Tuesday, January 22, 2019

Back to Basics: The Reciprocal Nature of Agency and Partnership Relationships

In Business Organizations, I am in the early part of teaching agency and partnership. In my last class, we discussed Cargill, which is a fairly typical case to open agency discussions.  I like Cargill, and I think it is a helpful teaching tool, but I think one needs to go beyond the case and facts to give a full picture of agency. 

Of note, the case deals only with "actual agency" -- for whatever reason, the plaintiffs did not argue "apparent agency" or estoppel in the alternative.  A. Gay Jenson Farms Co. v. Cargill, Inc., 309 N.W.2d 285, 290 n.6 (Minn. 1981) (“At trial, plaintiffs sought to establish actual agency by Cargill's course of dealing between 1973 and 1977 rather than 'apparent' agency or agency by estoppel, so that the only issue in this case is one of actual agency. ”). I think this explains a lot about how the case turns out.  That is, the court recognized that to find for the farmer, there had to be an actual agency relationship.  

I don't love this outcome because one of the hallmarks of an agency relationship is its reciprocal nature. That is, once we find an agency relationship, the principal is bound to the third party and the third party is bound to the principal. In contrast, in a case of estoppel, the principal may be bound (estopped from claiming there is not an agency relationship), but that finding only runs one way. The principal still cannot bind the third party.  

This is a problem for me in Cargill. That is, I don't see a scenario where a court would bind the farmers to Cargill on similar facts. (I know I am not the first to make this observation, but it seemed worth exploring a bit.) As such, I don't think it can rightly be deemed an agency relationship.  

Assume the facts from the case to show agency, but suppose instead Cargill was suing the farmers because the grain prices had increased dramatically and that the farmers had a contract with Warren (the purported agent) to deliver grain at $5/bushel.  However, spot prices were now $15/bushel.  Warren had not paid the farmers for a prior shipment and did not have the ability to pay now. If the contract is with Warren, the farmers should be able to now sell that grain in the market and take the extra $10/bushel for themselves.  However, if Cargill were really the principal on that contract, Cargill would have a right to buy it at $5/bushel.  I just don't see a court making such a ruling on these facts.  

For what it's worth, I do think there is an estoppel argument here, and I think the Cargill court had ample facts to support finding Cargill a guarantor through other actions (promises to pay, name on checks, etc.), some of which might support an apparent authority argument, too. But because I don't see this relationship as an agency relationship as a two-way street, I don't think it can be an "actual agency" relationship. 

Incidentally, I see this reciprocal nature test as proper for partnerships, too.  That is, unless a court, on similar facts, would be willing to find a partnership where it works to the detriment of the plaintiffs, one cannot find a partnership.  Think, for example, of another classic case, Martin v. Peyton, 246 N.Y. 213 (N.Y. 1927).  There, creditors of the financial firm KNK sued KNK, as well as Peyton, Perkins, and Freeman (PPF) who had loaned KNK money. The claim was that PPF was not a mere lender, but had instead become partners of KNK because of the amount of control and profit sharing included in the loan arrangement.  If PPF were deemed partners of KNK, of course, PPF would be liable to the KNK creditors.  Here, the court determines that no partnership exists.  

While a reasonably close call,  I think this is right.  I don't think, based on a similar set of facts, that a court would find for PPF if the dispute were such that finding a partnership between PPF and KNK would reduce the amount KNK would pay its investors. If it can't run both ways, the partnership cannot exist.  I appreciate that in some cases, there simply is not a good analog to test the reciprocal nature of the relationship.  But where it's possible, I think this is a good test to determine whether there really is an agency or partnership relationship or if, instead, what we really have is a sympathetic plaintiff.   



Agency, Business Associations, Joshua P. Fershee, Partnership, Teaching | Permalink


This is awesome - I admit I never considered the reciprocal argument in Cargill!

Posted by: Ann Lipton | Jan 22, 2019 9:35:10 AM

I thought the case was about an agency relationship between the grain elevator company and Cargill thus obligating Cargill on contracts made by the elevator. How does that bind the counter-parties (farmers) on the contracts?

Posted by: Anon | Jan 22, 2019 10:46:42 AM

Thanks, Ann!

And thanks for the comment, Anon. The case is about an agency relationship between Cargill (principal) and Warren, the grain elevator (agent). The farmers are the third parties. If there is an agency relationship, that binds the Principal to the Third Party(ies), and vice versa). Once an agency relationship is established Principal and Third Party are bound to each other. That's what I am getting at with this post. The issue in Cargill was whether the agency relationship between Cargill and Warren made Cargill liable to the farmers on the contracts. The court said yes. But if that’s the case, it would also mean the farmers would be liable to Cargill on all terms of the contracts, too. That was not an issue in the case, but that is the nature of an agency relationship. If the court would not also hold the farmers liable to Cargill on all terms of the Warren-coordinated contracts, then finding that Warren was Cargill’s agent was wrong. (By the way, the court could, in theory, have held Cargill liable to the farmers via estoppel, without a reciprocity issue, and could similarly have found Cargill to be a guarantor by making certain payments and using their letterhead to communicate. But if it’s an agency relationship, contracts coordinated by Warren with farmers actually bind Cargill and the farmers.)

Posted by: Joshua Fershee | Jan 22, 2019 11:37:55 AM

And it's a problem for you that the farmers would be bound? I don't see why. In either case - either Warren is not insolvent or Cargill has to step in to save Warren's deals - the farmers end up in the same position - sell their grain.

Posted by: Anon | Jan 22, 2019 4:37:56 PM

Anon, I think we're missing each other. I have no problem with the farmers being bound, but I am skeptical that the court would have bound the farmers had there been any harm to the farmers. In the situation I posited, the farmers would lose out on the potential profits. I am simply pointing out that if a court were only willing to find an agency relationship to benefit the farmers, but would not if they would be harmed, they ran the test incorrectly.

Posted by: Joshua Fershee | Jan 22, 2019 5:35:02 PM

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