Story Case

James Worthington was the agent of the Flood Live Stock Company with authority to buy and sell horses. After Worthington had worked for this company some time he was given written instructions not to agree to pay more than $100 a head for horses, and the further statement was added that the company would not accept any horses bought at a larger price. Nevertheless, Worthington made a contract with another dealer, agreeing, in the name of the Flood Company, to pay $120 apiece for five horses. What is the liability of the Flood Company on this contract?

Ruling Court Case No. 1. Van Santwoord Vs. Smith, Volume 79 Minnesota Reports, 316

In this case it appears that the Wood Mowing & Reaping Machine Company, through one of its district agents, appointed and authorized Smith to act as their agent in selling reaping machines. In the contract by which the agency was created, Smith agreed to stand personally liable for all promissory notes taken by him except such as contained a full statement of the real and personal property owned by the purchaser. Van Santwoord, as receiver of the Wood Mowing and Reaping Company, brings this action to recover upon certain notes, basing the right to recovery upon the fact that the notes did not contain the property statement as agreed upon.

Smith, in his defense, proved that he was unable to get these statements, and had gone to Andrews, the district agent of the company, who orally agreed to dispense with that requirement. In the reply the company admitted that Andrews was their general agent, but said that they had given him oral instructions never to change any terms of any contract except in writing.

Justice Brown delivered the opinion:

Andrews was a general agent and, as such, he had power to act in the usual way for his principal. Limitations upon his general power are not binding upon defendant for he never knew anything about them. The Court said in part: "If the contract, between Smith and Andrews, as originally made, carried on its face, as contended by counsel for the plaintiff, Van Sant-woord, notice to defendants that Andrews had no authority to agree to a change or modification of the contract of the nature and effect of this one, he would concur in their contention that the modified contract would not be binding on the principal, and could not be enforced except by showing a ratification; but such notice was not conveyed by the original contract, nor does the evidence show any prohibition or restrictions upon the right of the agent to make changes and modifications in the contract with respect to the subject under consideration. The evidence relied on to show want of authority, is found in the testimony of Andrews, himself, to the effect that he was instructed 'not to make oral contracts with agents.' These instructions were not communicated to the defendant, by the original contract or otherwise, and defendant is not bound thereby. The principal may impose upon the authority of his agent as many limitations and restrictions as he thinks best, and these limitations and restrictions are binding upon third persons, if they have notice of them, or might with reasonable diligence have ascertained them."

Ruling Court Case No. 2. Farmers' And Mechanics' Bank Vs. Butchers' And Drovers' Bank, Volume 16 New York Reports, Page 125

In this case it appears that a depositor of the Butchers' bank entered into a fraudulent agreement with the teller of the bank, pursuant to which agreement the teller, in violation of his instructions and duty, certified five checks as "9,000", although this depositor had no money at all in the bank.

These checks were negotiated and came into the hands of the Farmers' bank, who paid value for them and had no notice at all of the fraudulent transaction made between the depositor and the teller of the Butchers' bank. They bring this action. The defendants contend that they should not be held liable for the reason that they told their agent, the teller, never to certify a check when there was no money on deposit in favor of the maker, sufficient to cover the amount.

Justice Selden gave the decision:

The Butchers' bank is liable nevertheless. These instructions were not brought to the notice of the plaintiff. The facts, concerning which the instructions were given, were within the peculiar knowledge of the defendant, and third persons are compelled to rely upon the honesty of the agents representing the defendant. The Court said in part: "This conclusion - as stated in the decision - is in no respect in conflict with that doctrine of the law of agency which makes it the duty of all persons dealing with a special agent to ascertain the extent of his powers. It is conceded that every one taking the check in question would be presumed to know that the teller had no authority to certify without funds, but this knowledge alone would not apprise him of the fact that the certificate was defective and unauthorized. To discover this he must not only have notice of the limitations upon the powers of the teller, but of the extrinsic fact that the bank had no funds; and as to this extrinsic fact, which he cannot justly be presumed to know, he may act upon the representation of the agent. There is a plain distinction between the terms of a power and facts entirely extraneous upon which the right to exercise the authority conferred, may depend. One who deals with an agent has no right to confide in the representation of the agent as to the extent of the powers. If, therefore, a person, knowing that the bank has no funds of the drawer, should take a certified check upon the representation of the cashier or other officer by whom the certificate was made, that he was authorized to certify without funds, the bank would not be liable; but in regard to the extrinsic fact, whether the bank has funds or not the case is different. That is a fact concerning which a stranger, who takes a check certified by the teller, cannot be supposed to have any means of knowledge. Were he held bound to ascertain, the teller would be the most direct and reliable source of knowledge, and he already has his written representation upon the face of the check, and it would be useless to return to the teller. If, therefore, one who deals with an agent can be permitted to rely upon representation of the agent as to the existence of a fact, and to hold the principal responsible in case the representation is false, this would be such a case." Judgment is given against the Butchers' and Drovers' Bank.

Ruling Law. Story Case Answer

It is a simple proposition that a principal is not bound by any act of an agent done without the scope or limits of his authority; but it is indeed very difficult to determine just what is the authority of an agent in a given case. It is obvious that the most comprehensive part of an agent's authority is that which is expressly conferred upon him. But powers expressly conferred are by no means all the authority an agent may exercise. There is also a very important class of powers which an agent may exercise, known as ostensible or apparent powers. This includes all powers usually exercised by agents in a given business; all powers which may be inferred from previous dealings between the parties; and powers which are sanctioned by business customs and usages. These, however, are not binding upon the principal if he limits the agent in the exercise of them, and these limitations are brought home to those whom the agent deals with.

As between the principal and agent such instructions as to the manner of exercising his power, which limit his real or apparent authority, are, of course, binding upon the agent. These instructions are not, however, binding upon third persons who do not know of them and who have no reason to suspect such secret limitations. Accordingly, secret instructions of this kind are not a part of an agent's authority. If they are made known to persons with whom the agent deals they define and limit his authority. Consequently, it would follow that in the Story Case, the Flood Company would be liable to pay $120 apiece for the horses purchased at that price by their agent, Worthington.