Agency & Partnership Professor Donald J. Kochan Class 14.

Agency & PartnershipAgency & PartnershipProfessor Donald J. KochanProfessor Donald J. Kochan

Class 14Class 14

Today’s MaterialsToday’s Materials

Pages 361-391Pages 361-391

Undisclosed PrincipalUndisclosed Principal

IntroductionIntroduction Do you or must you know WHO you are Do you or must you know WHO you are

really dealing with? How does that really dealing with? How does that question affect responsibility and reliance?question affect responsibility and reliance?

Must an agent disclose the identity of or Must an agent disclose the identity of or existence of a principal?existence of a principal?

How is the agent responsible if or when How is the agent responsible if or when he doesn’t disclose a principal?he doesn’t disclose a principal?

What are the monitoring responsibilities of What are the monitoring responsibilities of a principal?a principal?

Restatement (Third) of Agency, sec. 1.04Restatement (Third) of Agency, sec. 1.04““(1) (1) Coagents.Coagents. Coagents have agency relationships with the same principal. A Coagents have agency relationships with the same principal. A

coagent may be appointed by the principal or by another agent actually or coagent may be appointed by the principal or by another agent actually or apparently authorized by the principal to do so.apparently authorized by the principal to do so.

(2) (2) Disclosed, undisclosed, and unidentified principals.Disclosed, undisclosed, and unidentified principals.

(a) (a) Disclosed principal.Disclosed principal. A principal is disclosed if, when an agent and a third A principal is disclosed if, when an agent and a third party interact, the third party has notice that the agent is acting for a principal party interact, the third party has notice that the agent is acting for a principal

and has notice of the principal's identity.and has notice of the principal's identity.

(b) (b) Undisclosed principal.Undisclosed principal. A principal is undisclosed if, A principal is undisclosed if, when an agent and a third party interact, the third when an agent and a third party interact, the third party has no notice that the agent is acting for a party has no notice that the agent is acting for a

principal.principal.

(c) (c) Unidentified principal.Unidentified principal. A principal is unidentified if, when an agent and a A principal is unidentified if, when an agent and a third party interact, the third party has notice that the agent is acting for a third party interact, the third party has notice that the agent is acting for a

principal but does not have notice of the principal's identity.”principal but does not have notice of the principal's identity.”

Restatement (Third) of Agency Restatement (Third) of Agency sec. 6.03sec. 6.03

““When an agent acting with actual authority makes a contract on behalf of When an agent acting with actual authority makes a contract on behalf of an undisclosed principal,an undisclosed principal,

(1) unless excluded by the contract, the principal is a party to the (1) unless excluded by the contract, the principal is a party to the contract;contract;

(2) the agent and the third party are parties to the contract; and(2) the agent and the third party are parties to the contract; and

(3) the principal, if a party to the contract, and the third party (3) the principal, if a party to the contract, and the third party have the same rights, liabilities, and defenses against each other as if the have the same rights, liabilities, and defenses against each other as if the

principal made the contract personally, subject to principal made the contract personally, subject to §§ 6.05––6.09..

Comment:Comment:

a. Scope and cross-references.a. Scope and cross-references. This section states the basic principle that, when an This section states the basic principle that, when an agent enters into a contract on behalf of an agent enters into a contract on behalf of an undisclosedundisclosed principalprincipal, the third party, the principal, , the third party, the principal, and the agent become parties to the contract. Comment and the agent become parties to the contract. Comment bb discusses the rationales for contractual discusses the rationales for contractual

liability when an agent acts on behalf of an liability when an agent acts on behalf of an undisclosedundisclosed principalprincipal. Comment . Comment cc discusses the discusses the circumstances that determine when an agent has made a contract on behalf of an circumstances that determine when an agent has made a contract on behalf of an undisclosedundisclosed

principalprincipal, as well as consequences for an , as well as consequences for an undisclosedundisclosed principalprincipal who becomes a party to a who becomes a party to a contract. Comment contract. Comment dd covers circumstances that may affect the rights and liabilities of an covers circumstances that may affect the rights and liabilities of an

undisclosedundisclosed principalprincipal, including contracts that explicitly or implicitly exclude an , including contracts that explicitly or implicitly exclude an undisclosedundisclosed principalprincipal. Comment . Comment ee discusses the position of an agent as a party to a contract made on behalf of discusses the position of an agent as a party to a contract made on behalf of

an an undisclosedundisclosed principalprincipal. Comment . Comment ff examines the rights and liabilities of examines the rights and liabilities of undisclosedundisclosed principalsprincipals as parties to sealed contracts and negotiable instruments. . . . “ as parties to sealed contracts and negotiable instruments. . . . “

Supplemental (non-required) Supplemental (non-required) Readings re sec. 6.03Readings re sec. 6.03

Westlaw Citation with comments, enter:Westlaw Citation with comments, enter: 6.03 Restatement of the Law — Agency Restatement Restatement of the Law — Agency Restatement

(Third) of Agency Chapter 6. Contracts And Other (Third) of Agency Chapter 6. Contracts And Other Transactions With Third Parties Topic 1. Parties To Transactions With Third Parties Topic 1. Parties To

Contracts Current through April 2009 S 6.03 Agent For Contracts Current through April 2009 S 6.03 Agent For Undisclosed Principal REST 3d AGEN § 6.03Undisclosed Principal REST 3d AGEN § 6.03

AmJur and ALR citationsAmJur and ALR citations Am.Jur.2d: AgencyAm.Jur.2d: Agency

1. Undisclosed Agency, Liability of Principal, Generally 1. Undisclosed Agency, Liability of Principal, GenerallyAm.Jur.2d: AgencyAm.Jur.2d: Agency

2. Undisclosed Agency, Liability of Agent, Generally 2. Undisclosed Agency, Liability of Agent, GenerallyALR ALR

3. Right of Defendant in Action by Undisclosed Principal to 3. Right of Defendant in Action by Undisclosed Principal to Avail Himself of Defenses or Set-Offs That Would Have Avail Himself of Defenses or Set-Offs That Would Have

Been Available in an Action by the Agent in His Own Right Been Available in an Action by the Agent in His Own Right on the Contracton the Contract

Introduction (cont.)Introduction (cont.) Ultimately about liabilityUltimately about liability

Subterfuge, Misleading Representations, Pretending, Subterfuge, Misleading Representations, Pretending, Stealth, Fraud, etc. issuesStealth, Fraud, etc. issues

Remember there is 3 v. P, 3 v. A, P v. A, and A v. P in Remember there is 3 v. P, 3 v. A, P v. A, and A v. P in these situations (and, of course sub-A’s mix it all up, these situations (and, of course sub-A’s mix it all up, where you add 3 v. SA, P v. SA, P v. A because of SA, where you add 3 v. SA, P v. SA, P v. A because of SA,

SA v. P, SA v. A, and A v. SA) – Understand all the SA v. P, SA v. A, and A v. SA) – Understand all the possible litigation positions; understand the election possible litigation positions; understand the election

rule and the abandonment of the election rulerule and the abandonment of the election rule

Introduction (cont.)Introduction (cont.) The textbook authors ask, “What accounts for this The textbook authors ask, “What accounts for this unusual doctrine, where a person can become a party unusual doctrine, where a person can become a party

to a contract in the absence of a manifestation of to a contract in the absence of a manifestation of mutual assent?” – Answer? Think back to our previous mutual assent?” – Answer? Think back to our previous

discussion of equitable accountability in the face of discussion of equitable accountability in the face of two innocent parties and who should bear the burden two innocent parties and who should bear the burden

(ex ante and ex post).(ex ante and ex post).

Are contracts “inherently personal”? / reliance issuesAre contracts “inherently personal”? / reliance issues

Walt Disney acquisition example is very poignantWalt Disney acquisition example is very poignant

Assertion of Rights by the Undisclosed Assertion of Rights by the Undisclosed PrincipalPrincipal

Ability of principal to herself enforce the Ability of principal to herself enforce the contract made by the agent even if the contract made by the agent even if the third party didn’t know of the principalthird party didn’t know of the principal

The “if the law says I can be sued by The “if the law says I can be sued by you, then I can also sue you” doctrine – you, then I can also sue you” doctrine –

all about equity -- advantages and all about equity -- advantages and disadvantagesdisadvantages

Parol Evidence RuleParol Evidence Rule

““the act of the agent is the act of the act of the agent is the act of principal” for purposes of this principal” for purposes of this

evidentiary rule unless the principal evidentiary rule unless the principal is expressly excludedis expressly excluded

Reference your notes from EvidenceReference your notes from Evidence

Sealed ContractsSealed Contracts

Generally a sealed contract does not Generally a sealed contract does not make it “undisclosed” to the principal or make it “undisclosed” to the principal or

the third partythe third party

Must check statutesMust check statutes

Contrast with traditional common law Contrast with traditional common law rulerule

Exceptions to Undisclosed Principal Exceptions to Undisclosed Principal LiabilityLiability

How do each of these facts affect liability. How do each of these facts affect liability. Can we be Oz hiding behind the curtain?Can we be Oz hiding behind the curtain?

Personality/Trust AvoidancePersonality/Trust Avoidance

Competitive IssuesCompetitive Issues

Subterfuge issues, againSubterfuge issues, again

Kelly Asphalt Block Co. v. Kelly Asphalt Block Co. v. Barber Asphalt Paving Co.Barber Asphalt Paving Co.

Warranty caseWarranty case Using an agent to deal with a competitor; the Using an agent to deal with a competitor; the

agent is the “ostensible principal” because th agent is the “ostensible principal” because th actual principal feared his presence, if “disclosed”, actual principal feared his presence, if “disclosed”, would preclude consummation of the transaction.would preclude consummation of the transaction.

Can the contract be invalidated for “mistake”?Can the contract be invalidated for “mistake”? Is fraud or misrepresentation needed? Yes; why?Is fraud or misrepresentation needed? Yes; why? What role did post-notice deliveries make in the What role did post-notice deliveries make in the

decision? Waiver?decision? Waiver? Contract law – meeting of the minds issuesContract law – meeting of the minds issues

Finley v. DaltonFinley v. Dalton Real estate case / fraudulent representations / Real estate case / fraudulent representations /

intended usesintended uses What is the necessity of disclosure?What is the necessity of disclosure?

Was there fraudulent concealment? Why would Was there fraudulent concealment? Why would it matter?it matter?

Materiality of “misstatement or Materiality of “misstatement or misrepresentation” issuesmisrepresentation” issues

How does purpose of buying the property How does purpose of buying the property matter?matter?

Silence v. Disclosure IssuesSilence v. Disclosure Issues Duty of Inquiry IssuesDuty of Inquiry Issues

NotesNotes

Read the notes following Read the notes following FinleyFinley to to reconsider that we are dealing with BOTH:reconsider that we are dealing with BOTH:

The Undisclosed Principle to be SuedThe Undisclosed Principle to be Sued

AndAnd

The Undisclosed Principal’s Rights to Sue The Undisclosed Principal’s Rights to Sue the Third Partythe Third Party

Unauthorized TransactionUnauthorized Transaction ExplicitExplicit

ImplicitImplicit

AssumedAssumed

____________________________

Notice/Knowledge of Third PartyNotice/Knowledge of Third Party

Factual InquiryFactual Inquiry

P v. A issues if P is found liableP v. A issues if P is found liable

Watteau v. FenwickWatteau v. Fenwick Transfer of beerhouse ownership and exclusivity Transfer of beerhouse ownership and exclusivity

cigar supplier agreement casecigar supplier agreement case ““principal is resposnible for all the acts of the principal is resposnible for all the acts of the

agent which are within the authority usually agent which are within the authority usually confided to an agent of that character, confided to an agent of that character,

notwithstanding limitations, as between the notwithstanding limitations, as between the principal and the agent put upon that authority.”principal and the agent put upon that authority.”

Third party “knew nothing of the existence of the Third party “knew nothing of the existence of the principal.” – Reliance/Estoppel Issuesprincipal.” – Reliance/Estoppel Issues

In other words, draft with authorization limitations In other words, draft with authorization limitations and scream it out to the world.and scream it out to the world.

Restatement (Third) of AgencyRestatement (Third) of AgencySec. 2.06Sec. 2.06

““An undisclosed principal may not rely on An undisclosed principal may not rely on instructions given an agent that qualify or reduce instructions given an agent that qualify or reduce the agent’s authority to less than the authority a the agent’s authority to less than the authority a third party would reasonably believe the agent to third party would reasonably believe the agent to

have under the same circumstances if the principal have under the same circumstances if the principal had been disclosed.”had been disclosed.”

Reliance Issues/Reasonable ExpectationsReliance Issues/Reasonable Expectations Does this give the agent too much discretion?Does this give the agent too much discretion? How does it incentivize principal monitoring?How does it incentivize principal monitoring?

But, are not the efficiencies in agency that the But, are not the efficiencies in agency that the principal can delegate and how do these rules principal can delegate and how do these rules

affect that?affect that?

Senor v. Bangor MillsSenor v. Bangor Mills Sole producer of nylon yarn case/shortage of Sole producer of nylon yarn case/shortage of

supply/secondary market issuessupply/secondary market issues

What were the issues of consent to buy and consent to What were the issues of consent to buy and consent to price as related to express or implied authority? price as related to express or implied authority?

““no authority to but . . . except as specified and agreed no authority to but . . . except as specified and agreed to from time to time . . .” – issue of authority and to from time to time . . .” – issue of authority and

responsibility of agent and how authority is controlledresponsibility of agent and how authority is controlled

Consider factual consent issue – how much discretion Consider factual consent issue – how much discretion of an agentof an agent

Senor v. Bangor Mills (cont.)Senor v. Bangor Mills (cont.) ““It is axiomatic that the existence of an agency relationship and, in large measure, It is axiomatic that the existence of an agency relationship and, in large measure,

the area it covers are determined by whatever agreement the parties have made the area it covers are determined by whatever agreement the parties have made as the circumstances under which the agent may and will act for the principal.”as the circumstances under which the agent may and will act for the principal.”

““An undisclosed principal who entrusts an agent with the management of his An undisclosed principal who entrusts an agent with the management of his business is subject to liability to third persons with whom the agent enters into business is subject to liability to third persons with whom the agent enters into

transactions usual in such business and on the principal’s account, although transactions usual in such business and on the principal’s account, although contrary to the directions of the principal.” Restatement of Agency sec. 195.contrary to the directions of the principal.” Restatement of Agency sec. 195.

From Notes: “An undisclosed principal may not rely on instructions given an agent From Notes: “An undisclosed principal may not rely on instructions given an agent that qualify or reduce the agent’s authority to less than the authority a third party that qualify or reduce the agent’s authority to less than the authority a third party would reasonably believe the agent to have under the same circumstances if the would reasonably believe the agent to have under the same circumstances if the

principal had been disclosed.” Restatement (Third) of Agency sec. 206(2). principal had been disclosed.” Restatement (Third) of Agency sec. 206(2).

If you believe you are an agent, “look before you leap” – or at least ask and clarify authority; If you believe you are an agent, “look before you leap” – or at least ask and clarify authority; same for principals in choosing an agent.same for principals in choosing an agent.

Irrelevance of third party acceptance issueIrrelevance of third party acceptance issue

Payments and Setoffs andPayments and Setoffs andOil Supply Company Inc. v. Oil Supply Company Inc. v.

Hires Parts Services Inc.Hires Parts Services Inc.

Will not be tested but please Will not be tested but please understand that it plays a role in the understand that it plays a role in the relevant relationships and availability relevant relationships and availability

of remedies.of remedies.

Concluding RemarksConcluding Remarks

Principals cannot hide behind agentsPrincipals cannot hide behind agents Agents cannot hide behind principalsAgents cannot hide behind principals

Justifiable reliance controls re Third PartiesJustifiable reliance controls re Third Parties Representations and Notice and Representations and Notice and

Misrepresentations played key roles in Misrepresentations played key roles in these casesthese cases

Consider the importance of principal Consider the importance of principal monitoring to avoid liabilitymonitoring to avoid liability

Consider drafting issues to control agentsConsider drafting issues to control agents