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Principles Of Business Law - BOOK II CHAPTER I

1. CHAPTER I

2. CHAPTER II

3. CHAPTER III

4. BOOK I CHAPTER I

5. CHAPTER II

6. CHAPTER III

7. CHAPTER IV

8. CHAPTER V

9. CHAPTER VI

10. CHAPTER VII

11. CHAPTER VIII

12. BOOK II CHAPTER I

13. CHAPTER II

14. CHAPTER III

15. CHAPTER IV

16. BOOK III CHAPTER I

17. CHAPTER II

18. CHAPTER III

19. CHAPTER IV

20. CHAPTER V

21. CHAPTER VI

22. CHAPTER VII

23. CHAPTER VIII

24. CHAPTER IX

25. CHAPTER X

26. BOOK IV CHAPTER I

27. CHAPTER II

28. CHAPTER III

29. CHAPTER IV

30. CHAPTER V

31. CHAPTER VI

32. CHAPTER VII

33. CHAPTER VIII

34. CHAPTER IX

35. CHAPTER X

36. CHAPTER XI

37. CHAPTER XII

38. CHAPTER XIII

39. BOOK V CHAPTER I

40. CHAPTER II

41. CHAPTER III

42. BOOK VI CHAPTER I

43. CHAPTER II

44. CHAPTER III

45. CHAPTER IV

46. CHAPTER V

47. BOOK VII CHAPTER I

48. CHAPTER II

49. CHAPTER III

50. CHAPTER IV

51. BOOK VIII CHAPTER I

52. CHAPTER II

53. CHAPTER III







BOOK II
AGENCY


CHAPTER I
CREATION OF THE AGENCY

Classification of Agents

Sec. 1. Introduction. We are still witnessing a period in which
big business seems to be the order of the day. The corporate form
of organization seems to be most desirable for the conduct of such
business. Clearly, therefore, much, and, under corporate organiza-
tion, all, of the business must be conducted through representatives
or agents. The law of agency is of relatively recent origin, very
little attention having been paid to it until somewhat over a cen-
tury ago. It is only with the advent of large business projects that
the necessity for many agents arose.

Some maintain that there is no law of agency, but that the rela-
tions arising from the use of agents may all be settled through the
employment of the familiar principles of contracts. However, as
the business conducted by agents has grown and peculiar situations
have arisen from time to time, definite principles relating only to
agency have evolved and a new body of law has gradually devel-
oped.

Sec. 2. Definition. In the broad sense agency is the relation
created by employment. Strictly defined, however, agency is the
relationship whicharises when one party authorizes another Jx)
create, to modify, oFtoterminate cnr^t ritual rpktinn^ Between the
former ancLthird parties. The one granting the authority is known
as the principal, while the one who is given the power is called the
agent. Agency as defined in this limited sense excludes the rela-
tionship of master and servant, as the latter has no power to create

For an agent to act, three parties are neces-



sary: the principal, the agent, and a third ^afty witlTwhom con-
tracts may be formed. To create the master and servant relation,
only two parties are necessary. However, as the laws relating to
master and servant are analogous to those governing principal and
agent, and as the two relations often merge by an agent's perform-
ance of the duties of a servant, and vice versa, the rules of agency
herein set forth will be deemed to apply to either situation unless
otherwise stipulated.

Sec. 3. Agent distinguished from independent contractor. A
person may contract for the services of another in such a way as to
have full and complete control over the manner in which the latter
conducts the work, or he may contract for a certain result. If the

105



106 AGENCY

agreement provides that the second party is to accomplish a certain
result, and has full control over jthe manner and methods to be pur-
sued in bringing aboutTEe ^ result^ he is deemed an independent con-
tractor and the one^receiving the benefit of his seryices is in no sense
responsible to third parties fofTiis actions. 1 On the other hand, if
the second party places his services at the disposal of the first in
such a manner that their identity practically merges and the action
of the second is controlled by the former, an agency relation is es-
tablished. To illustrate: A contracts to build P a boat for $100,
according to certain specifications. In such a case it is clear that
A is an independent contractor with the completed boat as the re-
sult, and P in no sense becomes responsible for lumber or other
material purchased. However, had P engaged A by the day to
build the boat and had authorized A to purchase the necessary ma-
terials, it is equally clear that an agency would have been created.

Sec. 4. Classification of agents. First, agents may be classified
as actual and ostensible. An actual agent is one upon whom au-
thority has been expressly conferred by the principal, while an os-
tensible agent is one who has no actual authority, but who the
principal has, by conduct, led third persons to believe is clothed
with authority, thus making, in certain instances, the principal
responsible for his conduct.

Second, agents may be either general or special. To distinguish
between them is an exceedingly difficult task. A general agent is
one who has been granted power to do a series of acts, and his em-
ployment is of a continuous nature. A special agent is created
usually for only a single transaction. Under existing law little rea-
son exists for determining which kind of agent is appointed, except
that occasionally it may aid in determining just what incidental
authority custom or usage has fastened upon him because of the
nature of the appointment.

Appointment of Agent

Sec. 5. Proper parties. It is generally stated that anyone who
may act for himself may act through an agent. To this rule there
is one fairly well-recognized exception. An infant may enter into
a contract, and, so long as he does not disaffirm, the agreement is
binding. However, the weight of authority is probably to the effect
that any appointment of an agent by an infant is void. Therefore,
any agreement entered into by such an agent would be ineffective,
and an attempted disaffirmance would be superfluous. Many re-
cent cases hold, however, that only the act of the agent is voidable,

a Moreland et al. v. Mason, Sheriff, et al., 1927, 45 Idaho 143, 260 Pac. 1035; p. 547.



CREATION OF THE AGENCY 107

being subject to rescission or ratification by the minor after he
reaches his majority.

Nevertheless, an infant may act as an agent for someone else,
and any agreement which he makes while acting for his principal
is binding. Although the infant has a right to terminate his con-
tract of employment at his convenience, so long as he continues in
the employment his acts become those of his employer.

Contracts which delegate authority to an agent, like any other
agreements, must have for their purpose a legal object. As in the
case of other illegal contracts, the courts would not force the parties
to carry out an agency agreement with an illegal purpose, but
would leave the parties without any legal redress.

Sec. 6. Express delegation of authority. The usual procedure
followed in the creation of an agency is for the principal expressly
to confer certain authority upon the agent. The agreement may
be explicit, setting forth in detail the rights and duties of the re-
spective parties, or it may consist of general terms, in which event
they depend upon various factors, such as custom and business
usage, to construe their agreement for them.

Usually no particular formalities are essential to such an appoint-
ment; it may in most cases be either written or oral. To this rule
there are two well-defined exceptions. First, where the purpose
of the agency can be fulfilled only by the signing of a formal docu-
ment under seal, the agency must be created under seal. Where a
formal sealed instrument is used for the conferring of authority
upon the agent, he is said to possess a power of attorney. 2

In addition to the above, the law in the majority of the states
requires that any agent who is given power to sell or to convey any
interest in or concerning real estate must obtain such power by a
written authorization from the principal. The ordinary real estate
broker, however, would not need a written agreement, as his au-
thority is merely to find a buyer with whom the seller is willing to
contract. Normally, he is not given any authority to enter into a
binding contract to convey the property and to sign his principal's
name thereto.

Some few states go so far as to hold that the authority must pos-
sess the same dignity as the act to be performed. In these states
an agent who possesses authority to sign a contract which is re-
quired to be in writing must receive his appointment by an instru-
ment in writing. Such is not the law in most states.

In any of the cases suggested, the agency may be disclosed in
such a manner that the agent acts openly for his principal, or he

a See form # 1.



108 AGENCY

may act in his own name without disclosing the fact that he is rep-
resenting another. In the latter case the employer is known as an
undisclosed principal.

Sec. 7. Authority by estoppel. No agency ever arises without
some action or conduct on the part of the principal. The proposed
agent cannot by his own conduct alone establish the relationship.
An agency is a matter to be proved, and third persons dealing with
an agent do so at their peril. The duty rests upon the third party
to ascertain the nature and extent of the agent's authority. Gen-
erally speaking, if the agent hasjiojuj^ it is insufficient to
authorize the paTticu!^

n^e^rlK^ often develop under which the principal,

because of his conduct, is estopped to deny the existence of an
agency. An agent under such conditions is called an ostensible
agent, and the agency is said to arise by estoppel. Two factors are
essential in order to create an agency by estoppel: (1) The princi-
pal must conduct himself in such a manner as to lead third parties
reasonably to believe that an agency exists. (2) The third party
must know of such conduct and act in reliance thereon. 3 No es-
toppel can arise except where the third party relies upon facts
known to him at the time he transacts business with the agent,
which facts would have led a reasonably prudent person to assume
that an agency existed.

An agency by estoppel may arise from a course of dealing on the
part of the agent, which is constantly ratified by the principal, or it
may result from the agent's holding himself out as such without any
dissent on the part of the principal and under conditions where the
principal owed a duty to speak. To illustrate: Upon several oc-
casions A indorses his principal's name to checks and has them
cashed at the bank. The principal has never given the agent such
authority, but no objection is raised until the bank pays one of the
checks, the proceeds from which have been appropriated by the
agent. The principal then attempts to recover from the bank.
Clearly, by ratification of the agent's previous misconduct, the
principal has led the bank reasonably to assume that the agent
possesses such authority.

Sec. 8. Agent's power to appoint subagents. Agents are usu-
ally selected because of their personal qualifications. Owing to
these elements of trust and confidence, a general rule has developed
that an agent may not delegate his duty to someone else and clothe
the latter with authority to bind the principal. An exception has
arisen to this rule in those cases in which the acts of the agent are

"Pettinger v. Alpena Cedar Co.. 1913, 175 Mich. 162, 141 N.W. 535; p. 548.



CREATION OF THE AGENCY 109

purely ministerial or mechanical. An act which requires no dis-
cretion, and is purely mechanical, may be delegated by the agent to
a third party. 4 Such a delegation does not make the third party
the agent of the principal or give him any action against the prin-
cipal for compensation. The acts of such third party become in
reality the acts of the agent and bind the principal only so long as
they are the authorized acts of the original agent. Acts which in-
volve the exercise of skill, discretion or judgment may not be dele-
gated without permission from the principal.

The agent may, however, have power to appoint subagents for
his principal in such a manner as to make them agents of the prin-
cipal. Such a power on the part of the agent is rarely implied, and
the situation must be such as to make it impossible to carry out the
purpose of the agency without the appointment of such agents.
Thus, a manager who is placed in charge of a branch store is pre-
sumed to possess the necessary authority to employ the required
help.

Ratification

Sec. 9. Definition. An agent may purport to act for another
when, as a matter of fact, he possesses no authority to do so. Con-
tracts entered into under such circumstances are ineffective unless
they are subsequently adopted by the principal. Ratification coi>
sistsofjh^affirmance^f an actjperformed^by ojne party for. another
without" authority. Such affirmance cures the defect of lack of
authority, and the relation of the parties assumes the status that
would have existed had authority been granted before the act took
place.

Sec. 10. Conditions required for ratification. Various condi-
tions must exist in order that ratification be effective and thus
bring about a contractual relation between the principal and the
third party. It should be borne in mind in this connection that
ratification is used only where no authority, either actual or other-
wise, can be shown. Furthermore, by reason of ratification, the
authority reverts back and becomes^ effectiyeL^S__Qj[JLhe date of Jhe
acFpTer formed by TKe^aent7 Because of this fact, ratification ^an
beTelfective onlywhe^ were ca-

pable^ doing the act at^the. time JjjLwasjp^^
capable at the time of^r^l^^tion. For this reason a corporation
contracts made by its promoters before the corpora-



tion was formed. For the corporation to be bound by such agree-
ments a novation or assumption of liability must be shown. Rati-

4 Groscup v. Douney, 1907, 105 Md. 273, 65 Atl. 930; p. 549.



110 AGENCY

fication is impossible because the corporation was not in existence
when the agreement was formed and could not possibly have en-
tered into a contract at that date.

Sec. 11. Other conditions. An agent's act may be ratified
only when he holds himself out as acting for the one who is subse-
quently charged with the agreement. In other wordsjthe agent
must have professedjtp_aci^a^an agent. A person who professes to
BfcT "for "himself and who makes a Contract in his own name does
nothing which can be ratified even though he intends at the time to
let another have the benefit of his agreement. It isjpgcause ofjthis
fact^that an agent of an undisclosed principal, who exceeds iii& ai>
thority, may neyer~Hhd~hTs pr^^

islater adopted by the principal. The agent in such a case does not
disclose his principaj.

The states are slightly in conflict as to whether the third party
may withdraw before ratification takes place. The better view,
and that which apparently has the support of most of the states, is
to the effect that the third party may withdraw from the transaction
at any time before it is ratified by the principal. If not permitted
to withdraw, he would be unable to hold the principal and at the
same time would not be free to act with others concerning the sub-
ject matter until the principal had exercised his option. It seems
[>nly fair, therefore, to permit the third party to withdraw at any
time before the principal has indicated his adoption of the transac-
tion. However, it should be pointed out that ratification does not
require notice to the third party. As soon as conduct constituting
ratification has been indulged in by the principal, the third party
loses his right to withdraw.

Furthermore, it is laid down as a general principle that_xatifica-
tion does not bind the j)rincip_al .unl.esa.lie. acts with, lull knowledge
of~aH Ih~e~lnTportant facts. Of course, where ratification is ex-
pre^sed and the principal acts without any apparent desire to know
or to learn the facts involved, he may not later defend himself on
the ground that he was unaware of all the material facts. Where,
however, ratification is to be implied from the conduct of the prin-
cipal, it must be apparent that he acts with complete understanding
of all important details. Thus, A, a salesman with authority only
to solicit orders, contracts to sell certain of his principal's goods to
T 7 , and signs P's name to the order. As an inducement to T to
enter into the agreement, A sells all of the articles at a 10 per cent
discount. A informs P of the sale, and the duplicate sales slip is
filed. At the time the order is ready to be shipped, it is noted for
the first time that the discount is to be allowed. Clearly no ratifi-
cation can be implied from P's conduct.



CREATION OF THE AGENCY 111

A few states hold that a principal may not ratify an unauthorized
act after all risk involved in the contract has passed. However,
most of the states appear to hold to the contrary and allow a prin-
cipal to ratify an unauthorized policy of insurance after a fire loss
has occurred.

Sec. 12. Conduct constituting ratification. What conduct on
the part of the principal will amount to ratification? Ratification
may be either express or implied. Where^ertamjormalitie such
as a writing or an authorization under seal, are required to create a
particular agency, the ratificati^m^^ rjemurgH f r

the creation of the agency^ Aside from this, any conduct which
definitely indicates an intention on the part of the principal to
adopt the transaction will constitute ratification. It may take the
form of words of approval to the agent, a promise to perform, or
actual performance, such as delivery of the product called for in
the agreement. Accepting the benefits of the contract or basing a
suit on the validity of an agreement clearly amounts to ratification.
l^ mentionedL tiiatjmjin



may not be ratified_.in .part ^ and rejected in part. 5 The principal
cannot accept the benefits and refuse to assume the obligations.
Because of this fact it is said that a principal, by accepting the
benefits of an authorized agreement, ratifies the means used in pro-
curing the agreement unless, within a reasonable time after learn-
ing of the true facts, he takes steps to return, so far as possible, the
benefits which he has received. 6

Some conflict exists as to whether silence or inaction on the
principal's part can be construed as ratification. Where the situa-
tion is such that failure to speak misleads the third party, causing
him to rely upon the validity of the agent's acts, it seems that a
duty to speak develops. Failure to protect the third party by
prompt disaffirmance of the agent's acts after they are known by
the principal is likely to result in ratification.

Review Questions and Problems

1. Give a definition of agency. What are the parties to an agency
relation called? How many parties are necessary before the agency
relation can function?

2. The roof of P's building needed repairs. He had A inspect it and
estimate what it would take to put it in first-class shape. It was esti-
mated that the cost would be $400, whereupon P contracted with A for
the repair of the roof at that figure. In performing the work it became
necessary for A to purchase $250 worth of materials. The materials
were purchased on credit. Is P liable for the materials in case A fails
to pay for them?

3. Who may be an agent? What is the difference between an actual
and an ostensible agent? Is any particular form required for the ap-
pointment of an agent?

4. P authorized A to borrow $500 of C and to sign P's name to a note
for that amount. A requested one B to sign P's name to the note, which
B did in the presence of A. Is P liable on the note?

5. A operated a meat market in the name of his mother. He also de-
posited the money in his mother's name and she signed a number of
checks in blank with which A might pay the bills. She never gave her
son any authority to represent her, and he was actually carrying on his
own business. The business failed and one of the creditors, who had
relied upon the credit of the mother, desires to recover from her. May
he do so?

6. What is meant by ratification? Name three acts that would con-
stitute implied ratification.

7. A entered into a contract with T for P for the purchase of 300
bushels of potatoes at 50 cents a bushel. A possessed no authority to
represent P, and T attempted to withdraw from the contract before it was
ratified by P. Was the rescission effective?

8. May an agent's act be ratified where he presumes to act in his own
name, although it is his intention to give a principal the benefit of his
action? May an act be ratified when the principal does not exist at the
time the agent acts?




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