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)
Cost of
Apartment
Cost of
Hotel

Cost to Firm
$70,000
$19,300
$50,700
Cost to Jonah
(100% owner)
$70,000
$19,300
$50,700
Cost to Jonah
(10% owner)
$7,000
$1,930
$5,070
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
Inward-looking
consequences
Agent
Outward-looking
consequences
Third Party
Agent Action
Principal
Fiduciary
relationship
Agent
Obligation or liability
Third Party
Contract or tort
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
Farmers
grain
Warren Seed
& Grain Co.
loan
Cargill
grain
(90%)
grain
(10%)
Minn.
Grain
Exchange
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
Principal
Inward-looking
consequences
Agent
“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
The Role of Fiduciary Duty
Principal
Inward-looking
consequences
Agent
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)
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
Inward-looking
consequences
Agent
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
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
Principal
Manifestations
create actual
authority
Agent
Manifestations
create apparent
authority
Third Party
The Agency Relationship
Principal
Inward-looking
consequences
Agent
Outward-looking
consequences
Third Party
“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
Principal
Manifestations
create actual
authority
Agent
Manifestations
create apparent
authority
Third Party