Agency Law for Business Associations Spring 2010 Professor Robert Rosen 1. Formation

Theoretical Perspectives Transaction Cost Economics (Coase, Williamson): with positive transaction costs, owners of various resources will contract in order to reduce costs and share efficiency gains (firm as a “nexus of contract”). Agency Cost Theory (Jensen & Meckling): uneconomic decisions for the firm may be in the personal interest of the manager.

Jonas Hypothetical (p.11) $5,070$1,930$7,000Cost to Jonah (10% owner) $50,700$19,300$70,000Cost to Jonah (100% owner) $50,700$19,300$70,000Cost to Firm  Cost of Hotel Cost of Apartment Two scenarios: (a)Incremental benefit of apartment = $100,000 to Jonas (b)Incremental benefit of apartment = $10,000 to Jonas

Agency: A Tripartite Relationship Principal Agent Third Party Inward-looking consequences Outward-looking consequences

Agent Action Fiduciary relationship Contract or tort Obligation or liability Principal Agent Third Party

Definition of Agency Agency is the fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an "agent") that the agent shall act on the principal's behalf and subject to the principal's control, and the agent manifests assent or otherwise consents so to act. Restatement (Third) of Agency §1.01

Mutual Assent Agency is the fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an "agent") that the agent shall act on the principal's behalf and subject to the principal's control, and the agent manifests assent or otherwise consents so to act.

Benefit Agency is the fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an "agent") that the agent shall act on the principal's behalf and subject to the principal's control, and the agent manifests assent or otherwise consents so to act. Restatement (Third) of Agency §1.01

Control Agency is the fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an "agent") that the agent shall act on the principal's behalf and subject to the principal's control, and the agent manifests assent or otherwise consents so to act. Restatement (Third) of Agency §1.01

Formation -- Types of Agency Scope: special agents (limited to a single act or transaction) vs. general agents (series of acts or transactions) Disclosure to T: P disclosed; P undisclosed; P partially disclosed Right to Control: employee (or “servant”) vs. independent contractor.

Termination At Will P owns a resort hotel. P engages A to manage the hotel for a term of 10 years, in an agreement that expressly provides that P may not revoke A’s authority except pursuant to mutual agreement. The agreement states that P’s promise not to revoke A’s authority constitutes security to A for A’s interest in receiving the management fee specified in the agreement, which is three percent of gross revenues for the first five years, and five percent for the second five years. => Not specifically enforceable

A Grain Elevator

Jenson Farms Co. v. Cargill Cargill Warren Seed & Grain Co. Minn. Grain Exchange Farmers grain loan grain (90%) grain (10%)

2. Agent’s Duties to Principal Fiduciary Duties Duty of Care (Duty of Performance) Duty of Loyalty

Fiduciary Duty of Care Duty to perform in accordance with express and implied terms of contract with principal (§ 8.07) To act with care, competence and diligence normally exercised by similar agents (§ 8.08) Duty to act only within scope of actual authority and to comply with lawful instructions from principal or those designated by principal to instruct agent (§ 8.09) Duty to act in such a way as to not bring principal into disrepute (§ 8.10) Duty to provide information that the agents knows, has reason to know, or should know when the agent knows or has reason to know that the principal would wish to know the information (§ 8.11) Duties regarding Principal’s Property: Identification, Segregation, Record-Keeping, and Accounting (§ 8.12)

Fiduciary Duty of Loyalty “An agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship.” Restatement (Third) of Agency §8.01 Principal Agent Inward-looking consequences

The Role of Fiduciary Duty Agent’s Duties Duty not to acquire a material benefit from a third party in connection with the agency (§8.02) Duty not to deal with the principal as or on behalf of an adverse party (§8.03) Duty to refrain from competing with the principal (§8.04) Duty not to use or disclose confidential information (§8.05) Principal Agent Inward-looking consequences

Tarnowski v. Resop A (Resop) takes $2,000 “secret commission” from T on “coin operated music machine” deal on behalf of P (Tarnowski). Plaintiff’s remedy from sellers: –Deal is void; $9,500 out of $11,000 down payment returned Plaintiff’s remedy from agent: –Secret commission –All costs of collecting from sellers as damages –total of $5,200 recovered from A

The Role of Fiduciary Duty Principal’s Consent Conduct that otherwise would constitute a breach does not constitute a breach of duty if the principal consents to the conduct (§8.06) To obtain consent, the agent must: –Act in good faith –Disclose all material facts –Otherwise deal fairly with the principal Principal Agent Inward-looking consequences

3. Duties of Principal to Agent Duty to perform in accordance with express and implied terms of contract with the agent (§ 8.13) Duty to deal with the agent fairly and in good faith, including a duty to provide agent with information about the risks of physical harm or pecuniary loss present in the agent’s work which are unknown to the agent, but the principal knows, has reason to know, or should know. (§ 8.15) Duty to indemnify agent »(1)in accordance with contract with agent »(2)When agent makes payment within scope of agent’s actual authority »(3)When agent makes payment that is beneficial to principal unless the agent acts officiously in making the payment »(4)When agent suffers a loss that fairly should be borne by the principal in light of their relationship

4. Principles of Attribution Manifestations create apparent authority Manifestations create actual authority Third Party Agent Principal

The Agency Relationship Principal Agent Third Party Inward-looking consequences Outward-looking consequences “The chief justification for the principal’s accountability for the agent’s acts are the principal’s ability to select and control the agent and to terminate the agency relationship, together with the fact that the agent has agreed … to act on the principal’s behalf.”

Authority Agents bind principals by acting with authority Two forms of authority –Actual : principal manifests consent to agent –Apparent : principal manifests consent to third party

Authority Authority is a form of “power” –“The common-law definition requires that an agent hold power, a concept that encompasses authority but is broader in scope and connotation…. An agent who has actual authority holds power as a result of a voluntary conferral by the principal…. An agent also has power to affect the principal's legal relations through the operation of apparent authority.… Additionally, a person may be estopped to deny the existence of an agency relationship…. Separately, a person may, through ratification, create the consequences of actual authority with respect to an actor's prior act.” Restatement (Third) of Agency § 1.01, Comment.

Actual Authority “Actual authority … is created by a principal's manifestation to an agent that, as reasonably understood by the agent, expresses the principal's assent that the agent take action on the principal's behalf.” Restatement (Third) of Agency § 1.03

Actual Authority “An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal's manifestations to the agent, that the principal wishes the agent so to act.” Restatement (Third) of Agency § 2.01 “Manifestation”: “written or spoken words or other conduct” Restatement (Third) of Agency § 1.03

Apparent Authority “Apparent authority is the power to affect the legal relations of another person by transactions with third persons, professedly as an agent for the other, arising from and in accordance with the other’s manifestations to such third persons.” Restatement (Second) §8 Implies direct communication between the principal and the third party “Apparent authority is the power held by an agent or other actor to affect a principal's legal relations with third parties when a 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.” Restatement (Third) §2.03 Implies that apparent authority may be created without any communication made directly to the third person. Custom may create apparent authority.

Domain of Apparent Authority Arises in two circumstances: –One person appears to be an agent of another, even though no agency relationship exists (“apparent agency”) –An actual agent exceeds the scope of his or her authority Apparent and actual authority may co-exist –Apparent authority may survive the termination of the agency relationship

“Estoppel” Very similar to apparent authority (many courts do not distinguish), but it is not an agency doctrine Differences from apparent authority: –Estoppel requires detrimental reliance –Restatement (Third) says estoppel is for situation where no “manifestation” –Estoppel does not bind the third party, only the principal

A Graphical Summary Manifestations create apparent authority Manifestations create actual authority Third Party Agent Principal