Agency & Partnership Professor Donald J. Kochan

1. Agency & PartnershipProfessor Donald J. Kochan Class 14

2. Today’s Materials • Pages 361-391 • Undisclosed Principal

3. Introduction • Do you or must you know WHO you are really dealing with? How does that question affect responsibility and reliance? • Must an agent disclose the identity of or existence of a principal? • How is the agent responsible if or when he doesn’t disclose a principal? • What are the monitoring responsibilities of a principal?

4. Restatement (Third) of Agency, sec. 1.04 “(1) Coagents. Coagents have agency relationships with the same principal. A coagent may be appointed by the principal or by another agent actually or apparently authorized by the principal to do so. (2) Disclosed, undisclosed, and unidentified principals. (a) Disclosed principal. 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 and has notice of the principal's identity. (b) Undisclosed principal. A principal is undisclosed if, when an agent and a third party interact, the third party has no notice that the agent is acting for a principal. (c) Unidentified principal. 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 principal but does not have notice of the principal's identity.”

5. Restatement (Third) of Agency sec. 6.03 “When an agent acting with actual authority makes a contract on behalf of an undisclosed principal, (1) unless excluded by the contract, the principal is a party to the contract; (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 have the same rights, liabilities, and defenses against each other as if the principal made the contract personally, subject to §§ 6.05–6.09. • Comment: a. Scope and cross-references. This section states the basic principle that, when an agent enters into a contract on behalf of an undisclosedprincipal, the third party, the principal, and the agent become parties to the contract. Comment b discusses the rationales for contractual liability when an agent acts on behalf of an undisclosedprincipal. Comment c discusses the circumstances that determine when an agent has made a contract on behalf of an undisclosedprincipal, as well as consequences for an undisclosedprincipal who becomes a party to a contract. Comment d covers circumstances that may affect the rights and liabilities of an undisclosedprincipal, including contracts that explicitly or implicitly exclude an undisclosedprincipal. Comment e discusses the position of an agent as a party to a contract made on behalf of an undisclosedprincipal. Comment f examines the rights and liabilities of undisclosedprincipals as parties to sealed contracts and negotiable instruments. . . . “

6. Supplemental (non-required) Readings re sec. 6.03 • Westlaw Citation with comments, enter: • 6.03 Restatement of the Law — Agency Restatement (Third) of Agency Chapter 6. Contracts And Other Transactions With Third Parties Topic 1. Parties To Contracts Current through April 2009 S 6.03 Agent For Undisclosed Principal REST 3d AGEN § 6.03 • AmJur and ALR citations • Am.Jur.2d: Agency1. Undisclosed Agency, Liability of Principal, GenerallyAm.Jur.2d: Agency2. Undisclosed Agency, Liability of Agent, GenerallyALR 3. Right of Defendant in Action by Undisclosed Principal to Avail Himself of Defenses or Set-Offs That Would Have Been Available in an Action by the Agent in His Own Right on the Contract

7. Introduction (cont.) • Ultimately about liability • Subterfuge, Misleading Representations, Pretending, Stealth, Fraud, etc. issues • 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, 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 possible litigation positions; understand the election rule and the abandonment of the election rule

8. Introduction (cont.) • The textbook authors ask, “What accounts for this unusual doctrine, where a person can become a party to a contract in the absence of a manifestation of mutual assent?” – Answer? Think back to our previous discussion of equitable accountability in the face of two innocent parties and who should bear the burden (ex ante and ex post). • Are contracts “inherently personal”? / reliance issues • Walt Disney acquisition example is very poignant

9. Assertion of Rights by the Undisclosed Principal • Ability of principal to herself enforce the contract made by the agent even if the third party didn’t know of the principal • The “if the law says I can be sued by you, then I can also sue you” doctrine – all about equity -- advantages and disadvantages

10. Parol Evidence Rule • “the act of the agent is the act of principal” for purposes of this evidentiary rule unless the principal is expressly excluded • Reference your notes from Evidence

11. Sealed Contracts • Generally a sealed contract does not make it “undisclosed” to the principal or the third party • Must check statutes • Contrast with traditional common law rule

12. Exceptions to Undisclosed Principal Liability How do each of these facts affect liability. Can we be Oz hiding behind the curtain? • Personality/Trust Avoidance • Competitive Issues • Subterfuge issues, again

13. Kelly Asphalt Block Co. v. Barber Asphalt Paving Co. • Warranty case • Using an agent to deal with a competitor; the agent is the “ostensible principal” because th actual principal feared his presence, if “disclosed”, would preclude consummation of the transaction. • Can the contract be invalidated for “mistake”? • Is fraud or misrepresentation needed? Yes; why? • What role did post-notice deliveries make in the decision? Waiver? • Contract law – meeting of the minds issues

14. Finley v. Dalton • Real estate case / fraudulent representations / intended uses • What is the necessity of disclosure? • Was there fraudulent concealment? Why would it matter? • Materiality of “misstatement or misrepresentation” issues • How does purpose of buying the property matter? • Silence v. Disclosure Issues • Duty of Inquiry Issues

15. Notes • Read the notes following Finley to reconsider that we are dealing with BOTH: • The Undisclosed Principle to be Sued And • The Undisclosed Principal’s Rights to Sue the Third Party

16. Unauthorized Transaction • Explicit • Implicit • Assumed ______________ • Notice/Knowledge of Third Party • Factual Inquiry • P v. A issues if P is found liable

17. Watteau v. Fenwick • Transfer of beerhouse ownership and exclusivity cigar supplier agreement case • “principal is resposnible for all the acts of the agent which are within the authority usually confided to an agent of that character, notwithstanding limitations, as between the principal and the agent put upon that authority.” • Third party “knew nothing of the existence of the principal.” – Reliance/Estoppel Issues • In other words, draft with authorization limitations and scream it out to the world.

18. Restatement (Third) of AgencySec. 2.06 • “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 would reasonably believe the agent to have under the same circumstances if the principal had been disclosed.” • Reliance Issues/Reasonable Expectations • Does this give the agent too much discretion? • How does it incentivize principal monitoring? • But, are not the efficiencies in agency that the principal can delegate and how do these rules affect that?

19. Senor v. Bangor Mills • Sole producer of nylon yarn case/shortage of supply/secondary market issues • What were the issues of consent to buy and consent to price as related to express or implied authority? • “no authority to but . . . except as specified and agreed to from time to time . . .” – issue of authority and responsibility of agent and how authority is controlled • Consider factual consent issue – how much discretion of an agent

20. Senor v. Bangor Mills (cont.) • “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 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 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 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 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 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; same for principals in choosing an agent. • Irrelevance of third party acceptance issue

21. Payments and Setoffs andOil Supply Company Inc. v. Hires Parts Services Inc. • Will not be tested but please understand that it plays a role in the relevant relationships and availability of remedies.

22. Concluding Remarks • Principals cannot hide behind agents • Agents cannot hide behind principals • Justifiable reliance controls re Third Parties • Representations and Notice and Misrepresentations played key roles in these cases • Consider the importance of principal monitoring to avoid liability • Consider drafting issues to control agents