He Can do That! No He Can't! The Wonderful World of Agency!
I am one of those strange attorneys that thinks cases involving agency are interesting. An agent is a person (including a company) that acts for another. Simple, right! An officer is usually - not always - an agent for the company. What does it mean to be an agent? I am glad you asked.
What is an Agent?
The agency is created by contract - written or verbal. The contract determines the scope of the agency. If an agent has the power to bind the principal to a specific contract to purchase, the agency could be limited to that one agreement. Or the agency could be open ended. The officer of an LLC at least has the appearance of having the authority to enter into any contract as agent for the LLC. Agency is one of the simplest legal principles; the principle is based on contract law, and yet there are numerous disputes every year.
But He Didn't Have the Authority! He was No Longer the Agent!
The Delaware Business Litigation Report blog discusses a recent case that has many of the issues relating to Agency. In this case, the Plaintiff contracted with a Virginia LLC to provide certain services. Burden was the general manager of the LLC. Two days before the LLC signed the contract (by Burton) with the Plaintiff, the LLC amended its Operating Agreement to remove Burton as the general manager. The reason for the change was not related to the contract with the Plaintiff. When the Plaintiff was not paid, it sued. The LLC's defense was that Burton did not have the authority to bind the LLC. In other words, the Burton was no long an agent for the LLC when he signed the contract!
Defense Problems!
The defense has a several serious problems with this defense. First, since Burton was dealing with the Plaintiff as the general manager, how would the Plaintiff know that Burton no longer had the authority to bind the LLC? Burton apparently never mentioned it. Moreover, Burton continued to act as though he were still the general manager.
An agent can act for a principal when the agent has express authority (Contract,) Implied authority (as an officer of the corporation or LLC, a partner, or by the actions of the principal,) or apparent authority (when the agent holds himself out as having the authority and the principal allows the representation.) I am summarizing and these points are a little more complicated that I have outlined.
In this case, Burton had the authority before the contract was signed, and Burton continued to hold himself out as having the authority, with the knowledge of the principal, even after the authority was removed. So Burton appeared to have the authority to bind the LLC to contracts as an agent with either express or apparent authority.
What about the Ex-Agent?
One funny thing that the case does not mention is that the LLC, owned in part by Burton, is effectively arguing a position that Burton is personally liable as a principal to the contract. The case does not appear to address this point.
I discussed a similar legal point in an earlier post where I urged owners of corporations to disclose that the contracting entity is a corporation. Failure to disclose that you are an agent for a principal (the LLC or the Corporation,) or the failure to disclose that a prior agent can not longer bind the company can lead to unfortunate results.
Verbal Contracts and Agency!
This leads me to my final point. Verbal contracts are perfectly valid, and enforceable so long as they do not violate the Statute of Frauds. A verbal contract with an agent would not violate the Statute of Frauds. However, the always interesting Rush Nigut's Blog has an interesting post on the verbal agreements - with the simple but good advise: Don't do it!
