood had no authority, and the actions were not later ratified by Kinwood, the transaction is void and the property interests returns to Kinwood.
Ensuring an Agent has Authority
There are three main methods to ensure that an agent has authority. First a Secretary’s Certificate (a document by a designated secretary certifying that certain individuals have authority). Second, opinion letters (letters exchanged by attorneys to confirm who has authority). Third, a statement of authority (a certification that is filed with the government).
Principal Liability for Agent Torts
Quite simply, if an agent engages in a tort while within the scope of work of a business, the business may be liable for the agent’s conduct. This doctrine is called “respondeat superior” which directly translates to “let the master answer.” However, this only applies if the tortfeasor is an agent of the principal and engaged in the tort while in the scope of employment.
The Principal-Agent Problem and Agent Duties
The principal-agent problem is that both the principal and the agent have interests and sometimes that agent does not act in the interest of the principal but instead acts in their self-interests. In this situation, principals are required to make expenditures to limit costs associated with agent self-interest.
In an effort to reduce to reduce this self-interest, the law imposes a fiduciary duty of loyalty on the agent. These often protect the principal from the agent engaging in competition against the principal, take from the principal, etc. However, these requirements often come as a safety net, rather than the primary mode of recovery.
Foodcomm International v. Barry
328 F.3d 300 (7th Cir. 2003).
Foodcomm obtaining a preliminary injunction against Barry (and others) who appealed.
Question
Did Barry and others breach their fiduciary Foodcomm when they started their own business in competition and took Foodcomm’s largest customer with them?
Rule
Agents owe a fiduciary duty of loyalty to:
- Not exploit their positions within the corporation
- Hinder the ability to conduct business.
A breach occurs when agents:
- Fail to inform the company that they are forming a rival company
- Solicit the business of a single customer before leaving
- Use company equipment to assist them in the breach
- Or solicit other employees to join them.
Holding
There was a breach of the duty, the injunction is merited.
Facts
Foodcomm and a customer called Empire entered into negotiations for a new business format. The negotiations did not go well. Two of Foodcomm’s highest paid employees went to Empire to “smooth things over.” However, when they learned that the relationship between Foodcomm and Empire could not be repaired, they determined to start their own business (called Outback exports) and offer their services to Empire. Plans and negotiations for this new enterprise occurred over Foodcomm equipment.
When the employees resigned from their position with Foodcomm, Foodcomm discovered that they had started a rival company. They then sued the employees to enjoin them from working for Outback or Empire.
Analysis
Although the employees were not officers, their standing as agents within the company subjects them to a fiduciary duty of loyalty to Foodcomm. They breached this duty when they 1) started a rival company, 2) took Foodcomm’s largest customer, and 3) used Foodcomm’s resources to do so.
Additional Notes
When we consider a duty of loyalty, the first consideration is whether there are conflict of interest transactions. This occurs when an employee may be doing the same work for competitors.
Disclaimer
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.
