Theory of agency
Published on Oct 03, 2021
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PRESENTATION OUTLINE
Theory of agency
New Century Financial Services, Inc. v. Lee B. Dennegar
Dennegar's Liability
Bethan Maher
New England Institute of Business at Cambridge College
MBA 530 Legal and Ethical Dimensions of Strategic Management
Dr. William J. Aquilino
October 2, 2021
Bethan Maher
New England Institute of Business at Cambridge College
MBA 530 Legal and Ethical Dimensions of Strategic Management
Dr. William J. Aquilino
October 2, 2021
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Background & Case Summary
New Century Financial Services, Inc., v. Lee B. Dennegar
In the case of New Century Financial Services, Inc. v. Lee B. Dennegar, AT&T Universal (AT&T) issued a credit card to Lee Dennegar, sometime around February 1, 2001. Dennegar argued that he was not responsible for the $14,752.93 balance on the card, because his roommate applied for the card and made purchases in his name (Fisher, n.d.).
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Knutson managed financial & household responsibilities for Dennegar
Lee Dennegar and his roommate, Mark Knutson, had lived together from 1999 until Knutson’s death in 2003. While living together, Dennegar was the money earner and Knutson, although having no income of his own, was responsible for managing the household finances, mail, and other “office” duties (Fisher, n.d.).
In 2001, Dennegar acknowledged that he had been hospitalized and had allowed Knutson to manage the household’s financial affairs, open all the mail, pay bills, and even write checks in Dennegar’s name (although Dennegar recalled signing a few) (Fisher, n.d.).
AT&T send monthly statements to the home, and several payments had been issued in 2002. Dennegar claims that he was unaware of the credit card or balance until Knutson’s death in 2003, and because he did not apply for the card or make purchases using the card, was not liable for the card’s balance (Fisher, n.d.).
In 2001, Dennegar acknowledged that he had been hospitalized and had allowed Knutson to manage the household’s financial affairs, open all the mail, pay bills, and even write checks in Dennegar’s name (although Dennegar recalled signing a few) (Fisher, n.d.).
AT&T send monthly statements to the home, and several payments had been issued in 2002. Dennegar claims that he was unaware of the credit card or balance until Knutson’s death in 2003, and because he did not apply for the card or make purchases using the card, was not liable for the card’s balance (Fisher, n.d.).
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Overview of Agency Theory
Agent:
A person who acts in the name of and on behalf of another, having been given and assumed some degree of authority to do so.
In “agency law,” an agent can be defined as a person who acts in the name of and on behalf of another, having been given and assumed some degree of authority to do so. Agency is any relationship between two parties in which one party (agent) represents the other (principal) in day-to-day transactions. Principals hire agents to perform services on their behalf and delegate decision-making authority to agents. (Kopp, 2021).
Most human activity and virtually all corporations exist based on the theory of agency (Mejia, 2019).
Most human activity and virtually all corporations exist based on the theory of agency (Mejia, 2019).
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Agency Relationships:
Agents
Principals
Third Parties
The theory of agency and agency law has a long history that extends back to the 18th and 19th centuries. Common law dictated that “principals” employed agents or a person who acts with apparent authority to transact business. Third parties have a reasonable basis for assuming that agents have been granted authority by principals to conduct business (Barnes & Oldham, 2019).
Today, agency relationships are created either by agreement (expressly) or by operation of law (Mayer, 2013). Most agencies are created by contracts or formalized agreements (Mayer, 2013). In the Dennegar case, however, the agency relationship was created by an operation of law.
Today, agency relationships are created either by agreement (expressly) or by operation of law (Mayer, 2013). Most agencies are created by contracts or formalized agreements (Mayer, 2013). In the Dennegar case, however, the agency relationship was created by an operation of law.
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Implied and Apparent Agency Relationships
Agency relationships that aren’t created by contracts are considered operations of law, and either form impliedly or apparently. At times, courts have declared that agency relationships exist in the absence of agreements, particularly in cases of social need. For example, children may use their parents' money to purchase necessary items such as food because it is assumed that parents (head of household) provide for dependents (Mayer, 2013).
Apparent agency exists when a third party has reason to believe that an agent has assumed authority, even without express permission. According to apparent agency case law, principals are themselves liable for unauthorized transactions. Agency theory favors a third-parties who lack knowledge of agreements between agents and principals. This view assumes that transactions are legitimate and binding (Barnes & Oldham, 2019).
Apparent agency exists when a third party has reason to believe that an agent has assumed authority, even without express permission. According to apparent agency case law, principals are themselves liable for unauthorized transactions. Agency theory favors a third-parties who lack knowledge of agreements between agents and principals. This view assumes that transactions are legitimate and binding (Barnes & Oldham, 2019).
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The Law of Apparent Agency says
- Knutson acted as the agent
- Dennegar was the principal
- New Century Financial Services were the Third Party
Using the law of apparent agency, Knutson acted as the agent, Dennegar was the principal, and New Century Financial Services was the 3rd party.
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Supporting facts
- Knutson managed the household's financial affairs and "general office functions" and handled all the mail
- Knutson signed checks with Dennegar's name with Dennegar's knowledge
- Monthly statements from New Century Financial Services, Inc., were sent to the home
- Payments had been made periodically
How can we support this? Critical factors in the Dennegar case include:
-Knutson managed the household’s financial affairs & “general office functions”
-Knutson handled all the mail
-Knutson signed checks with Dennegar’s name, with Dennegar’s knowledge
-Monthly statements were sent to Dennegar’s home
-Payments had been made periodically (Fisher, n.d.).
-Knutson managed the household’s financial affairs & “general office functions”
-Knutson handled all the mail
-Knutson signed checks with Dennegar’s name, with Dennegar’s knowledge
-Monthly statements were sent to Dennegar’s home
-Payments had been made periodically (Fisher, n.d.).
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The RUling
According to Principal-Agency relationships, Dennegar had given authority to Knutson to conduct household and “office” affairs for him, including managing his finances, opening mail, and signing documents. Principals are responsible for the conduct of their agents, regardless of whether or not agents act in the principal’s best interest (Mejia, 2019). It’s clear that Dennegar gave Knutson authority to act as his agent in regard to household and financial matters.
Accordingly, the court ruled in favor of New Century Financial Services, Inc., because Dennegar had given Knutson apparent authority to act as his agent.
Accordingly, the court ruled in favor of New Century Financial Services, Inc., because Dennegar had given Knutson apparent authority to act as his agent.
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The Implications
Agency theory assumes that both principals and agents will act rationally and in their own self-interest. Without alignment of interests, conflict exists. Agents tend to be the “experts” with more information than principals, and therefore, principals assume risk in hiring (or appointing) agents (Van Thiel & Smullen, 2021). Therefore, principals, whether individuals, organizations, or corporations, need to properly incentivize agents to align goals, clearly articulate and align ethics and values, and implement control procedures (Van Thiel & Smullen, 2021).
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Conclusion
While the Dennegar case is that of principal-agency theory on a small scale, principal and agency relationships are the foundation for most organized human activity (Mayer, 2013). Corporations and businesses would not exist without agents. Proper controls and communication are necessary to ensure that agency relationships function well and serve both agents and principals.
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Barnes, V., & Oldham, J. (2019). The Legal Foundations of Apparent Authority. Journal of Corporation Law, 44(4), 649–664.
Fisher, J. A. D. (n.d.). Findlaw's Superior Court of New Jersey, Appellate Division Case and opinions. Findlaw. Retrieved October 3, 2021, from https://caselaw.findlaw.com/nj-superior-court-appellate-division/1263011.ht....
Kopp, C. M. (2021, September 4). Agency theory. Investopedia. Retrieved October 3, 2021, from https://www.investopedia.com/terms/a/agencytheory.asp.
Mayer, D. (2013). Business law and the legal environment. Flatworld Knowledge.
Mejia, S. (2019). Weeding out flawed versions of shareholder primacy: A reflection on the moral obligations that carry over from principals to agents. Business Ethics Quarterly, 29(04), 519–544. https://doi.org/10.1017/beq.2019.18
Van Thiel, S., & Smullen, A. (2021). Principals and Agents, or Principals and Stewards? Australian Arms Length Agencies' Perceptions of Arm's Length Government Instruments. Public Performance & Management Review, 44(4), 758–784. https://doi.org/10.1080/15309576.2021.1881803
Barnes, V., & Oldham, J. (2019). The Legal Foundations of Apparent Authority. Journal of Corporation Law, 44(4), 649–664.
Fisher, J. A. D. (n.d.). Findlaw's Superior Court of New Jersey, Appellate Division Case and opinions. Findlaw. Retrieved October 3, 2021, from https://caselaw.findlaw.com/nj-superior-court-appellate-division/1263011.ht....
Kopp, C. M. (2021, September 4). Agency theory. Investopedia. Retrieved October 3, 2021, from https://www.investopedia.com/terms/a/agencytheory.asp.
Mayer, D. (2013). Business law and the legal environment. Flatworld Knowledge.
Mejia, S. (2019). Weeding out flawed versions of shareholder primacy: A reflection on the moral obligations that carry over from principals to agents. Business Ethics Quarterly, 29(04), 519–544. https://doi.org/10.1017/beq.2019.18
Van Thiel, S., & Smullen, A. (2021). Principals and Agents, or Principals and Stewards? Australian Arms Length Agencies' Perceptions of Arm's Length Government Instruments. Public Performance & Management Review, 44(4), 758–784. https://doi.org/10.1080/15309576.2021.1881803
Fisher, J. A. D. (n.d.). Findlaw's Superior Court of New Jersey, Appellate Division Case and opinions. Findlaw. Retrieved October 3, 2021, from https://caselaw.findlaw.com/nj-superior-court-appellate-division/1263011.ht....
Kopp, C. M. (2021, September 4). Agency theory. Investopedia. Retrieved October 3, 2021, from https://www.investopedia.com/terms/a/agencytheory.asp.
Mayer, D. (2013). Business law and the legal environment. Flatworld Knowledge.
Mejia, S. (2019). Weeding out flawed versions of shareholder primacy: A reflection on the moral obligations that carry over from principals to agents. Business Ethics Quarterly, 29(04), 519–544. https://doi.org/10.1017/beq.2019.18
Van Thiel, S., & Smullen, A. (2021). Principals and Agents, or Principals and Stewards? Australian Arms Length Agencies' Perceptions of Arm's Length Government Instruments. Public Performance & Management Review, 44(4), 758–784. https://doi.org/10.1080/15309576.2021.1881803
