Help with Negotiable Instruments and Agency/Principal Relationships

Question

Edward H. Rosenthal, Esq. is a partner at Arnold, Quisling & Doud. As firm Chairman of the Operations Committee, he hires the firm of Ayotte Leisenfelder to represent his firm as it seeks to buy a building for its new headquarters.

The firm of Ayotte Leisenfelder contacts the RXR Development Group, who is aware that the firm of Ayotte Leisenfelder is representing the interests of Edward H. Rosenthal, Esq. and his fellow partners at Arnold, Quisling & Doud.

Ayotte Leisenfelder contacts Jennings, Hockett & Kannengeiser about acquisition of space at their Lake Success office park. Seth Rosner, Esq., the agent for Jennings, Hockett & Kannengeiser, is aware that Ayotte Leisenfelder is representing the interests of someone else, but he never inquired at to whom.

Ayotte Leisenfelder contacts the development firm of DeBarr & Buddenhagen about acquiring space from them without any mention of Edward H. Rosenthal, Esq. and his fellow partners at Arnold, Quisling & Doud.

Principle to Agent Relationships:

1. Identify whether or not such a relationship exists between Edward H. Rosenthal, Esq. and his fellow partners at Arnold, Quisling & Doud. Include in your response the type of Agency-Principal relationship exists between Edward H. Rosenthal, Esq and the firm of Arnold, Quisling & Doud.

2. Identify whether or not such an Agency-Principal relationship exists between the firm of Ayotte Leisenfelder with Edward H. Rosenthal, Esq. and his fellow partners at Arnold, Quisling & Doud.

3. Define what type of Agency-Principal agency relationship exists between the firm of Ayotte Leisenfelder and Arnold, Quisling & Doud in the possible transactions with RXR Development Group; Jennings, Hockett & Kannengeiser and DeBarr & Buddenhagen and what liability the firm of Ayotte Leisenfelder has to those three third parties, if any.

Answer 1

The key concepts here are actual authority and whether the principal is disclosed, partially disclosed, or undisclosed to each third party.

1. Rosenthal and Arnold, Quisling & Doud

Yes, an agency relationship exists. Arnold, Quisling & Doud is the principal, and Edward H. Rosenthal is acting as its agent when conducting firm business.

As a partner and Chairman of the Operations Committee, Rosenthal appears to have actual authority to act for the firm in matters within the authority assigned to him, including hiring another firm to assist with acquiring new headquarters. His authority could be express, arising directly from the partnership's authorization, or implied from his position and responsibilities.

Partners can also act as agents of a partnership when conducting partnership business. Therefore, assuming obtaining new office space falls within Rosenthal's authority, his actions can bind Arnold, Quisling & Doud.

2. Ayotte Leisenfelder and Arnold, Quisling & Doud

Yes. When Rosenthal hires Ayotte Leisenfelder to represent the firm in acquiring a building, Arnold, Quisling & Doud becomes the principal and Ayotte Leisenfelder becomes its agent.

Ayotte therefore has actual authority to perform the tasks the firm authorized it to perform. It also owes traditional agency duties to the principal, including loyalty, reasonable care, obedience to lawful instructions, disclosure of relevant information, and appropriate accounting.

3. The three transactions

The nature of Ayotte's potential contractual liability depends primarily upon what each third party knows about the principal.

RXR Development Group — Disclosed principal

RXR knows both that Ayotte is acting as an agent and that it represents Rosenthal and the partners of Arnold, Quisling & Doud. Thus, Arnold, Quisling & Doud is a disclosed principal.

When an authorized agent enters a contract for a disclosed principal, the principal generally becomes the party liable on the contract and the agent ordinarily does not incur personal contractual liability, unless the agent separately agrees to be liable.

Therefore, Ayotte generally would not be personally liable to RXR on an authorized contract.

Jennings, Hockett & Kannengeiser — Partially disclosed/unidentified principal

Rosner knows that Ayotte is acting for somebody else but does not know the principal's identity. This makes Arnold, Quisling & Doud a partially disclosed (unidentified) principal.

Here the rule is different. Because the third party knows an agency exists but does not know who the principal is, both the principal and agent can generally be parties to the contract. Consequently, Ayotte can potentially have contractual liability to Jennings, Hockett & Kannengeiser.

DeBarr & Buddenhagen — Undisclosed principal

Ayotte does not mention that it is acting for Arnold, Quisling & Doud. From DeBarr & Buddenhagen's perspective, Ayotte appears to be acting for itself. Arnold, Quisling & Doud is therefore an undisclosed principal.

An agent contracting for an undisclosed principal is ordinarily personally liable on the contract because the third party reasonably believes it is contracting directly with the agent. If the principal is later discovered, the undisclosed principal may generally also be held liable when the agent acted within its actual authority, subject to exceptions.

Therefore, the basic results are:

RXR: disclosed principal → Ayotte generally not personally liable.

Jennings: partially disclosed principal → Ayotte may be personally liable.

DeBarr: undisclosed principal → Ayotte generally is personally liable.

One additional point is important: these rules assume Ayotte acts within its authority. If an agent purports to make a contract for a principal without authority, separate liability can arise for breach of the agent's implied warranty of authority.