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Though one can find many points of tension in Story's treatise that foreshadow the future bifurcation of the field, the really important observation is that he was largely unconcerned with the issue. Only later in the century, when great increases in railroad and industrial injuries made the strict liability of the employer a central-and costly-concern, was there any strong inducement to radically separate the two fields.
The central legal issue for Story, as it continued to be for all later legal thinkers, was what constituted the authority conferred on the agent. As if to underline the still close relationship between master and servant and between principal and agent, Story wrote of the agent's authority as a kind of status. His basic division was between "general" and "special" authority. In the case of general authority, the principal was bound by the acts of his agent, "although he violates by those acts his private instructions and directions, which are given to him by the principal, limiting, qualifying, suspending, or prohibiting the exercise of such authority under particular circumstances."38 For the agent with special authority, by contrast, the principal was not bound by acts exceeding that limited authority.
In the commercial world of Story's day, the embodiment of the general agent could be "familiarly seen in the common case of factors."39 The factor, employed by a merchant to sell goods on consignment, was one of the earliest examples of the shift to commercial specialization in nineteenth-century America. "In the 1790's the general merchant . . . was still the grand distributor. . . . He was an exporter, wholesaler, importer, retailer, shipowner, banker, and insurer."40 During the next fifty years, the all-encompassing functions of the general merchant began, one by one, to be subdivided into specialized commercial activities.
By 1815, the stupendous rise in the cotton trade expanded the importance of the factor. "The spread of commercial agricultural in the south encouraged commercial specialization in the east. The unprecedented volume of the cotton trade helped to make New York the nation's leading city and initiated the swift decline of the all-purpose general merchant. 1141
For Story, the factor was the model of the agent with general authority. "A third person has a right to assume," Story wrote, that a factor or a broker "has also an unqualified authority to act for his principal in all matters, which come within the scope of that employment."42 "The agent could bind the principal even in situations that exceeded his express or implied authority. The agent's power, Story wrote,
extends farther, and binds the principal in all cases, where the agent is acting within the scope of his usual employment, or is held out to the public, or to the other party, as having competent authority, although in fact he has, in the particular instance, exceeded or violated his instructions, and acted without authority. For, in all such cases, where one of two innocent persons is to suffer, he ought to suffer, who misled the other into the contract, by holding out the agent, as competent to act, and as enjoying his confidence."
We see, in this passage, the ambiguity that was to become central in latenineteenth-century agency law. On the one hand, Story conceived of a general agency as a relatively fixed, well-known category defined by commercial practice. He did not hesitate to use "scope of employment" language later associated with a more extensive master-servant liability to define the authority of the agent. All those who dealt with the factor could legitimately assume that he possessed general authority, and could bind the principal even if "in the particular instance" he "exceeded or violated his instructions, and acted without authority." On the other hand, Story traced the justice of this rule to a kind of negligence in the principal, who "misled" the third party "by holding out the agent, as competent to act. . . .44 Story also employed precisely the same "holding out" language to justify the liability of the master for the torts of his servant. Above all, the overwhelming concern of his treatise was with protecting the third party's stable expectations rather than with the individual culpability of the principal-"for otherwise, such secret instructions and orders would operate as a fraud upon the unsuspecting confidence and conduct of the other party."45
Story wrote his treatise just as a radical increase in business specialization was undermining the coherence of his simple distinction between general and special agents. "Little institutional innovation occurred in American business before the 1840s," Chandler has written.46 Thereafter, "the much larger flows of a greater variety of goods" produced dramatic increases in specialization and impersonality in business arrangements. 47 Moreover, the small business partnership began to be replaced by the chartered, stock-issuing corporation and the self-employed worker by the wage-earning employee. Almost from the moment Story's treatise was published, judges and jurists struggled to free themselves from its categories.
If specialization undermined Story's categories, changes in the theory of tort liability of employers produced the far more threatening prospect of strict liability. When Story wrote, the dominant theory of respondent superior still contained consensual elements. The "command theory" held the master liable for his servant's torts only if he had authorized the servant's acts.4A The litmus test of this doctrine was that the master was not liable for the willful torts of the servant, since they were clearly outside of the master's control. But as the corporate employer replaced the personalized employment relation, courts began to resort to an objective "scope of employment" test, so that by the last quarter of the nineteenth century it had become largely irrelevant whether the master had commanded or authorized an employee to perform a particular act.49 At this point, a status-based master-servant liability, largely exorcised of earlier consensual elements, had come to represent the anomaly of strict liability that Holmes protested against. S0 The uncritical ease with which Story had moved between the liability of masters and of principals was no longer possible.
If strict liability triggered the fear of arbitrary redistribution of wealth, the institution of contract expressed the individualistic ideal of completely private and voluntary transactions. Hence, the aspiration of late-nineteenth-century thinkers was to place the law of principal and agent on unmistakably contractual foundations. Their first step was to replace Story's "general" and "special" agents with the categories of "actual" and "apparent" authority.
Story's treatise went through nine editions by 1882 under the supervision of different editors. Until Francis Wharton published his own treatise in 1876, S' no other general text on agency had appeared in America, though the subject of principal and agent had been treated in most contracts texts. By the time Wharton's work appeared, not only had a great gulf developed between the two subdivisions of Story's treatise but the decisions of courts had greatly undermined its structure.
By mid-century, the spread of specialization began to produce judicial resistance to the status-based framework that Story had erected for the law of agency. Judges started to insist that Story's distinction between general and special agents was "highly unsatisfactory, and will be found quite insufficient to solve a great variety of cases." 52 By 1866, in the fifth edition of his treatise on contract, Theophilus Parsons inserted, for the first time, a criticism of Story's classification and attacked its strong tendency to impose liability on principals.
Of late years, courts seem more disposed to regard this distinction [between general and special agents] . . . as altogether subordinate to that principle which may be called the foundation of the law of agency; namely, that a principal is responsible, either, when he has given to an agent sufficient authority, or, when he justifies a party dealing with his agent in believing that he has given to this agent this authority. 53
Parsons thus sounded the major theme of all late-nineteenth-century efforts to reconceptualize agency law: that, in the words of an English judge, "No one can become the agent of another person except by the will of that other person." 54 Unless a principal either had actually authorized an agent to act or had negligently misled a third party into believing he had given such authority, he could not be bound.
The c
ulmination of the effort to overthrow Story's categories and to root the law of agency directly in the will of the principal was Francis Wharton's Commentary on the Law of Agency and Agents (1876). Wharton was the first writer to acknowledge a clear bifurcation of the field between principal-agent and masterservant. This permitted him to confine the doctrine of respondeat superior so as to prevent its strict liability underpinnings from devouring the law of agency.
Even within tort law, Wharton sought to reduce the scope of strict masterservant liability. He posited a novel distinction between "agency" and "service" in which "the former relates to business transactions, in which there is more or less discretion allowed to the employee, while the latter relates to manual services, which the employee is, as a rule, obliged to perform under specific orders." 55 At the very moment at which the tort law, dominated by railroad accidents, was beginning to impose more extensive liability on employers for the torts of their employees, Wharton sought to restore an anachronistic "command" justification by grounding master-servant liability in the requirement of "specific orders." This move permitted him not only to reinterpret the employer's vicarious liability in terms of the will of the master but, even more important, it enabled him to shrink strict master-servant liability to cover only the very special case in which courts could plausibly merge the identities of master and servant.
The bifurcation of agency law permitted late-nineteenth-century jurists to divide the field along tort-contract lines. Whereas in the first half of the century agency had been treated as a separate and autonomous branch of law, by the end of the century it had become common to subsume the field within tort or contract treatises. Sir William Anson, one of the leading English contract writers of the late nineteenth century, defended this approach by insisting that the liability of a principal arises "not in virtue of any occult theory of representation" but through contract. 56
Just as Wharton sought to separate sharply and to isolate the strict liability standard in master-servant law from the negligence standard in principal-agent law, he also completed the attack, begun by Parsons, on Story's classification of general and special agents. Story's framework, he wrote, "cannot be accepted without some modification." He approvingly quoted an English legal writer:
No principal can be held, by merely appointing one his agent, to guarantee the world against any undue assumption of powers on his part, or fraudulent abuse of the opportunities his agency may give him for deceiving others; and if, without [the principal's negligence], damage has accrued to a third party by the agent's assumption of authority or abuse of his position, the loss must fall on the party dealing with him.17
Thus, Wharton sought to reverse Story's virtually conclusive presumption that a general agent was "held out" to the world as authorized to bind the principal.
This effort to reverse Story's presumption, we have seen, arose in the midst of fundamental changes in the structure of business enterprise. In Story's day, there had usually existed a personal relationship between principal and agent, which the explosion of the business corporation did much to reverse. Especially in the railroad and banking fields, there were now large numbers of employees, serving in specialized roles and spread across large geographical areas, who had the power to misrepresent the scope of their authority.
This structural shift in business was highlighted in an important series of New York cases between 1856 and 1865, in which a sharply divided Court of Appeals argued over the authority to be imputed to agents who misappropriated various forms of negotiable paper-bank drafts, checks, bills of lading-that subsequently passed into the hands of innocent third parties. Typical cases were ones in which a bank teller erroneously certified that a drawee had deposited enough funds to pay his draft or in which a railroad employee issued a bill of lading for nonexistent grain.58 "In each of these cases," the New York Court of Appeals observed, "the extrinsic fact which constituted the condition of the authority was peculiarly within the agent's knowledge, and was necessarily represented to exist by the execution of the agent's powers." 59
The division within the court turned on the realization that if a principal could be liable for the act of an agent who misrepresented his own authority, it was easy for an agent to defraud his principal. On the other hand, as one judge put it, as between an innocent third party and a principal who held out his agent as authorized to act, "who is to bear the consequences of this false and fraudulent representation of the agent?"'
Those who wished to bring the law of agency more closely into line with the will of the principal sought to distinguish the holding out situation from the agent's own enlargement of his authority. The "fundamental proposition," declared New York Justice George F. Comstock in 1856, ". . . is that one man can be bound only by the authorized acts of another. He cannot be charged because another holds a commission from him and falsely asserts that his acts are within it."G1 "The appearance of the power is one thing," he argued, "and for that the principal is responsible. The appearance of the act is another, and for that, if false, I think the remedy is against the agent only."62 Comstock's formula for limiting the liability of principals was adopted by Theophilus Parsons in the 1857 edition of his contracts treatise and was repeated even after it had been rejected in New York. 63
The distinction between a general "power" and a particular "act" was, however, difficult to apply to the most typical cases in which the agent fraudulently misrepresented some fact, such as whether there was actual property standing be hind a bill of lading or actual deposits supporting a certified draft. "In truth," the New York court observed, "the power conferred in these cases, is of such a nature, that the agent cannot do an act, appearing to be within its scope of authority, without, as a part of the act itself, representing . . . that the condition exists upon which he has the right to act. Of necessity, the principal knows this fact, when he confers the power."64 In fact, these cases permitted the New York courts to refuse to distinguish between master-servant and principal-agent liability. "The liability of principals for the negligence and for the frauds of their agents rests upon the same grounds," the New York court declared in 1862.65 The principal was liable for the fraudulent misrepresentation of the agent for the same reason that the master was liable for the negligence of his servant.
The result of these decisions was that there was a substantial gap between the thrust of the case law and that of the treatise literature. After the Civil War, the case law moved decisively in the direction of holding an organization liable for an agent's contracts if a third party could reasonably have believed that the agent had authority, whether or not he actually did. The case law, in short, tended to hold that apparent, not actual, authority was sufficient to charge a principal. These decisions weakened internal control within the corporation but strengthened the ability of strangers to rely on the representLtion of its agents.
By contrast, the central effort of the treatise literature was to subordinate the law of agency to the law of contract and to emphasize that only actual authority could justify liability. In its emphasis on will, the legal literature sought, above all, to proclaim that contractual freedom was the foundation of the law of agency, and that the necessities of organizational life could not justifiably restrict individual autonomy.
How does one account for these differences? The first thing to note is that an objective standard-apparent authority-triumphed earlier in the law of agency than in any other field, leading one to suppose that there is a strong correlation between the rise of the corporation and the emergency of objective standards. Once it is realized that the individualistic underpinnings of the will theory were difficult to apply to large organizations-indeed, that the emergence of large organizations threatened to render the will theory impractical, if not virtually incoherent-it is no surprise that courts turned to an objective "reasonableness" standard. In general, there appears to be a strong correlation between the rise of the corporation and the emergence of an anti-individualistic objective theory in all
fields of law.
But how does one explain the contrary thrust of the treatise literature? Perhaps this is a clue to one of the primary functions of the classical legal treatise, which sought not simply to report on the state of the law but to advance a highly abstract and integrated version that was grounded in a picture of a decentralized, individualistic economic and political order. Its most fundamental expression can be found in the set of ideas that constituted the doctrine of freedom of contract. It was here that the Progressive attack on Classical Legal Thought began.
Objectivism and the Law of Agency
One of the most surprising examples of the power of the contractual paradigm is the first law review article written by Arthur Corbin in 1906.66 Soon to become a major influence on the development of Legal Realism and the preeminent figure in the subversion of the will theory in contract law, Corbin, in his first effort, argued for a completely orthodox subordination of the law of agency to contract doctrine.
As in contract law, after 1905, the supposed anomalies in the law of agency were used to discredit the will theory itself. The most widely accepted doctrine that did not fit into the will theory was the rule that an undisclosed principal was liable for his agent's contract. How could the principal be held liable, the defenders of orthodoxy asked, for a contract between his agent and a third party? Since the third party had entered into the contract with no knowledge that anyone but the agent was involved, there was no meeting of minds between the principal and the third party.
Courts had nevertheless widely enforced the liability of an undisclosed principal on the ground that it was unjust for him to receive a benefit without undertaking a corresponding burden. And in perhaps the last effort to justify agency doctrines exclusively in terms of the contractual assent of the parties, James Barr Ames, dean of the Harvard Law School, declared in 1909 that the liability of the undisclosed principal was an anomaly that "ignores . . . fundamental legal principles. . . ."67 In his view, the law of agency was simply a subcategory of the law of contracts in which the will theory governed.