AGENCY
Efficiency – is corporate law efficient?
Pareto When all parties experience a net utility gain from the transaction (or at least no loss)
Efficiency - This efficiency harms nobody, absolutely nobody. So a rule prohibiting fraud
would not be Pareto efficient.
- Assumes the existing distribution of wealth – so A could have 20usd and B 0usd.
Then A has $20 and B has $1 (that’s Pareto efficient). But is B happy? Not really.
So it could be that something is Pareto efficient yet that says nothing about the
distribution of wealth.
Kaldor-Hicks A move that helps some people, may hurt others, but the gains to the winners are big
Efficiency enough to offset the losses to the losers.
- Total gains exceed total costs – the pie gets bigger.
(WE FOLLOW - Internet invention was probably efficient in this way.
THIS TYPE OF
EFFICIENCY)
Efficiency “Courts rarely, if ever, use the language of efficiency to justify their decisions.” Instead
AND fairness they use “fairness.” So why do we think judges care about efficiency?
- Corporation law talks about fairness what it means it’s fairness to SHs.
- Protecting their interests being fair to them is generally consistent with
increasing wealth in Kaldor-Hicks efficient fashion.
TOOLS FROM ECONOMIC THEORY:
Transaction-cost theory
The explanation on why we have corporations is that they reduce transaction costs – they pour resources
into one place and then decide what to do with those resources.
Agency theory
Agency theory – a transaction may be motivated, in part at least, to serve an interest of a controlling agent
rather than the interest of her principal. I can invest in Google, they are spending my money, there is a risk
that they will look at their interests, not mine.
▪ Jensen further asserts that the firm could be best understood as a complex of contracts between
owners of various factors of production of the firm.
▪ Basically, where there is conflict between company management (agent) and company
shareholders (principals) there will be agency costs.
▪ Shareholders want the company to maximise the value of their shares, management sometimes
makes decisions that aren’t aligned with shareholders’ interests. So for example management
might increase its salaries that will hurt the company.
▪ Agency cost – any cost that is associated with exercise of discretion over principal’s property by an
agent.
Three types of agency costs:
Monitoring Costs that owners spend to make sure that agents are loyal to owners, given the
costs potentially divided interests of agents.
Example – fees that public company shareholders pay to auditors. Auditors watch the
money on behalf of SHs.
Bonding Costs that agents spend to prove to owners they will be loyal.
costs Example – paying tuition by university students, proving to your future employer that you
are loyal.
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,Residual Agency costs arising from differences in the agent’s and principal’s interests even after
costs monitoring and bonding have been tried.
These are leftover costs, once the agent has showed loyalty (bonding costs), principal
spent costs (monitoring costs) watching the agent, residual costs are incurred – so I have
to pay someone to watch the agents even though loyalty has been established.
Our obsession with agency costs and transaction costs
Reducing agency costs is the mission of corporate law. BUT agency costs cannot be completely
eliminated from the society (we still have residual costs). Everything we do to reduce agency costs will
lead to an increase in transaction costs – we can watch these guys more carefully, but we will incur
higher costs to oversee them.
Ex ante price internalization – two parties thinking about what will happen in the future make plans,
internalize it today.
Jensen and Meckling assume that the principal bears all these costs.
- Bonding costs sounds like it’s spent by the agent – ex ante price internalization – in anticipation
of the agents future compensation, she is willing to pay bonding costs today.
- Example: Your salary you will be paid down the road reflects the money that you have to spend
now as agent.
AGENCY FORMATION, TERMINATION, PRINCIPAL’S LIABILITY
Formation S1.01 UPA (agency definition): Agency is the fiduciary relationship that arises when
one person (principal) manifests assent to another person (agent) that an 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.
→ Agency arises out of consent.
→ Agent has legal power to bind the principal to a third party (with respect to
the principal’s property).
The scope of the agent’s authority
Agents may be:
Special agents General agents
Agency limited to single act. Agency involving many acts.
Disclosure that third parties have about agency
Principals may be:
Disclosed principals Undisclosed principals Partial principals
Ts know that A acts on Ts do not know that A is an Ts know A is an agent,
behalf of particular P. agent. but not identity of P.
Control P has over A:
Employee – detailed and completed control (aka servant).
Independent contractor – less extensive control.
Termination → Either P or A can terminate agency at any time.
→ BUT IF, contract fixes a set term of agency: damages for breach of contract will
be available.
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, → what agent wanted in this situation is that the court forcing her to run the
hotel by way of specific performance.
→ If P revokes A’s authority, is this agreement enforceable by way of specific
performance? NO, courts will not do that, it will not force the parties to be in
the agency agreement. Why? The court will award damages compensating the
agent for all investments that she made and the expectations of profit that she
had at the time the principal revoked her authority.
IS THERE AN Cargill case:
AGENCY Facts:
RELATIONSHIP?
• Plaintiffs brought action against defendant Cargill and
Warren to recover losses sustained when Warren defaulted on
the contracts made with plaintiffs for sale of grain.
• Warren purchased grain from farmers and then resold it.
• Warren got a loan from Cargill bank. Under contract,
they also agreed that Warren’s sales would be deposited with
Cargill.
• In return for the loan, Cargill was given right of first
refusal to purchase market grain sold by Warren.
• Later Warren agreed to provide Cargill with annual financial statements. Cargill
was also given the right to access Warren’s books.
• Warren was not to make capital improvements or repairs in excess of 5k
without Cargill’s prior consent.
• Warren was not become liable as guarantor on another’s indebtedness or
encumber its assets except with Cargill’s permission.
• Warren needed consent from Cargill before it would be allowed to declare
dividend or sell and purchase stock.
• Cargill later contracted with Warren to act as its agent to seek growers of some
wheat. So Warren was Cargill’s agent. Warren entered into contracts for the
growing of wheat seed, with Cargill named as contracting party.
• Warren got into financial troubles. Plaintiffs alleged that Cargill was jointly
liable for Warren’s indebtedness as it had acted as principal for the grain
elevator.
Holding:
I. Warren was agent, Cargill was principal.
II. But didn’t we say that agency requires consent? Was there a consent here?
Did Cargill intend to create an agency? No, Cargill did not intend that.
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, III. The court still found agency because the parties’ conception of an agency
does not control. Instead, we can infer consent to an agency through the
actions of the parties, not their conception of the relationship.
IV. The court observed 3 elements of formation of agency under s1.01 UPA:
1) A manifestation of consent from one person to another AND
2) That other shall act on the principal’s consent and subject to her
control AND
3) Consent by that other (the agent) to do so.
I. In this case: there was all kind of things Cargill was doing: they had a right of
first refusal on the grain, they also made recommendations that Warren
should reduce its seed grain in cash.
II. They also made all kinds of recommendations that Warren should reduce its
seed grain in cash and grain inventories; that they should improve their
collection of accounts receivable.
III. Even though these ideas were never implanted by Warren, this suggests that
Cargill was Warren’s principal in the eyes of common law because even when
the agent is acting somewhat autonomously, you can still find an agency if
there are sufficient interactions between the principal and the agent.
IV. Cargill argued that it was just a bank – all it did was lend money to someone
and so it said that it can’t be that every bank is a principal to another.
i. This argument didn’t persuade the court, Cargill went further than a
bank:
ii. The bank was the buyer of the grain;
iii. they were making suggestions as to how the inventory was managed;
iv. also, Cargill had specific business motivations for doing this, you
wanted their grain, you were making a supply arrangement for
yourself. This gave the court a sense that something more than merely
the lender-client relationship is happening.
v. Counter argument: to lend money as a bank you have to keep an eye
on your borrowers. BUT it still doesn’t make them principals!
PRINCIPAL’S LIABILITY IN CONTRACT
ACTUAL AUTHORITY
The authority that a reasonable person in the agent’s position would infer from the conduct of P.
s2.01 – P’s communications to A.
Express actual authority Implied actual authority
• Communication was explicit. • A’s actions were reasonably calculated to
discharge P’s explicit instructions.
APPARENT AUTHORITY
S2.03 – authority that a reasonable third party (T) would infer from the statements or actions of the
principal (P).
White v Thomas
Facts:
• Simpson works for White. Simpson signed closing papers for White on property sales before.
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, • White gives Simpson authority to attend auction for land and bid up to 250k for a land except for
a house.
• Thomas couple win the action for house. Simpson wins the action for the land but for 327k.
• Simpson realises he messed up and agrees to sell some land to the Thomas couple.
• White is pissed but still agrees to pay for the land but refuses to sell some portion of land to
Thomas couple.
Holding:
I. Actual authority to sell any land by agent to the couple?
i. NO. Principal’s order was to just buy the land, not to sell it.
II. Inherent authority?
i. NO. Selling something was not necessary to accomplish the assigned task (the purchase of
land).
III. Apparent authority?
i. NO. Look into the minds of the third party and see if it had any reason to believe that
principal gave agent the specific authority (in this case sell the land).
ii. Apparent authority does not depend on anything the agent does or says! So it didn’t
matter that the agent said he was allowed to sell the land.
INHERENT AUTHORITY
Agent’s power to bind based on court’s view about reasonableness of third parties beliefs. This is a
gap filling device so courts can reach cases not addressed by actual/apparent authority.
S161 – even if P forbid A from taking a step, if T understands that this is normally included in what this A
would do then P can be held liable. Agent can bind principal (whether disclosed or undisclosed) to an
unauthorized contract, if A would ordinarily have the power to enter such a contract and third party T
does not know that matters stand different.
S194 – A can subject P for liability for acts usual or necessary to transactions A is authorized to conduct.
S8A – the reason: a way to protect T rather than P in cases where T dealt with A acting on P’s behalf.
S2.05 (TR) – agency by estoppel – p23 SS.
The agent will have implied actual authority to do such things as are incidental to the performance of his
duties, eg an agent who has express actual authority to sell cosmetics on behalf of the principal will have
implied actual authority to receive payment on the principal’s behalf.
Gallant v Isaac
Facts:
• Gallant (P) sells car insurance to Isaac (T) through its agent Thompson (A).
• Policy says any changes to policy have to be authorized by P.
• Isaac (T) trades up and A agrees to insure new car immediately. T will come to sign papers a few
days later. Before the papers are signed, T has a car accident.
• P denies insurance because A was not authorized to renew T’s policy without P’s authorization.
Holding:
I. T could have reasonably believed that A had authority to bind insurance coverage.
• Second, agent also had common practice of telling its insured that they were bound despite not receiving
payment until later, violating instructions by principal and provisions in the policy.
• Third, the court looks to the agent’s direct and indirect manifestations and determines whether the third
party could have reasonably believed that the agent had authority to conduct the act in question. Here,
Isaac (third party) could have reasonably believed that agent had authority to orally bind coverage. Isaac’s
past dealings were all through agent. Direct communication between principal and Isaac never occurred.
SO, it was reasonable for Isaac to take at face value agent’s communication that coverage was bound and
that she could come at the end of the weekend to pay for the policy renewal.
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, → Isaac had no reason to second guess a direct communication by agent stating coverage was bound,
particularly since that was a common practice of agent… as such we find that agent’s direct and indirect
manifestation over time, and its direct verbal communication to Isaac that coverage was bound, lead Isaac
to reasonably believe that agent had authority to renew insurance policy.
• Fourth, Isaac lacked notice that agent didn’t have authority to verbally bind coverage.
→ IF, principal informed Isaac or basically customers that agent couldn’t verbally bind coverage, principal
would have given notice to Isaac.
II. This is the case where inherent authority fills a gap and says even though we can’t see that T
knows what P is doing, it’s enough that T thought that A’s job necessarily came with the power
to say T is bound today.
Policy
• Benefit of agency – allows T and P who never met each other to enter into a contract. The cost
of is that information is lost (they don’t talk, don’t know each other so don’t know how much
power A actually has). Question court asks is which party in this game could at the least cost
discover that information.
• In White – court focuses on fact that T could have asked questions of P to understand the A’s
authority. Court believed that T could do it easily on the least costly basis so they imposed
liability on them.
• In Gallant – court believes it would be very costly on T to investigate whether has authority to
make changes in P’s policies. So, court shifts information cost to P and tells P you have to be
clearer with A. The effect is that court doesn’t want to put the burden on customers to find out
what the policy is between A and P.
PRINCIPAL’S LIABILITY IN TORT
Restatement §§ 2.04, Principals are liable for agents’ torts IF:
7.07 (SS 23, 35): 1) Agent is an employee rather than independent contractor; AND
▪ S7.07(3) – Employee – focuses on control exercised (or that
could be exercised) by the principal.
2) Tort committed within scope of employment.
Economics
Incentives – if P’s behaviour can reduce accidents (supervise employees)
then it makes sense to hold P liable because if they hold P liable, P will take
more care watching her employees. If P isn’t monitoring then behaviour
can’t affect whether A causes a tort. Holding P liable won’t affect social
costs of accidents.
Response – Uber prefers independent employees not employees.
Why not impose principal liability for all agent’s torts? – but P would have
to monitor all the time which would be super costly (monitoring costs).
Restatement (Third) A principal is liable for a class of intentional ‘communicative torts’ when her
Agency §7.08 and 7.08 agent speaks on her behalf with apparent authority to do so.
comments a & b:
Apparent authority
Humble Oil v. Martin
Facts:
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, • Humble gas station operated by Schneider.
Humble leases the station and equipment to Schneider;
“Commission Agency Agreement” says Humble can
“require[]” actions by Schneider.
• Schneider has authority to hire/fire, but little
else. Hires Manis.
• Mrs. Love parks her car at the station but leaves
the break off; car hits Martins.
• Love and Manis found negligent.
• Is Humble liable? – is Schneider an employee or
independent contractor?
Holding:
I. Is Humble liable? – is Schneider an employee or independent contractor?
II. Humble is liable for Manis’s tort.
III. Schneider is an employee – Humble exercises control over Schneider (who employed Manis)
because of the Commission Agency Agreement – Humble could ask Schneider to do anything
Humble wanted. By exercising this much control, Schneider is an employee of Humble.
IV. Why exactly? – Humble is paying is the costs and gets most of the PROFITS – the person taking
the profit/loss is in the best position to monitor what’s happening in the business. Holding liable
those with the profits therefore makes sense because they have the money to monitor.
V. [Counterargument to this judgment] – ok Humble had control but not over the decisions that led to
the accident: Schneider had the precise control over hiring and firing people (like Manis). Humble
had no control over hiring / firing people.
Hoover v. Sun Oil Co.
Facts:
• Sunoco has a franchise agreement with
Barone (station operator). Station operator
hires a station attendant who smokes while
filling up the tank, there is fire, Hover is
injured. Hover sues.
Holding:
I. Is Sunoco liable? – is Barone an employee or independent contractor?
II. Barone is an independent contractor – Sunoco had no control over Barone (in Humble, the
contract expressly said we can tell you what to do).
III. Why exactly? – Barone gets all the PROFITS –the person taking the profit/loss is in the best
position to monitor what’s happening in the business. Holding liable those with the profits
therefore makes sense because they have the money to monitor.
WHO IS DOING THE CONTOROLLING?
Humble / Schneider Sunoco / Barone
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,Humble set hours of operation. Barone set hours of operation.
Schneider sold only Humble products. Barone could sell non-Sunoco products.
Humble held title to goods that Schneider sold on Barone took title to goods.
consignment.
Lease was terminable at will. Lease was terminable once annually.
Rent was ‘at least in part, based on the amount of Barone had ‘overall risk of profit and loss’ though
Humble’s products sold’ and Humble paid most subsidies from Sunoco to ensure competitiveness.
operating costs (75% of utility bills).
THE ABOVE PROFIT FACTOR IS V IMP. THE ABOVE PROFIT FACTOR IS V IMP.
WE FIND WHO HAS CONTROL BY LOOKING AT WE FIND WHO HAS CONTROL BY LOOKING AT
PROFITS. PROFITS.
The court wants to hold those liable who have The court wants to hold those liable who have
control. control.
Humble could require periodic reports, Schneider ‘No written reports’ required; representative
to perform ‘such other duties’ as required. Peterson visited weekly in an advisory capacity.
Doctrine – where is the most efficient way to put liability?: why would we ever want to hold the oil
company liable if they can’t monitor closely and the gas station is better placed to do that? – if we
arrange it in a way that the main oil company never has any liability then they will never have incentives
to take care with the way they set up their franchises; they will escape responsibility for the harm they
are causing and this gives them reason to create harm. The most efficient way to put liability is to make
it dependent on the profits aspect. If someone captures more of the profits, it will take more care.
Imposing liability on those who don’t capture profits isn’t going to lead to more care because they don’t
have incentives anyway (they don’t capture the profits). We impose liability on those who take profits,
on those who can afford to take care.
AGENT’S DUTIES
Nature of ▪ An agent is a fiduciary of the principal.
agent’s ▪ Fiduciary – legal power over property held by fiduciary is held for the sole purpose
fiduciary of advancing the aim of a relationship pursuant to which she came to control that
relationsh property (it’s to advance the purposes of the principal). Fiduciary must exercise
ip good faith judgment.
Three categories of fiduciary duties:
DUTY OF • To obey principal’s commands while agency relationship continues.
OBEDIENC • The agent must obey what the agency documents say.
E
DUTY OF • S8.02 – agent has a duty not to acquire a material benefit from a third through the
LOYALTY agent’s use of agent’s position.
• S8.03 – agent can’t act on behalf of an adverse party (I agent can’t take the other side
of the transaction that you P have asked me to do for you).
o S8.06 – BUT agent can be adverse ONLY IF
1) P consents to it AND
2) A has to act in good faith and disclose it AND
3) There is fair dealing.
Why don’t we just completely disallow agents to be adverse?
Some transactions that might benefit some transactions to it would be lost – pie will be
lost. If might just happen that A is the best guy to buy the house of P. So we do allow this
to have more pie.
Why both disclose AND fair price?
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, Information asymmetry possibility – e.g. real estate agent will know much more than P.
Disclose solves the information imbalance and helps parties to come to a more fair deal
and do that with the backdrop of extra protection of the court deciding what’s fair if they
can’t agree.
Tarnowski (loyalty in agency)
Facts:
• Resop (A) takes 2k secret commission from T on sale of machine for Tarnowski (P)
who needed to purchase a machine. A lied that he investigated well and just took
T’s claims about the machine.
• P paid 9,5k for down payment.
• P sues T (sellers). P wins the case.
Holding:
I. P gets back 9,5k AND 2k of secret commission AND costs of lawsuit.
Gleeson (loyalty in trusts)
Facts:
• Gleeson (P) dies. Con (A) (close friend and tenant is executor and trustee under her
will). The will benefits Gleeson’s 3 kids.
• Con leases the Gleeson’s land for himself (from which he profits) because no one
could be found to lease it. Con increases the rent and pays 70% more for the land.
Another tenant is found next year.
• Con after filing the annual report is sued by beneficiaries as they object to it.
Holding:
I. S203 of trusts – all profits must go to trust (the money that someone earns from the
conflicted transaction must be returned to the trust).
II. Even though Con didn’t do anything wrong, no cheating nothing, he is liable – for
trusts, conflicted transactions are simply prohibited PERIOD.
Loyalty in agency Loyalty in trusts
Conflicted transaction is allowed provided Conflicted transaction is never allowed.
s8.06 conditions are met. Assumption in trust law – there will be so
much cheating, so we need to prohibit
completely. In Gleeson – is the P but not
doing lots of monitoring because P is dead
lol.
Why so harsh?
Deterrence in agency – this isn’t about compensating P! There are forms of conduct that
are hard to detect but once we find them we need to punish it so hard that the
wrongdoer won’t do it again. Holmes produced an article where he talked about the 'Bad
Man’ Math – if the overcompensation wasn’t in place, the wrongdoer would basically be
left profitable.
Deterrence in trusts – we care about deterrence and ensuring monitoring by principles.
But P who can’t monitor (like in trusts), we need even stricter standards than in cases
where they can monitor (like in agency).
DUTY OF • Duty to act as a reasonable person would act, in similar circumstances, in becoming
CARE informed and exercising the power conferred by principal.
• The duty to be careful when you are spending someone else’s money.
PARTNERSHIP
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, PARTNERSHIP
Partnership A business arrangement in which two parties (or more) are both principal and agent to
each other. Characteristics:
• All owners (“partners”) are liable as principals.
• All partners are also general agents.
• All general partners are jointly and severally liable for the debts of the
partnership, exactly like single principals are.
• All partners share equally in control—UNLESS they agree otherwise.
• Partners owe one another fiduciary duties (loyalty, care)
Why partnership?
• Sometimes the cost of being an individual principal is too high.
• All partners have aligned incentives – all partners have reasons to increase value.
FORMATION s6.1 UPA – partnership is association of 2 or more persons to carry on as co-owners a
business for profit.
S7 UPA – states rules of inference for judging whether partnership exists.
▪ Joint ownership of property alone or
▪ Sharing of gross revenues alone
▪ … will not make this a partnership.
S7(4) – BUT sharing of net profits is prima facie evidence of partnership unless the
profits are used for:
▪ Repayment of debt
▪ As wages
▪ As interest on a loan.
▪ NOTICE: the profits point just like in agency – those who share profits, share
control and because of that he is probably a partner for purpose of liability.
Is there a partnership? Consider 3 factors:
1) Control over the enterprise
2) Whether there is profit sharing
3) The intent of parties (however, the parties’ conception of the arrangement does
not control what it is as a matter of law)
Vohland v. Sweet
Facts:
• Sweet does apprenticeship with Vohland the Elder. Elder dies. Vohland Junior
takes over and renames the business.
• Sweet is paid 20% of net profits of Vohland.
• There is no explicit agreement. Sweet calls the 20% a commission.
• Sweet goes to court and says there is partnership. He wants to dissolve it and get
his share.
• Vohland conceded that a portion of the profits (that Sweet would have normally
fully received) had been used to pay for capital improvements (increased
inventory). Sweet wants his share out of the inventory.
Holding:
I. Sweet is a partner.
i. You can be a partner even if you didn’t contribute any money, but just
labour.
ii. If you are accepting profits in the business and this gives you incentives
to invest productively in the business, it’s more likely that the person
will be a partner (Over the years of this business, Sweet had been running
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