Agency

Menard v Dage-MTI, 726 NE2d 1206 (Ind, 2000).

Facts: In early 1993, the board of directors of Dage-MTI, Inc. took control of the company management from its president, Arthur Sterling. Sterling was the president and a member of the board for twenty years, and historically managed the company with minimal supervision from the rest of the Board. In October 1993, Sterling received an offer from Menard, Inc. to purchase a thirty-acre plot owned by Dage-MTI. Sterling forwarded the offer to the Board, which rejected it due to several objectionable provisions. Sterling notified Menard of the rejection, upon which Menard indicated they would make a second offer. The Board authorized Sterling to offer the parcel to other buyers and collect offers on the property, but expressly precluded him from negotiating, or agreeing to sell the property without the Board's consent.

In December 1993, Sterling received Menard's second offer, which increased the purchase price, but still contained the unacceptable provisions. Sterling failed to forward this offer to the Board, and instead signed the purchase agreement. The Board later learned of Sterling's conduct, but did not notify Menard of its intention not to sell the property until March 29, 1994. Menard sued Dage-MTI, seeking specific performance to sell the property. The trial court ruled for Dage-MTI on the basis that Sterling did not possess the express or apparent authority to bind Dage-MTI to the purchase agreement. Menard appealed, and the appellate court affirmed the decision. Menard appealed to the Supreme Court of Indiana, which granted review.

Holding: Reversed and remanded. The trial and appellate courts based their decision exclusively on express and apparent authority to determine if the purchase agreement was binding on Dage-MTI. Apparent authority vests in an agent when a third party reasonably believes the actions of the principal instilled such authority in the agent. The lower courts reasoned that since Menard had not witnessed any actions of the Board, Sterling did not possess apparent authority, and Dage-MTI was not bound to sell the property. The Court found this argument flawed, as it did not address the principle of inherent agency power.

The principle of inherent agency power exists to protect third parties from adverse dealings with an agent. Under inherent agency power, a principal is bound by the acts of an agent if the acts are such that they "usually accompany or are incidental to transactions that the agent is authorized to conduct and the other party reasonably believes that the agent is authorized to do them and has no notice that the agent is not so authorized." Restatement (Second) of Agency § 161. The premise of this theory is that business enterprises should suffer the hardships of losses that result from negligent actions of their agents.

Menard dealt exclusively with Sterling, the president and a member of the Board. Sterling operated with little Board supervision for more than 20 years, and previously purchased and sold company property without approval of the Board. The court found signing the purchase agreement was within the normal scope of Sterling's duties as president, and sufficient to establish Menard's reasonable belief that Sterling possessed the necessary authority. Although Menard knew the Board rejected the initial offer, it was inadequate to suffice for actual notice that Sterling did not have the authority to sell the property. In addition, the Board failed to take any steps to notify Menard that approval of any sale must come from the entire Board. Thus, "the loss should fall on the party who is most at fault," and under inherent agency power, Dage-MTI is bound by the purchase agreement.

The dissent argued that Menard possessed sufficient notice of the Board's need to review any offers before acceptance. After the Board's rejection of the first offer, Menard knew that the Board must approve any subsequent offer before it could become binding. Thus, the principle of inherent agency power is not appropriate in this case.

EDITOR'S NOTE: Illinois courts have recognized the principle of inherent agency power to a limited extent. The First District has stated a principal may be bound by the acts of an agent possessing "inherent power arising from the agency relationship and not dependent upon actual or apparent authority." Roscoe Co v Lewis University College of Law, 79 Ill App 3d 1098, 398 NE2d 1083, 35 Ill Dec 133 (1st D 1979). However, to date, only one case exists in which a court bound a principal based on inherent agency power. See People's Gas Light & Coke Co v Barrett, 118 Ill App 3d 52, 454 NE2d 713, 73 Ill Dec 616 (1st D 1983). Thus, it is difficult to predict how an Illinois court would use inherent agency power under similar circumstances. Historically, comparable cases have used the principle of apparent authority as the decisive factor. See Yale Development Co v Texaco, Inc, 51 Ill App 3d 616, 366 NE2d 892, 9 Ill Dec 381 (2nd D 1977).

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