Agency Law and Contract Formation
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Agency Law and Contract Formation
https://khothuvien.cori!American Law and Economics Review V6 N1 2004 (XX-XX)Agency Law and Contract FormationAgency Law and Contract FormationEric Ras Agency Law and Contract Formationsmusen, Indiana UniversityI thank Stephen Bainbridge; Royce Barondes; Jeanne Carlson; Edwin Greenebaum; William Klein; Sean Mead; Larry Ribstein; Kathryn Spier; participants in seminars at the Midwest Law and Economics Association Meeting; Indiana University’s Kelley School of Business; Cardozo, Geo Agency Law and Contract Formationrgetown, Northwestern, and Quinnipiac Law Schools; and especially Deborah DeMott and J. Mark Ramseyer for helpful comments.Send correspondence to: EriAgency Law and Contract Formation
c Rasmusen, Department of Business Economics and Public Policy, Kelley School of Business, Indiana University; Fax: (812) 855-3354; E-mail: erasmuse@ihttps://khothuvien.cori!American Law and Economics Review V6 N1 2004 (XX-XX)Agency Law and Contract FormationAgency Law and Contract FormationEric Ras Agency Law and Contract Formationa contract on his behalf that he would immediately wish to disavow? The tradeoffs resemble those in tort, so the least-cost avoider principle is useful for deciding which agreements are binding and can unify a number of different doctrines in agency law. In particular, an efficiency explanation can Agency Law and Contract Formationbe found for the undisclosed-principal rule, under which the agent’s agreement binds the principal even when the third party with whom the contract isAgency Law and Contract Formation
made is unaware that the agent is acting as an agent.-1-1. IntroductionAgency was important enough in the common law to be chosen in 1933 as the secohttps://khothuvien.cori!American Law and Economics Review V6 N1 2004 (XX-XX)Agency Law and Contract FormationAgency Law and Contract FormationEric Ras Agency Law and Contract Formationgents, something true not only for large corporations but for any business with employees. This is particularly true, of course, for an organization that has more than one owner. In partnerships, the partners act as each other’s agent. In corporations, the shareholders are completely unable to act o Agency Law and Contract Formationn their own behalf, instead delegating authority to a board of directors, which in turn delegates authority to officers. Agency is thus one of the maiAgency Law and Contract Formation
n themes of corporate law and a standard introductory section of its textbooks.The first Restatement was followed by a second, and now the third has rhttps://khothuvien.cori!American Law and Economics Review V6 N1 2004 (XX-XX)Agency Law and Contract FormationAgency Law and Contract FormationEric Ras Agency Law and Contract Formationbeen at the center of some of the most exciting research in economics, as well. Economists have used the idea of principal and agent to explain the intricacies of labor compensation, the organization of hierarchies, the design of securities, and a host of other problems (see, e.g., the works by Milg Agency Law and Contract Formationrom and Roberts, 1994; spulber, 1999: and Rasmusen, 2001a). In the paradigmatic model, a principal hires an agent to exert some kind of effort. The agAgency Law and Contract Formation
ent is tempted to be slack in his effort, and (he principal tries to overcome this moral hazard by designing a contract that bases the agent’s compenshttps://khothuvien.cori!American Law and Economics Review V6 N1 2004 (XX-XX)Agency Law and Contract FormationAgency Law and Contract FormationEric Ras Agency Law and Contract Formationwill not induce enough effort by the agent; the-2-lawyer’s concern is what happens when the agent is active but his effort is mischanneled. The lawyer’s agent places an order with a supplier when he has been forbidden to do so. drives a delivery' truck into a schoolbus, hires the wrong employee for Agency Law and Contract Formationthe principal’s business, or sexually harasses a fellow worker. For the economist, the agency problem is how to give the agent incentives for the righAgency Law and Contract Formation
t action; lor the lawyer, it is how to "mop up" the damage once tire agent has taken the wrong action. The paradigmatic legal problem involves not jushttps://khothuvien.cori!American Law and Economics Review V6 N1 2004 (XX-XX)Agency Law and Contract FormationAgency Law and Contract FormationEric Ras Agency Law and Contract Formationt in the wrecked schoolbus, and, unless the law enforces the contract, he is unhurt by tire agent’s foolish 01 unauthorized purchases.Third parties are harmed, however, so government intervention can aid efficiency. When the agent takes a mistaken action, the damage must be allocated to someone—prin Agency Law and Contract Formationcipal, agent, or third party—and how the law does this matters.This kind of problem is intrinsically amenable to economic analysis. Judge Posner usesAgency Law and Contract Formation
such analysis in his opinion dissenting from the Seventh Circuit in the two leading sexual harassment cases, Jansen V. Packaging Co. (1997), believinghttps://khothuvien.cori!American Law and Economics Review V6 N1 2004 (XX-XX)Agency Law and Contract FormationAgency Law and Contract FormationEric Ras Agency Law and Contract Formationudge Posner in antiquated screeds, however, and hope to show that many of the principles found in the common law of agency do have sound foundations— foundations not in the legal formalisms courts try to use, but in economic analysis. The economic approach has already been applied to one of die best Agency Law and Contract Formation-known problem of agency law: what happens when an agent tortiously injures a third parly. The law deals with these involuntary creditors according toAgency Law and Contract Formation
die doctrine of vicarious liability 01 respondeat superior, which makes the principal liable for torts committed by his agent in the course of the aghttps://khothuvien.cori!American Law and Economics Review V6 N1 2004 (XX-XX)Agency Law and Contract FormationAgency Law and Contract FormationEric Ras Agency Law and Contract Formation principal with a third party?42. The Law of AgencyThe Restatement (Second) of Agency defines agency as “the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to a Agency Law and Contract Formationct.”5 In the present article, we shall lake for granted that the agent does not assume the risks of the enterprise. The problem of allocating loss froAgency Law and Contract Formation
m mistaken contracts is much easier when the loss can be put on the agent, but that case is relatively uninteresting because the theory is simple and https://khothuvien.cori!American Law and Economics Review V6 N1 2004 (XX-XX)Agency Law and Contract FormationAgency Law and Contract FormationEric Ras Agency Law and Contract Formationget for litigation, having fled or protected his assets from legal judgments. Moreover, though questions involving the agent’s liability for contracts are interesting, agency issues are secondary, because what matters most is the contract between principal and agent rather than between agent and thi Agency Law and Contract Formationrd party. The most interesting case for agency law is when (he agent has created a conflict between the principal and some third party, who must shareAgency Law and Contract Formation
the loss because the agent cannot pay or because it would be inefficient to impose the risk on him.The common law provides the following six reasons https://khothuvien.cori!American Law and Economics Review V6 N1 2004 (XX-XX)Agency Law and Contract FormationAgency Law and Contract FormationEric Ras Agency Law and Contract Formationagent, authorizing him to take a particular action: a board of directors votes to authorize the president of their company to purchase a new office building.-4-Actual implied authority. The principal has entered into an explicit agreement to employ the agent, and, although he has not specifically au Agency Law and Contract Formationthorized the particular action at issue, the agent can reasonably infer that authority for that action has been delegated to him. If the general managAgency Law and Contract Formation
er of a department store hires clerks, the store is bound by his contract, even if he was not expressly granted this authority (Restatement [Second) ohttps://khothuvien.cori!American Law and Economics Review V6 N1 2004 (XX-XX)Agency Law and Contract FormationAgency Law and Contract FormationEric Ras Agency Law and Contract Formation from the principal’s conduct that the agent was authorized.' If the home office tells a customer that the sales manager has authority to sell flour and then withdraws that actual authority without telling the customer, the sales manager still has apparent authority.5 Apparent authority depends on t Agency Law and Contract Formationhe beliefs of the third party, not on the actual relation between principal and agent.Estoppel. The principal is “estopped" from objecting to the agreAgency Law and Contract Formation
ement made by the agent if the principal could have intervened to prevent the confusion over authority—for example, if the principal overheard the agrhttps://khothuvien.cori!American Law and Economics Review V6 N1 2004 (XX-XX)Agency Law and Contract FormationAgency Law and Contract FormationEric Ras Agency Law and Contract Formations prevented by his own acts from claiming a right to detriment of other party who was entitled to rely on such conduct and has acted accordingly." As one opinion puts it,In order to prove agency by estoppel, the following elements must be established: (1) intentional or negligent acts of commission Agency Law and Contract Formationor omission by the alleged principal which created the appearance of authority in an agent; (2) reasonable and good faith reliance on the appearance oAgency Law and Contract Formation
f authority in the putative agent by the third party; and (3) a detrimental change■5-in position by the third party due to its reliance on the agent’sGọi ngay
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