Story Case

James King, the general manager of Stone & Company, executed, to Frank Ellis, a negotiable note of the company in payment for merchandise delivered. Ellis objected to taking the note, saying to King that Stone & Company had previously informed him never to take negotiable paper from any of their general managers. King replied that, nevertheless, the paper would be all right in this case. Ellis finally took the paper. Later, the company refused to pay the note, and suit was brought against the company, on the ground, that it is the usual custom of general managers for commission houses to give such paper, and King was acting within the apparent scope of his authority. The company presented, as their defense, the lack of authority, and the knowledge of Ellis. For whom should judgment be given?

Ruling Court Case. Rogers Vs. Halden, Volume 142 Massachusetts, Page 196

It appeared, in this case, that the plaintiff employed an agent, Norris, to sell goods for them. Norris was specifically instructed never to sell any goods below a certain price, called the "minimum price". The agent was negotiating with defendant, with a view to selling him goods. At this time; the defendant knew that the agent had no power to sell below the "minimum price", and he knew what those prices were.

Notwithstanding this, the defendant agreed to purchase goods at prices below the "minimum price".

The agent sent in the order with "minimum price" quoted. The plaintiff sent the goods in pursuance of the order. The defendant paid to the agent the prices agreed upon between themselves. The agent reported to the plaintiff that the defendant had paid the "minimum price". Thereupon, the plaintiff charged this amount to their agent. Subsequently, they discovered the detail of the transaction, as recited above, and brought this action as against the defendant for the balance due them, being the difference between the price agreed upon by the defendant and the agent, and the "minimum price" as made by the principal.

Justice Gardner delivered the opinion.

Where a third person knows of the limitations upon the authority of an agent, with whom he deals, no agreement by the agent outside of this authority will be binding upon the principal. The Court said in part: "The defendant says, 'We did not make this contract, although we knew that Norris ordered the goods for us at the minimum prices, and, although we received the bills of the goods at the same prices at which they were ordered, we have remained silent ever since. Yet, we made an agreement with Norris, which we knew he was not authorized to make, to buy goods at a less price.' We think that the defendant cannot set up this agreement for the purpose of denying the contract which the law says exists between him and the plaintiff. He will not be permitted to take advantage of his own wrong, for his own benefit."

Ruling Law. Story Case Answer

We learned, in the section covering construction of agents' authority, that the principal is liable for any act of the general agent done within the apparent scope of his authority. It is true, therefore, that if the third person has actual knowledge of the agent's limitations, anything done beyond this is both unauthorized and beyond the apparent scope of authority, and the principal is not bound thereby. Therefore, in the Story Case, although it is usually within the scope of authority of a general manager for a commission house to issue negotiable paper, and thereby bind the house, he cannot hold the principal in this case, since Ellis knew of the actual limitation. Had Ellis been innocent, he could have held Stone & Company.