Opinion
No. 4999.
Submitted March 7, 1962.
Decided April 3, 1962.
1. In the world of credit there is emerging a rule, consistent with modern business practices, under which a principal is bound by the promise of his general agent, whether or not authorized, when such promise is made within the scope of the agent's power.
2. An undisclosed principal, when discovered, may be held liable upon mercantile contracts made by an agent within the scope of the agent's authority, although the contract was originally made with the agent in entire ignorance of the principal.
3. An undisclosed principal who entrusts an agent with the management of his business is subject to liability to third persons with whom the agent enters into transactions usual in such businesses and on the principal's account, although contrary to the directions of the principal.
Action at law by the plaintiff to recover on a mercantile claim in the sum of $348 for merchandise allegedly furnished to the defendant. The defendant filed a motion to dismiss the action on the ground that the plaintiff had not transacted any business with the defendant but that all business had been done by the plaintiff with one John C. Cochrane, doing business as a sole proprietor under the name, Stylecraft Co. After hearing the Court (Griffith, J.) denied the motion to dismiss and awarded a verdict to the plaintiff against the defendant for $348 and reserved and transferred the defendant's exception thereto.
Although the record is sketchy, there was evidence from which the Court could find the following facts. John C. Cochrane, doing business under the name of Stylecraft Co., was engaged in selling motel supplies and purchased mattresses from the plaintiff who billed the invoice to him in the amount of $348. Cochrane was also president, treasurer, director and a stockholder of the defendant corporation which was constructing and furnishing a motel for sale, which included the mattresses purchased from the plaintiff. In addition Cochrane was a construction foreman of the defendant corporation and its manager. He denied that anyone had the title of general manager of the defendant corporation but conceded that he conducted "most of" its business as "advised by three directors," one of whom was his wife. The motel, constructed and furnished by the defendant corporation, was equipped with the mattresses ordered by Cochrane doing business as Stylecraft Co. when it was sold to a third party.
The basis of the verdict below is that Cochrane purchased the merchandise from the plaintiff as an agent for the undisclosed principal, the defendant corporation.
J. Morton Rosenblum for the plaintiff, furnished no brief.
Perkins, Holland and Donovan for the defendant, furnished no brief.
In the world of credit there is emerging a rule, consistent with modern business practices, under which a principal is bound by the promise of his general agent, whether or not authorized, when such promise is made within the scope of the agent's power. Mearns, Vicarious Liability for Agency Contracts, 48 Va. L. Rev. 50 (1962). The rule has been developed and nurtured over some period of time by an eminent authority. Seavey, The Rationale of Agency, 29 Yale L. J. 859 (1920) and Agency Powers, 1 Okla. L. Rev. 3 (1948) reprinted in Seavey, Studies in Agency 181 (1949). The rationale of the rule is not based on express authority, implied authority, apparent authority or estoppel "but [is derived] solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent" and is described as "inherent agency power." Restatement (Second), Agency, s. 8A.
In the present case it is obvious that the plaintiff did not and could not rely on Cochrane as a person who had apparent authority to act as an agent of the defendant at the time the merchandise was sold. It is true that there are many cases in many jurisdictions holding the undisclosed principal liable where the discussion has been in terms of apparent authority but this theory will not always hold water even though the result reached is correct. See Hatch v. Taylor, 10 N.H. 538; Brooks v. Shaw, 197 Mass. 376; Watteau v. Fenwick [1893] 1 Q. B. 346; cf. Restatement (Second), Agency, s. 194, comment a. An undisclosed principal, when discovered, may be held liable upon mercantile contracts made by an agent within the scope of the agent's authority, although the contract was originally made with the agent in entire ignorance of the principal. Manchester Supply Co. v. Dearborn, 90 N.H. 447; Mechem, Outlines of the Law of Agency (4th ed. 1952) s. 151. Restatement (Second), Agency, s. 161, comment a and s. 195.
The old rule that the president of a corporation has no inherent power to make a contract binding on the corporation (Hilliard v. Railroad, 77 N.H. 129; Wait v. Association, 66 N.H. 581) has been severely criticized. "It is high time, at this day when corporations are so common and when so much of the business of the country is transacted by them, to break away from the early rules laid down when corporations were more or less in their infancy, and to cease blindly following precedents in regard to this matter, and to adopt the sensible rule, in accordance with the well-recognized ideas of the people at large, that a president of a corporation is the head of the corporation subject to the control of the board of directors as to matters out of the ordinary, but with power to bind the corporation in regard to contracts involved in the everyday business of the corporation, such as . . . purchasing supplies and other property necessary to run the company. . . ." 2 Fletcher, Corporations (1954 Rev. vol.) s. 558. Presumably the Trial Court in this case thought it was "high time" to hold the defendant liable for the purchase made by Cochrane from which the defendant benefited when the purchaser was president, treasurer, director and manager of the defendant corporation.
"An undisclosed principal who entrusts an agent with the management of his business is subject to liability to third persons with whom the agent enters into transactions usual in such businesses and on the principal's account, although contrary to the directions of the principal." Restatement (Second), Agency, s. 195. In this case the verdict is supported by the evidence and defendant's motion to dismiss was properly denied. 1 O'Neal, Close Corporations, s. 1.15 (1958).
Judgment on the verdict.
All concurred.