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 organization, 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 century 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 relations 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 developed. 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 relationship 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 contracts 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 performance 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 pursued in bringing aboutTEe ^ result^ he is deemed an independent contractor 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 established. 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 result, 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 materials, 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 authority has been expressly conferred by the principal, while an ostensible 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 employment is of a continuous nature. A special agent is created usually for only a single transaction. Under existing law little reason 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 recent 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 contract 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 respective 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 appointment; 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 document 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 authority 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 possess the same dignity as the act to be performed. In these states an agent who possesses authority to sign a contract which is required to be in writing must receive his appointment by an instrument 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 representing 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. Generally 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 principal 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 estoppel 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 occasions 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 usually 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 discretion, 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 principal 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 involve the exercise of skill, discretion or judgment may not be delegated 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 principal. 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 presumed 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. Contracts 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 conditions 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 otherwise, 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 capable^ 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 agreements a novation or assumption of liability must be shown. Rati4 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 subsequently 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 subject 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 transaction. 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_xatification 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 expre^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 principal, 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 ratification 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 principal 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 procuring the agreement unless, within a reasonable time after learning 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 situation 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 estimated 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 appointment 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 deposited 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 constitute 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?