Business Organizations Outline 10/08/2010

 Fundamental Agency Issues – who is an agent?

 Agency
 When one principal gives his consent that someone else will operate on his behalf and subject to his
control, and the agent so agrees to act
 Parties need not intend to enter into this relationship or call it agency  they just need to intend to act
in this fashion
 Contract or business relationship NOT required, anyone can enter into agency
 Agency law is concerned w/ substance, not form
 Agents are always liable for their own torts, but might be useless to sue (judgment proof)
 Agency can be terminated at will by either party
 Restatement (second) §1: agency is 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
 Agent is basically someone working one someone else’s behalf; mutual consent between the Principal and the
Agent; basically allows the principal to be two places at once
o When one party agrees to act on behalf of another party subject to that other party’s control
 Gorton v. Doty (1937)
 Facts:  let  use her car to drive high school football players to a game; car accident, injured ’s son,  sues
 under agency theory
 RULE: principle is liable for the actions of the agent to the extent that the principal had done the harm
himself; agency in this case is satisfied, ownership of a car is sufficient here for prima facie case
 When one party agrees to act on behalf of another party subject to that other party’s control
 Policy: people must be more careful when exhibiting acts of kindness/cooperation, it promotes caution and
judgment when doing something like letting another person use your car; more safe cars could be a product
of something like this rule
 Jensen Farms v. Cargill (1981)
 Facts:  farmers sold grain crops/extended credit to Warren (local grain elevator operator),  is international
grain dealer very involved w/ Warren business. Warren bought grain from  farmers and sold it to .
Warren became insolvent, didn’t pay  for grain,  sues  for Warren’s default on their contracts
 RULE: court held  liable as principal b/c it exercised influence and control over Warren; a creditor who
assumes control of his debtor’s business may become liable as a principal for the acts of the debtor in
connection w/ the business;
  actions were not viewed in isolation, rather in light of all surrounding circumstances
 Policy: farmers (and businessmen like them) should be entitled to some form of reasonable reliance in their
regular course of business, aka shouldn’t have to be constantly checking the financial stability of those selling
grain (and businesses like that)
 Humble Oil & Refining Co. v. Martin
  X parks car in gas station, rolls and injures ;  doesn’t sue X or the station attendant b/c X and the attendant
both have no $; Y controls operations of the gas station, walks and talks like the owner, but really is just a
manager/clerk who performs duties for  and reports to 
 Liability of principal to third parties in a contract
 Agent’s Authority:
 Actual authority – principal gave express/explicit orders to the agent, perfectly clear
 Implied authority – authority circumstantially proven that show the principal intended for the agent to
possess powers that are practically/reasonably necessary to carry out his duties
 Mill Street Church v. Hogan
 Facts:  a regular handyman at  church;  hires brother to help him w/ job, brother injured on the
job
 RULE: the point of agency is to extend authority, the scope that the law settles on what a
reasonably prudent agent in that situation would do
  hired  to extend  powers so they wouldn’t have to be there for every single step of the paint
job  implied authority to hire  brother to reasonably get the job done
 questions of implied authority  questions of reasonability
 Policy: agency extends powers so we don’t have to live in a world where the churches of the world
don’t have to oversee every single individual step of a Hogan paint job
 Apparent Authority – Restatement (Second) of Agency §8 - when the third party reasonably believes the actor
has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations
 Three-Seventy Leasing Corp. v. Ampex Corp.
 RULE: an agent has apparent has apparent authority sufficient to bind the principal when the
principal acts in such a manner as would lead a reasonably prudent person to supposed that the
agent had the authority he purports to exercise; absent knowledge of the third parties on the
contrary, an agent has the apparent authority to do those things which are usual and proper to the
conduct of the business .
 Inherent Authority – indicates power of an agent is derived solely from the agency relation and exists for the
protection of persons harmed by or dealing with a servant or another agent;
 Restatement (second) §8A; see additional Restatements below
 Watteau v. Fenwick
 RULE: If you are a principal undisclosed to the 3rd party that your agent is doing business, with,
then you are liable for the contracts which your agent enters into, irrespective of whether you gave
actual or implied authority to enter into those contracts
 Applying the modern Restatement of the Law (Second) Agency to this old English case:
  Restatement (2nd) §194: agent for an undisclosed principal authorized to conduct
transactions subjects his principal to liability for acts done on his account, if usual or
necessary in such transactions, although forbidden by the principal to do them
 Restatement (3rd) §195: undisclosed principal who entrusts an agent with the management
of his business is subject to liability to third persons with whom the agent enters,
although contrary to the directions of the principal
 Ratification:
 Restatement of the Law (Second) Agency §82: ratification is 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
 Basically a way for the principal to say “my agent didn’t have the right to enter into this contract, but I’m glad
he did so. Accordingly, Ill affirm the transaction and agree to be bound by this contract
 2 questions arise: what types of acts constitute an affirmation by the principal? What effect should this
affirmation be given?
 Estoppel:
 Restatement §8B Estoppel-Change of Position
 Hoddeson v. Koos Bros.
  brought this action against  furniture store to reimburse her for money spent at the store with an
alleged imposter salesman;  alleges lack of evidence to establish an agency relationship with the
imposter third party
 RULE: absent proof of an agency relationship, a party may have a duty of care for the other party to
ensure that the other party is not disadvantaged in dealing w/ the party
 Agent’s Liability on the Contract
 Atlantic Salmon A/S v. Curran
 RULE: An agent can be held liable for his actions on behalf of the principal if the agent does not
disclose the agency to the third party  it is not enough that the third party have the means to
ascertain knowledge of the agency or the principals identity
 Liability of Principal to Third Parties in Tort
 Servant Versus Independent Contractor
 Respondeat superior – a “master” (employer) is liable for the torts of its servants (employees)
 Restatement (Second) §2 Master; Servant; Independent Contractor
 1) master is a principal employing an agent to perform service in his affairs and controls or has the right
to control the physical conduct of the other in the performance of service
 2) servant is an agent employed by 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) independent contractor contracts w/ another to do something for him but isn’t controlled by the other
nor subject to the other’s right to control
 agent-type independent contractor – agrees to act on behalf of another, the principal, but not subject
to the principal’s control over how the result is accomplished
 non-agent independent contractor – operates independently and simply enters into arm’s length
transactions with others
 Agency relationship exists based on what the relationship actually is, not what the parties call it. When an
agreement, considered as a whole, establishes an agency relationship, the parties cannot effectively
disclaim it by formal “consent”
 Humble Oil & Refining Co. v. Martin
 Love parks her car in gas station, operated by Schneider, through an agreement with Humble, car rolls
down hill and injures Martin’s family; Love is judgment proof, gas station attendant is judgment proof,
Schneider appears to be the gas station owner, walks, talks, and acts like he’s owner
 Humble actually controls significant operations at the station and had strict financial control and
supervision, all for Humble’s benefit; land is owned by Humble  Schneider nothing more than an
employee performing duties  Humble is liable as Master
 Rule: determining a master-servant relationship, rather than independent contractor relationship, is a
question of fact, answered in the affirmative when the master exerts considerable control over the
responsibilities of the servant
 Hoover v. Sun Oil Company
 Station employee negligently caused a fire on  car; held,  not liable for negligence of an employee of
Barone who is in turn is an independent contractor and not a servant of 
 the operation is an arm’s length contractual relationship; court found insignificant indicating a
master-servant relationship; both gained equally from their relationship
 RULE: no master-servant relationship here when independent contractor controls the daily operations
of the entity responsible for damages
 Franchise Agreement: franchisee agrees to operate its business in certain ways in return for use of the license;
purpose is to create standardization and uniformity to achieve the brand in all franchises nationwide
 Franchise agreement does not insulate from agency relationship master-servant liability
 Murphy v. Holiday Inns, Inc.
  slipped/fell/injured in hotel;  had license agreement (franchise) with hotel operator  purpose of
contract was to achieve standardization and uniformity of the brand for both parties’ benefit,  had
no control over daily operations etc
 RULE: when establishing agency relationship through contracts (franchise), the nature and extent
of the control agreed upon determines if agency exists
  Policy issue of franchise agreement is that business present themselves as one entity for advertising
purposes, and then turns it around for tort purposes and tries to split into separate entities  seems like
fraud  acceptable for K purposes, not necessarily for tort
 Tort Liability and Apparent Agency
 Miller v. McDonalds Corp.
  seeking damages from McD’s for a stone she bit into in her food; McD’s a franchise owned by 3K, who
had an explicit agreement saying no agency relationship; McD’cs did have an agreement w/ 3K w/
thorough operating guidelines
 RULE: if the franchise agreement goes beyond setting standard and gives the franchisor the right to
exercise control over the daily operations of the franchise, an agency relationship exists  this is
known as the Control Test under Actual Agency
 Question of Apparent Agency arises from Restatement §267 – one who represents that another is his
servant or other agent and thereby causes a third person justifiably to rely upon the care or skill of such
apparent agent is subject to liability to the third person for harm cause by the lack of care of skill of the
one appearing to be a servant or other agent as if he were such.
 Question for the jury whether McD’s held 3K out to be its agent and whether  reasonably relied on
that representation
 Scope of Employment
 Restatement (second) Agency §228 and 229
 Ira S. Bushey & Sons, Inc. v. United States
 Sailor’s drunken conduct not so unforeseeable as to make it unfair to hold the govt. liable for damage
done by the sailor to a third party dock
 RULE: conduct of a servant is w/in the scope of employment if it’s actuated, at least in part, by a
purpose to serve the master
 Policy says employers should be held to expect risks, to the public also, which arise out of and in the
course of employment of labor
 Manning v. Grimsley
 Court held pitcher’s employer liable for throwing at a fan who was heckling him during a game
 RULE: employer liable for damages resulting from an assault by an employee when the assault was in
response to ’s interference of that employee’s duties
 Restatement (second) Agency §231: An act may be w/in the scope of employment although consciously
criminal or tortuous (comments indicated serious crimes exempt)
 Restatement (second) Agency §228(1)(d): conduct of servant w/in scope of employment if the use of
intentional force on another is not unexpected by the master
 Statutory Claims
 Factors to consider when deciding if employee was acting w/in the scope of employment:
  time, place, purpose of the act
 similarity to acts which the servant is authorized to perform
 whether the act is commonly performed by the servant
 the extent of departure from normal methods
 whether the master would reasonably expect this act to be performed
 Arguello v. Conoco Inc.
 After several racial incidents at gas stations under  name, court held no master-servant relationship
between Conoco-branded stations, they were independently owned and  didn’t control daily
operations; scope of employment question is one of fact for the jury to decide
 RULE: once a master-servant relationship is established, a master is subject to liability for the torts of
the servant when the servant is acting w/in the scope of their employment – Restatement (second) §219
 Liability for Torts of Independent Contractors
 Ordinarily when a person engages an independent contractor (who conducts an independent business by
means of his own employees), that person is not liable for the negligent acts of the independent contractor in
the performance of the contract; exceptions:
 When land owner retains control of the manner and means of the contracted work
 When he engages and incompetent contractor
 Where the activity contracted for is a nuisance per se
 Majestic Realty Associates, Inc. v. Toti Contracting Co.
  hired by Authority Parking to demolish bldg next to  bldg, damage incurred to  bldg during the
process  court held Authority liable for  negligence b/c the work was inherently dangerous, meaning
liability cannot be delegated to another party; its nature poses high risk to the general public
 RULE: Some actions are so inherently dangerous that their liability cannot be delegated
 Policy: the party hiring the contractor, although innocent of any direct negligence, should bear the burden
of damages over a third party that is completely innocent ( here)

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