By: Sam Dudar, Esq. – Attorney
I. Creation and Termination of an Agent: Authority and the Agent-Principal Relationship
All business associations, such as partnerships and corporations, begin with a branch of law known as Agency Law. People (and, by law, a corporation is considered to be a person with an unlimited lifespan–although corporate administrations may be dissolved if they do not pay their annual dues to the applicable Secretary of State to remain an up-to-date corporation) make up the law of agency.
An agency relationship exists when one person (the “agent”) acts for another person (the “principal”). A principal is said to “authorize” or “invest authority in” another person. What is authority? Authority is the extent to which a principal can do something or, to speak more exactly, the right or permission to act legally on another’s behalf. A simple example involves an attorney and a client: a person can represent oneself at law (this person is said to act pro se); a lawyer can represent a person in their stead, but the lawyer’s authority to act on behalf of the person is limited by professional rules that govern lawyers (e.g. the client can accept or reject a settlement offer; absent the client’s specific authority invested in the lawyer, the lawyer cannot ethically settle a lawsuit for a client without the client’s permission). There are different types of authority that exist:
Actual/Express Authority: authority that the agent gave to the principal from the principal’s manifestations.
Actual/Implied Authority: authority that the agent reasonably implied from the actual authority given to the agent by the principal.
Apparent Authority: the authority a third-party reasonably believes from the principal’s manifestations that the principal gave to the agent.
Principal’s Ratified Authority (or simply Ratification): a person is retroactively given authority to act on behalf of (i.e. with the authority of) a person-principal, when the person-principal affirms (i.e. ratifies) a prior act by the actor (now the agent).
Authority can be shared among multiple people and even delegated. “Co-agents” have an agency relationship with the same principal. They may be appointed by the principal or by another agent actually or apparently authorized by the principal to do so. “Subagents” are people appointed by an agent to perform functions that the agent has consented to perform on behalf of the agent’s principal and for whose conduct the appointing agent is responsible to the principal. The relationship between an appointing agent and a subagent is one of agency, which means that the agent is now the “principal” and the subagent is the “agent.”
Lawyers have to think of all sorts of scenarios when advising their clients, so it shouldn’t come as a surprise that agency law should consider how an agency relationship is terminated. In many situations, termination is more important than creating the agency relationship because a person has become an undesirable agent through apparent authority and is creating liability to the person’s superiors. You may notice this in disclaimers spread throughout the entertainment industry where people are given air-time to voice their opinions and speculations, which, should an agency relationship exist, may become the official stances of an organization; if these stances are viewed negatively or relied upon and turn out to be wrong, liability can attach to the organization. Many such statements abound and here are two such examples.
As the first example, during the 2008 Presidential Election, Samuel Joseph Wurzelbacher, who rose to national attention and became colloquially known as “Joe the Plumber” in subsequent presidential debates after posing his plumbing-repair-based business question to (and critical of) former President–at the time, Senator–Barack H. Obama on live television as a member of the audience stepping out of the crowd, with which Senator Obama was shaking hands and chatting informally; capitalizing on Joe’s recent rise to fame, former Senator and Republican John S. McCain, III and his campaign organization apparently recruited “Joe the Plumber” to a limited extent to voice conservative perspectives on behalf of Senator McCain; at one point during the campaign, an audience member posed to Joe a question about whether the election of Senator Obama meant “the death of Israel”? After some momentary hesitation, Joe assented to the audience member’s question, which immediately put the McCain campaign organization into damage-control mode, denying that Joe’s answer represented the views of Senator McCain.
As the second example, on January 30, 2000, Super Bowl XXXIV took place, whose expensive advertisements (generally viewed as eccentric in comparison to the type of ads aired during most of the remaining times of the year) featured one with Christopher Reeve of Superman (1978) fame; Mr. Reeve suffered severe spinal injuries after his tragedy of being thrown from a horse named Orient Express; for the remainder of his life, Mr. Reeve was a quadriplegic; yet in this particular ad in support of stem-cell research, Mr. Reeve was digitally rendered as capable of walking steadily on stage! In fact, this digital rendition of Mr. Reeve was so well-executed that millions of fans of Mr. Reeve and also those who suffered crippling spinal injuries reached out and called throughout the world to learn if Mr. Reeve had, so it seemed, recovered and, if so, could they receive such treatment to walk again? Sadly, the answer to both questions was “No,” but observe with what medical authority Mr. Reeve had become from this Super Bowl ad: perhaps if it weren’t for the fact that Super Bowl ads are generally–and reasonably–accepted as “head-over-heels” and “over-the-top” or, simply put, histrionic, the organization he represented could have faced massive state and federal class-action lawsuits for false advertising that a certain medical organization produced a procedure for healing quadriplegics when no such procedure existed.
In such cases, it becomes necessary to terminate an agent’s authority. Generally, this can be done in several ways: first, the principal can revoke the agent’s authority, which is what happened in the first example above; second, the principal or the agent can become incapacitated, which can occur biologically (e.g. the person dies or suffers an injury that prevents that person from executing the applicable authority), or, if the agency relationship is governed by contract or a statute, an event in the contract or statute is triggered. In Business Law, writing a contract is like playing a game of literary chess: it requires strategy, foresight, practice and experience, along with the gift of drafting or writing legal documents well. In employment contracts, it is critical that each employee understands the limits of the employee’s duties and authority to bind a corporation; as one tip, it would best save time to limit the ability of most employees to bind a company in any way and ensure that it is clear to a corporation’s clients that those employees do not present any apparent authority, which can be done expressly through written disclaimers or more subtly through different uniforms or official company titles, which is where things can get tricky.
In can get tricky during negotiation, where it is imperative to know that one is negotiating with someone who can bind an organization; put differently, one side should always know that the other side has been invested with the authority to bind their side to any agreement the two sides come to; otherwise–and this tactic has been used many times and will likely always be used in the future, too-one side is tricking the other side to disclose “hidden” facts about a company’s assets or willingness to come to a settlement only for a new person, vested with authority to bind the company this time, starts the negotiation afresh in a better position than the person replaced; so what was thought to be, at first glance, a fair shake at the negotiation table has become asymmetrical, which may either cause one side to end the negotiation (i.e. the status quo, which can be good, bad, or neutral), or the negotiation can result in unfairness, which, is itself, a defense to contractual agreement.
The capitalist structure of the United States and according to the famous economist and philosopher, Milton Friedman, the only obligation of a company is to make profits for itself. This has been a thoroughly argued perspective on all sides of the issue; but it is generally accepted that an economy that is constrictive will, in the long run, be less prosperous than an economy where there is much movement. For example, the Dow Jones Industrial Average is predicated on idea that, in general, an increase in production coupled with an increase in transportation will, on the whole, result in greater prosperity and wealth (i.e. producers need transporters to move their products and transporters need products to ship), which has been historically true, especially in the cases of the great port cities of the world, such as New York City, London, and Danzig during the years of the Polish-Soviet Civil War, along with many other cities measured and indexed as “great cities” or “alpha+ cities” or “global cities” such as Paris, Shanghai, Beijing, Hong Kong, Singapore, Tokyo, Sydney, and Dubai (for more information, research the Globalization and World Cities Research Network (GaWC)). The upshot of this discussion is that the more negotiations that result in balanced successes from all sides will result in greater happiness for a larger percentage of a population than failed or one-sided negotiations; this is, at least, one of the main tenets of a philosophical movement that has gained much traction among high judicial circles called the Law and Economics Movement. And all of this begins from the law of agency.
II. Building a Corporation: The Forms of Agency and Their Impact
The simplest form of agency is the two-person principal and agent example, such as when a parent tells a child, “You may use my car if you drive it,” and the child drives the car. Here, the parent’s permitted the child could drive the car on behalf of the parent, and the child drives the car; in this example, there is the parent’s oral manifestation to the child to act on behalf of the principal-parent, plus the controlling limitation that only the parent-principal’s child could drive the car and not just anyone; finally, the child assented to the terms of the parent-principal by driving the car; note here that the child’s action, not the child’s words, resulted in assent, which discloses that assent (just as “acceptance” is judged in Contract Law) is a factual question of what a reasonable person would think, which is usually a fact-intensive issue for a judge or jury to decide, involving all possible factors surrounding the parties; here, assent was manifested by actual performance of the principal’s authority.
Of course, this is an example is when all things are going hunky-dory. In the subsequent update to this thread, we shall see more nefarious examples, which could happen purposefully or, more likely, accidentally in contractual relationships, which can impact the exact sort of business entity created. As a teaser example, we shall see that a partnership is frequently not the best business entity to have, but is, unfortunately, one that individuals can fall into, such as when two lawyers with two different firm names share the same office space, same legal research subscription, refer clients to each other, and thereby intermix their originally separate business entities into a partnership, a consequence of which is shared personal liability: a liability that does not exist in, say, a Limited Liability Corporation.