Both United States and Hungarian law allow business firms to use representatives to form contracts. United States law uses the word "agent" to describe a person (natural or juristic) who agrees to act for a business firm under the control of the firm's management. See Restatement (Second) of Agency, section 1. Hungarian law uses the term representative" to describe a person with the authority to agree to a contract for a firm. Hungarian Civil Code, section 219. This paper uses the terms interchangeably.
An individual (i.e. a sole proprietorship) has the option of using agents (representatives) to form contracts but does not have to do so. Other types of firms (i.e. business associations) have no option. They must use agents to form contracts.
A firm that uses agents takes the risk that the agent might exceed his authority and bind the firm to an unprofitable contract. Legal rules, by providing that a firm has no duties under a contract if the firm's agent had no authority to bind the firm to the contract, can reduce this risk. The risk is not completely eliminated by such a rule because a contracting party whose agent has exceeded his authority may fail to convince the fact finder in an adjudication or arbitration proceeding that the agent actually exceeded his authority by agreeing to the contract. Nevertheless, the risk is lower in a jurisdiction that has such a rule than in a jurisdiction that lacks such a rule.
A rule excusing a firm from performing its obligations under a contract on the grounds that the agent exceeded his authority in forming the contract reduces one type of risk but creates another. A firm that negotiates a contract in such a jurisdiction faces the risk that it may incur costs to perform a contract only to discover that the other firm refuses to perform its contractual duties on the basis that the firm's agent lacked authority to form the agreement. The risk can be reduced by making firms liable for contracts agreed to by their agents regardless of the extent of the agent's authority, but that simply restores the risk described in the previous paragraph.
There are, of course, sets of legal rules that lie somewhere between the extremes of absolving firms from any liability under a contract agreed to by an who exceeded his authority and of making firms absolutely liable for the contracts agreed to by their agent. Each intermediate set of rules creates a unique set of risks for the firm. When a firm operates in more than one country, it must be cognizant of the different sets of risks that the rules of agency (representation) impose in each jurisdiction.
Hungarian and U.S. legal rules take different approaches to the risk that an agent might exceed his authority. This paper compares the legal rules in the United States that apply to a contract whose agent exceeded his authority by agreeing to the contract with the legal rules in Hungary that govern such a situation.
In the United States, three different legal doctrines could impose contractual liability on a privately owned firm when a natural or juristic person agrees to a contract on behalf of the firm but lacks the authority to do so. These legal doctrines carry the names of "ratification," "apparent authority" and "agency by estoppel". These doctrines do not result from legislation but from the courts' exercise of their common law powers to develop legal rules to resolve disputes between parties when there are no constitutional or statutory rules that apply to the controversy and no constitutional or statutory rules preventing the court from exercising jurisdiction over the controversy. Although the United States has a federal system of government and the court system of each state, in theory, could develop its own peculiar set of substantive law involving these doctrines, the various court systems have not done so. As a result, a legal dispute involving the doctrines discussed in this paper should have the same outcome regardless of the forum in which the parties litigate the dispute.
The Hungarian Business Associations Act and the Hungarian Civil Code do not use the terms
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ratification, apparent authority or agency by estoppel. However, there is a substantial overlap between these U.S. doctrines and subsection 1 of Article 39 of the Hungarian Business Associations Act and section 220 of the Hungarian Civil Code.
This paper describes the U.S. doctrines of estoppel, apparent agency and agency by estoppel and illustrates them with U.S. court cases. It then describes the provisions of subsection 1 of Article 39 of the Business Associations Act and section 220 of the Hungarian Civil Code. After describing U.S. and Hungarian law, it describes fact patterns that would fall within the plain language of the Hungarian Code and compares them to the U.S. doctrines of ratification, apparent authority and agency by estoppel. This procedure allows the reader to ascertain factual circumstances that likely will produce identical results under the two sets of legal rules and factual circumstances that likely will produce different results.
An agent is a natural or legal person who agrees to act for another natural or legal person (called the principal) under the principal's direction or control. Under U.S. law, circumstantial evidence is sufficient to prove the existence of an agency relationship. Circumstantial evidence is evidence from which a person rationally could infer the elements of an agency relationship. For example, if a person who is negotiating a contract leaves the negotiations to communicate with another person, a court or jury would have sufficient evidence to conclude that the negotiator was acting on behalf of a principal even though the negotiator and the alleged principal both deny it.
Under U.S. law, a business is bound by a contract agreed to by an agent of the business provided that the agent had authority to agree to the contract. In addition, under the legal doctrines of ratification, apparent authority and agency by estoppel, a firm can be bound by a contract agreed to by a person who exceeds his authority as an agent, or worse yet, by a person who is not an agent of the firm at all. Each of these doctrines will be discussed in turn.
If the following facts are present, the doctrine of ratification creates contractual obligations for a firm even though the person agreeing to the contract lacked authority to bind the firm:
1. The firm learns of the actions of its purported agent, and
2. The firm voluntarily approves the contract, having full knowledge of all the material terms of the agreement.
See Restatement (Second) of Agency, sections 82, 91, 93-100 (1958), Breen Air Freight LTD v. Air Cargo Inc. et al. 470 F.2d 767, 773 (2d Cir. 1972).
The ratification may be express or implied. Express ratification means that the principal takes some formal action to acknowledge that he comply with the terms of the agreement, such as the approval of the agreement at a regularly scheduled meeting by a majority of a quorum of the Board of Directors of a corporation. Implied ratification consists of ratification by an act signifying the firm's acceptance of the contract, such as the acceptance of the other party's whole or partial performance of his obligations under the contract. See Restatement (Second) of Agency, section 83 (1958), National Bank of Commerce v. Thomsen, 80 Wn.2d 406, 413-414, 495 P.2d 332 (1972).
The Doctrine of Apparent Authority
The doctrine of apparent authority creates contractual liability for a firm to a contract despite the absence of authority by the firm's agent to agree to the contract if all of the following facts are present:
1. The person who agreed to the contract was an agent of the firm; and
2. The other party to the contract, acting in good faith and conversant with business practices and customs, is led to believe, by the actions or conduct of the firm's decision makers (i.e. the firm's principals), that the agent has authority to agree to the contract.
See Restatement (Second) of Agency, section 27 (1958).
The case of Lindstrom v. Minnesota Liquid Fertilizer Company, 264 Minn. 485, 119 N.W.2d 855 (1963), is an example of a case of apparent authority. The relevant facts of the Lindstrom case, as reported by the Minnesota Supreme Court, are as follows.
Minnesota Liquid Fertilizer Company was a corporation that sold and distributed ammonia fertilizer. It owned land and buildings in several different locations in Minnesota, including the town of Farmington. Its property holdings in Farmington consisted of an office building, a 30,000-pound steel storage tank, small movable tanks and application equipment. "Minnesota Liquid Fertilizer Co.," was
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painted on a large sign above the office building, on the steel storage tank in letters of substantial size and prominence and also on the small storage tanks and equipment.
The corporation leased its Farmington property to a person named Hurley Weaver. Weaver agreed to repair and maintain the bulk plant, machinery and equipment at his own expense.
The corporation shipped the fertilizer to Farmington in rail tank cars on consignment to Weaver for resale to farmers in the area. Weaver sold the fertilizer and distributed it to customers in field tanks, using the leased equipment and applicators to apply it on the fields. In addition, Weaver also used a pick-up truck and two tractors that he personally owned to perform the work. The name "Hurley Weaver" appeared above the name "Minnesota Liquid Fertilizer Co." on his personal truck.
The corporation mailed advertising materials to prospective customers in Farmington that contained the corporation's name and home office address. The materials advised the recipients to see "Your Agro-Vita Lesee Manager" and gave the location of the Farmington plant leased by Weaver.
Weaver contacted a welder named Lindstrom and requested him to supply parts and material for certain equipment used in connection with applying fertilizer and also to perform welding services. At Weaver's request, Lindstrom opened a charge account in the name of "Minn. Liq. Fert. Co. Farmington, Minn." Weaver ordered various items of material and labor for the operation of his fertilizer business and for the maintenance of various items of the leased equipment, charging them to this account. Lindstrom assumed that he was furnishing the material and labor for the Minnesota Liquid Fertilizer Company. He testified that he had talked with Weaver about the account on numerous occasions during the years in which it was active and that at no time did Weaver indicate anything other than that the corporation was responsible for the account and he (Weaver) would see to it that the corporation (Minnesota Liquid Fertilizer Company) would pay it.
Weaver did not pay Lindstrom and various other creditors. The corporation learned of Weaver's unpaid accounts and mailed him a letter terminating the lease. The letter described the terminated lease as a "plant manager lease."
A jury found that Lindstrom was an agent of Minnesota Liquid Fertilizer Company and awarded a judgment against the firm for Weaver's unpaid account with Lindstrom. Minnesota Liquid appealed to the Minnesota Supreme Court, (the court of second instance in Minnesota), claiming that Weaver was a mere lessee of the company and not an employee or agent. It further claimed that Weaver had no authority to contract with Lindstrom on behalf of the company and pointed out that the lease required Lindstrom to maintain the plant, equipment and machinery at his own expense.
The Minnesota Supreme Court held that there was sufficient evidence for the jury to conclude that Weaver was an agent of Minnesota Liquid as well as a lessee of the corporation's equipment. It reached this conclusion even though the corporation's president had denied at trial that Weaver was an agent of the company. The Court stated:
The evidence here adequately supports a finding that defendant, by its actions, had made Weaver its actual as well as its ostensible manager of the Farmington branch. In its advertising material distributed in the Farmington area prospective customers were requested to refer to the "local manager" and "Agro-Vita Lessee Manager" of defendant's Farmington branch. In its letter of August 22, 1958, it definitely revealed that Weaver was actually looked upon by defendant as the manager of the Farmington branch as well as lessee.
Because the evidence was sufficient to sustain the jury's decision that Weaver was an agent of Minnesota Liquid, the next question was whether Weaver's actions in buying parts and labor from Lindstrom were within the scope of his actual or apparent authority as a corporate agent. The Court held that the decision was within his apparent authority, stating:
The jury's finding that a principal and agent relationship existed between defendant and Weaver would render defendant liable for acts performed by Weaver within the scope of his apparent authority as plant manager. Any secret limitations placed thereon by defendant would not absolve it from liability to third persons such as plaintiff who dealt with Weaver as defendant's manager and who were unaware of any limitations upon his authority as such.(citations omitted)
There was no issue concerning Lindstrom's good faith in entering into his contract with Weaver. Therefore, the Minnesota Supreme Court upheld the jury verdict without analyzing this issue.
The doctrine of agency by estoppel is similar to, but not identical with, apparent authority. Agency by estoppel differs from the doctrine of apparent authority because, unlike the doctrine of apparent authority, this doctrine of U.S. law can result in the imposition of contractual liability on a third party
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for the actions of a person who is not an agent of the third party. The doctrine of agency by estoppel does not create agency authority where none exists. It is a litigation rule that prevents one party to a purported contract from denying that a person who agreed to the contract was acting as his agent. The doctrine applies if all of the following facts are present:
1. The person who agreed to the contract was not an agent of the firm;
2. The purported principal knowingly caused the purported agent to act, or permitted the purported agent to act, in a manner that justifiably caused a person of careful and prudent business habits to believe that the person possessed the authority exercised; and
3. The purported principal avails himself of the benefit of the purported agent's acts or the other party changed his position in reliance upon the authority of the purported agent..
See Restatement (Second) of Agency, section 8B comment (b)(c) (1958)
The case of Parker v. Junior Printing Press Service, Inc., 266 Md 721, 296 A.2d 377 (1972) illustrates a case of agency by estoppel. The relevant facts of Parker are as follows.
Parker was a candidate for the United States Congress. A person by the name of Donald Embinder was his campaign manager. On four different occasions, Embinder ordered the printing of campaign literature from Junior Printing Press. Parker was not present when Embinder ordered the literature but Parker personally inspected the proofs at the printing shop on two separate occasions prior to the printing of the orders. Parker was also present on one occasion when the printing shop delivered the literature. He never told Junior Printing Press that he was not personally responsible for paying for the literature.
Parker refused to pay when he received an invoice, claiming that Embinder had no authority to order the literature and that only his campaign Treasurer had such authority. The trial court disagreed and decided that Embinder was Parker's agent and that his agency authority included ordering the printing of campaign literature.
Parker appealed to the Maryland Supreme Court, claiming that the evidence was insufficient to show that Parker was his agent. The Maryland Supreme Court ruled that the trial court's decision that Parker was contractually liable for the services was not clearly erroneous because Parker would be contractually liable for the services through the doctrine of agency by estoppel even if Embinder was not his agent. All of the elements of agency by estoppel were present. Parker must have known, when he inspected the proofs prior to printing, that Embinder had ordered campaign literature on his behalf. However, he did not warn Junior Printing press that Embinder had no authority to place such orders. Junior Printing Press justifiably believed that Embinder was Parker's agent and incurred the costs of printing the materials. Thus, Parker was estopped from denying Embinder's agency.
Six sections of Act IV of 1959 as amended (hereinafter referred to as the Civil Code) can apply when the parties are privately owned businesses and there is a dispute over whether the agent of one of the parties has the authority to agree to the contract. These sections are sections 219, 220, 221, 222, 223 and 237. Additionally, sections 21, 39, 40 and 55 of Act CXLIV of 1997 as amended (hereinafter referred to as the Business Associations Act) also apply to such a dispute.
Section 219 of the Civil Code provides that a contract can be made by a representative of the person who is obligated to perform the contract unless the law provides otherwise. This right of representation is the Hungarian Civil Code's equivalent of the common law concept of agency.
Section 39 of the Business Associations Act provides that business associations are represented by their executive officers vis-a-vis third parties by their executive officers and that while the executive officers' right of representation (i.e., their agency powers) may be restricted in the founding document of the association, the restriction is void vis-a-vis third parties. Section 21 of the Business Association Act defines executive officers as members of unlimited and limited partnerships who have the right to exercise management powers, the director of joint enterprises, the managing director (or directors) of limited liability companies and the Board of Directors of joint stock companies (unless the Deed of Foundation provides otherwise). Section 55 of the Civil Code, which also governs agency powers, is consistent with Section 39 of the Business Associations Act. Section 55 provides that business associations are represented vis-a-vis third persons by directors in joint enterprises, the managing director in limited liability companies, and the members of the Board of Directors in joint stock companies. Section 55 is silent on who may
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exercise agency powers in unlimited and limited partnerships, which means that the provisions of Section 39 of the Business Associations Act, previously discussed, should control.
Section 39 of the Business Associations Act allows the supreme body of a business association to appoint a person as company secretary. The company secretary has general agency powers, meaning that he has the authority to bind the association to all contracts. The company secretary acts independently in implementing the instructions of the association's executive officers. The business association may have one company secretary at its registered office and one at each branch office. In order to be a company secretary, a person must be (1) an employee and (2) be an executive officer of the association.
Section 39 also permits the executive officers of a business association to invest employees of the association with limited agency rights. Section 40 provides that the signatures of two persons with limited agency powers are required to bind the business association if neither agent is an executive officer but allows the association to permit one such person to bind the company if the foundation document so states. Section 40 also permits the foundation document to require the signatures of two or more executive officers to bind the association if the foundation document so states.
Section 222 of the Civil Code provides an additional method of creating agency powers. According to section 222, the power to act as an agent can be created by a statement (i.e., by a power of attorney) addressed to the other party in a transaction. Once a power of attorney issues, the agent retains the power to bind the business association, even if the association revokes the power, until the other party to the transaction is informed of the revocation.
Section 220 of the Civil Code grants agency powers to the employees of business associations and private persons (e.g., sole proprietorships) who work on business premises open to the public. The powers granted include entering into contracts that are usually entered into on the particular premises in which the employee works. Section 220 provides that the association or proprietorship can limit the agency authority of a particular employee but that the limitation is inoperable with respect to third parties unless the circumstances indicate that the employee lacks the agency powers of other employees or the third party is aware or could make himself aware of the limitation.
Subsection 2 of section 237 of the Civil Code recognizes the power of a firm to approve the unauthorized acts of persons who purportedly act for them as agents when the purported agent exceeds his authority or acts without any authority whatsoever. Subsection 2 of section 237 declares invalid contracts to be valid contracts when the cause of invalidity is removed. This provision would allows a business firm to approve an invalid exercise of agency authority. L. Keckes. Civil Law. Business Law in Hungary. (L. Keckes ed.)(1998) at 88-89.
Subsection 1 of section 221 is consistent with this interpretation of subsection 2 of section 237. Subsection 1 of section 221 provides that a person who exceeds the scope of his authority in good faith or who acts for another without the power to do so is liable to the person he purportedly represents for any damages that he causes unless the person purportedly represented approves his actions.
Under U.S. agency law, an agent who exceeds his authority can bind his principal to a contract, provided the factual pre-requisites for the doctrines of ratification, apparent authority or agency by estoppel exist. Hungarian law recognizes legal rules that are similar to these doctrines although it does not use these terms to describe its legal rules. The legal rules in the two countries, however, are not identical and the Hungarian legal rules can create contractual liability when the U.S. doctrines would not. Conversely, the U.S. doctrines can create contractual liability when the Hungarian legal rules would not. Thus, the law of agency (or representation, as Hungarians would label it) is a potential minefield for U.S. managers who operate subsidiaries of U.S. firms in Hungary and also for the managers of Hungarian firms who operate Hungarian subsidiaries in the United States.
Consider, for example, the provisions of section 39 of the Hungarian Business Associations Act. Subsection 1 of section 39 states:
(1) Business associations are represented by their executive officers vis-a-vis third parties and before the court and other authorities. The right of representation of executive officers may be restricted in the articles of association (deed of foundation, statutes), or may be distributed among several executive officers. Any restriction of the right of representation shall be void vis-a-vis third parties.
Section 39 embodies the legal rules found in the United States common law doctrine of apparent authority. It is, however, broader than the doctrine of apparent authority that exists in the United States. Subsection 1 of section 39 allows the executive officers of business associations to bind the association to a contract regardless of whether
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the officer has actual authority to do so under the foundation document of the association. The doctrine of apparent authority, as enunciated in the United States, does not make business associations liable for the acts of their executive officers when the officers exceed the authority granted them by the association's foundation document.
The case of Deers, Inc. v. DeRuyter, 9 Wn. App. 240, 511 P.2d 1379 (1973), illustrates the point. The relevant facts of Deers are the following.
Deers, Inc. contracted to provide K-Pak Homes, Inc., a Washington corporation, with certain advertising and promotional material. The material was delivered but K-Pak Homes failed to pay when Deers billed it for its services.
Litchenberger, a Deers' representative, learned that First Republic Corporation controlled K-Pac. He contacted a person named William DeRuyter at First Republic and demanded that First Republic pay K-Pak's indebtedness. DeRuyter, in addition to being an executive at First Republic, was a vice-president of American Combining Corporation which owned First Republic. DeRuyter was also a member of the Board of Directors of American Combining. He agreed executed promissory notes on behalf of American Combining to secure payment of K-Pac's indebtedness. Litchenberger made no attempt to verify DeRuyter's authority to execute the notes on behalf of American and, in fact, DeRuyter had no authority to execute the notes. When the other directors of American Combining learned of the execution of the notes, the board met and refused to ratify DeRuyter's execution. American Combining notified Deers that it did not intend to honor the notes.
Deers filed a lawsuit claiming that American Combining was liable to Deers for the sums owing on the unpaid notes. The trial judge, sitting without a jury, ruled that Deers could not recover from American Combining because DeRuyter had no authority to execute the notes. Deers appealed, claiming that American Combining was liable on the notes because DeRuyter had apparent authority to bind the corporation by executing them.
The Washingon Court of Appeals held that American had no liability to Deers because a person who was acting in good faith and was conversant with business practices and customs would not have relied on DeRuyter's representation that he had authority to execute the notes. The Court stated:
Mr. Litchenberger did not telephone, wire or otherwise attempt to contact anyone at American Combining's sole place of business in New York to determine whether Mr. DeRuyter had any authority to sign promissory notes on behalf of the corporation. Mr. Litchenberger, an experienced businessman, knew that a corporation officer must have authorization of the Board of Directors before he may execute notes for the corporation. Litchenberger was dealing with an officer of a corporation about which he knew very little. Finding of fact No. 8. In light of these facts, Deers' failure to verify DeRuyter's authority with American does not comport with "ordinary prudence". The trial judge correctly concluded that Deers failed to establish apparent authority in DeRuyter to execute the notes.
The reader should also note that the purported principal, American Combining, did nothing to cause Deers' agent, Litchenberger, to believe that DeRuyter had any authority to execute the notes. The lack of any action by American Combining also would have been sufficient to defeat Deers' claim.
Under subsection 1 section 39 of the Hungarian Business Associations Act the outcome of Deers would have been different. The firm would have had liability on the notes because the payee would not have any duty to exercise prudent business judgment and inquire into whether the person signing on behalf of the firm had authority to do so.
Although an executive officer who exceeded the scope of his authority under the business association's foundation document might not be able to subject his firm to contractual liability under the doctrine of apparent authority in the United States, he might be able to do so, in appropriate factual circumstances, under the doctrine of agency by estoppel. The Parker case, discussed earlier in this paper, demonstrates this proposition. Subsection 1 of section 39, therefore, might be read as embodying a doctrine similar to the U.S. doctrine of agency by estoppel as well embodying legal rules similar to the U.S. doctrine of apparent authority. Subsection 1, however, is broader than the doctrine of agency by estoppel that exists in the United States. The doctrine of agency by estoppel in the United States does not apply unless the owner of the sole proprietorship or the governing body of the business association is aware that the executive officer is exceeding his authority and does not stop this activity and warn the person who is dealing with that executive officer of the executive officer's lack of authority. Restatement (Second) of Agency, section 8B comment (b)(c)(1958). See also Parker. However, subsection 1 of section 39 does not require that the governing body of the business association be aware of the executive officer's actions in order to be subject to contractual liability as a result of the executive officer's contractual activity.
The previous discussion demonstrates that subsection 1 of section 39 can create greater legal exposure for business associations than the U.S.
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doctrines of apparent agency and agency by estoppel. For one type of business firm, however, subsection 1 of section 39 creates less legal exposure than the U.S. doctrine of apparent agency. Subsection 1 applies only to firms regulated by the Business Associations statute - i.e., it applies only to business associations. It does not apply to individuals conducting business on their own behalf (i.e., to sole proprietorships).
The provisions of subsections 1 and 2 of section 220 of the Hungarian Civil Code, by virtue of the operation of subsection 3 of section 220, govern the contractual liability of a sole proprietorship when a person agrees to a contract on behalf of the proprietorship but lacks the authority to do so. Section 220 of the Hungarian Civil Code states:
(1) Employees or members of an artificial person that is regularly engaged in buying or selling goods or providing other services who work on business premises open to customers shall be regarded as representatives of the artificial person in concluding and performing the contracts that are usual in that place, unless otherwise provided by legal regulation or otherwise indicated by the circumstances.
(2) Restrictions on the scope of authority of an employee or member shall be inoperative towards third persons, unless the third person is or could be aware of the restrictions.
(3) These provisions shall also be duly applied to the employees of private persons.
As does subsection 1 of section 39 of the Hungarian Business Associations Act, section 220 of the Civil Code appears, at first glance, to be a statutory embodiment of legal rules that are similar to the U.S. doctrines of apparent authority and agency by estoppel. However, there are important, though subtle, difference between section 220 and these doctrines. Section 220 creates contractual liability for the firm in cases in which the U.S. doctrines of apparent authority and agency by estoppel would not.
Consider the case of a trainee working on premises where the typical employee has the authority to agree to contracts on behalf of the firm. Suppose the firm does not grant an employee the authority to contract on behalf of the firm until he successfully completes training. What is the result under section 220 and under U.S. law if the trainee agrees to a contract on behalf of the firm without anyone in the firm (other than the trainee) knowing that he is holding himself out to customers as having such authority? Unless the customer had reason to suspect that the trainee lacked contract-making authority, section 220 would impose liability on the firm. Section 220 does not require, as a condition of imposing liability, that anyone other than the other contracting party be aware of the purported agent's actions or that the other party to the contract would suffer harm if the firm were not held to the contract. Under U.S. law, however, the trainee's firm would have no liability in the absence of ratification. The U.S. doctrines of apparent liability and agency by estoppel are inapplicable because the trainee's employer lacks knowledge that the trainee has claimed contract making authority when dealing with the firm's customer. See Restatement of the Law, Agency Second, Lindsrom and Reichert. Additionally, the other contracting party would have to prove that he would suffer harm if the trainee's firm was excused from the contract on the grounds that the trainee lacked contracting authority.
The reader should not conclude from the discussion of subsection 1 of section 39 of the Business Association Act and section 220 of the Civil Code that Hungarian Law always provides more exposure to contractual liability for the unauthorized acts of purported agents than U.S. law does. The reader should note that section 39 only applies to the acts of executive officers who exceed their authority and section 220 of the Civil Code applies only to the acts of employees who are working on business premises. Subsection 4 of section 39 of the Business Association Act allows business associations to grant agency powers to employees who are not executive officers. Section 222 of the Civil Code allows both sole proprietorships and business associations to create agencies through the mechanism of powers of attorney. Nothing in the Business Association Act or the Civil Code require the agents of a business association or a sole proprietorship to represent the firm on the business premises of the firm. Thus, there is an extremely large set of factual situations that are not governed by subsection 1 of section 39 of the Hungarian Business Association Act and subsection 220 of the Hungarian Civil Code.
Neither the Business Association Act nor the Civil Code contain any provisions creating contractual liability for firms when a non-executive acts in excess of his authority as agent, or without any agency authority whatsoever, and agrees to a contract on behalf of the firm while he is absent from the firm's premises. As discussed previously, the U.S. doctrines of apparent authority and agency by estoppel can create legal liability for the firm in these circumstances provided the necessary factual pre-requisites for the application of these doctrines are present. Thus, in these types of circumstances, U.S. law provides greater legal exposure than Hungarian law.
Both Hungarian and U.S. law permit private business firms to act through representatives (i.e., agents) to form contracts. Under both U.S. and Hungarian agency law, a purported agent who exceeds his authority can, in certain factual circumstances, create contractual liability for his firm despite his lack of contractual authority. In Hungary, the liability is created by section 39 of the Business Associations Act and section 220 of the Civil Code. In the United States, the common law doctrines of ratification, apparent agency and agency by estoppel create the liability. On the surface, Hungarian statutory law appears similar to the U.S. doctrines of apparent authority and agency by estoppel. The Hungarian statutes, however, sometimes apply when the U.S. doctrines would not apply and sometimes do not apply when U.S. doctrines would apply. Thus, the law of agency is a potential minefield for U.S. managers who operate subsidiaries of U.S. firms in Hungary and also for the managers of Hungarian firms who operate Hungarian subsidiaries in the United States. Managers must recognize the existence of this minefield and seek appropriate legal advice to avoid the mines.■
- L. Keckes. Civil Law. Business Law in Hungary. (L. Keckes ed.)(1998)
- American Law Institute. Restatement of the Law, Second: Agency
- Act IV of 1959 (as amended)(The Hungarian Civil Code), sections 219, 220, 221, 222, 223, 237.
- Act CXLIV of 1997 (as amended)(The Hungarian Business Associations Act), sections 21, 39, 40, 55
- Breen Air Freight LTD v. Air Cargo Inc. et al. 470 F.2d 767, 773 (2d Cir. 1972).
- Deers, Inc. v. DeRuyter, 9 Wn. App. 240, 511 P.2d 1379 (1973)
- Lindstrom v. Minnesota Liquid Fertilizer Company, 264 Minn. 485, 119 N.W.2d 855 (1963)
- National Bank of Commerce v. Thomsen, 80Wn.2d 406, 495 P.2d 332 (1972)
- Parker v. Junior Printing Press Inc., 266 Md 721, 296
A.2d 377 (1972)
- Smith v. Hansen, Hansen & Johnson, 63 Wn. App. 355, 818 P.2d 1127 (1991).
13 These rules are well summarized in the Restatement (Second) of Agency. With respect to actual authority, Restatement SS 26 says in pertinent part:
[A]uthority to do an act can be created by written or spoken words or other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal's account.
- With respect to apparent authority, Restatement SS 27 says in pertinent part:
[A]pparent authority to do an act is created as to a third person by written or spoken words or any other conduct of the principal which, reasonably interpreted, causes the third person to believe that the principal consents to have the act done on his behalf by the person purporting to act for him. And with respect to how the creation of actual and apparent authority differs, comment a to Restatement SS 27 says in pertinent part:
Apparent authority is created by the same method as that which creates [actual] authority, except that the manifestation of the principal is to the third person rather than to the agent.
- Smith v. Hansen, Hansen & Johnson, 63 Wn. App. 355, 818 P.2d 1127 (1991).
- The Restatement of Agency summarizes some of the specific manifestations that can, in appropriate circumstances, support a finding of apparent authority. Restatement SS 27, comment a, at 104 says:
The information received by the third person may come directly from the principal by letter or word of mouth, from authorized statements of the agent, from documents or other indicia of authority given by the principal to the agent, or from third persons who have heard of the agent's authority through authorized or permitted channels of communication. Likewise, as in the case of [actual] authority, apparent authority can be created by appointing a person to a position, such as that of manager or treasurer, which carries with it generally recognized duties; to those who know of the appointment there is apparent authority to do the things ordinarily entrusted to one occupying such a position, regardless of unknown limitations which are imposed upon the particular agent.
- Smith v. Hansen, Hansen & Johnson, 63 Wn. App. 355, 818 P.2d 1127 (1991).
- 14 Again, these rules are well summarized in the Restatement. In SS 8, comment c, it states:
"Apparent authority exists only to the extent that it is reasonable for the third person dealing with the agent to believe that the agent is authorized. Further, the third person must believe the agent to be authorized. In this respect apparent authority differs from [actual] authority since an agent who is authorized can bind the principal to a transaction with a third person who does not believe the agent to be authorized."
- Brown v. MacPherson's, 86 Wn.2d 293, 545 P.2d 13 (1975). .2d 1127 (1991).
related rule is "agency by estoppel," which occurs when one intentionally or carelessly causes the belief in third persons that an act is committed on behalf of the estopped party. As a corollary to that rule, "estoppel by silence" exists where one knows that another is acting or will act under a misapprehension yet remains silent. Restatement (Second) of
Agency SS 8B, comment (b) (c) (1958).
In the case of a public entity, where its authority is limited by statute, which in itself is notice to the public, there is no rule of apparent authority or agency by estoppel and the public entity can only be bound to the extent of the true agency. G. Reenhard, Law of Agency SS 472 (1902)
- Smith v. Hansen, Hansen & Johnson, 63 Wn. App. 355, 818 P.2d 1127 (1991).
13 These rules are well summarized in the Restatement (Second) of Agency. With respect to actual authority, Restatement SS 26 says in pertinent part:
[A]uthority to do an act can be created by written or spoken words or other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal's account.
- With respect to apparent authority, Restatement SS 27 says in pertinent part:
[A]pparent authority to do an act is created as to a third person by written or spoken words or any other conduct of the principal which, reasonably interpreted, causes the third person to believe that the principal consents to have the act done on his behalf by the person purporting to act for him. And with respect to how the creation of actual and apparent authority differs, comment a to Restatement SS 27 says in pertinent part:
Apparent authority is created by the same method as that which creates [actual] authority, except that the manifestation of the principal is to the third person rather than to the agent.
- 140/141 -
- Smith v. Hansen, Hansen & Johnson, 63 Wn. App. 355, 818 P.2d 1127 (1991).
The Restatement of Agency summarizes some of the specific manifestations that can, in appropriate circumstances, support a finding of apparent authority. Restatement SS 27, comment a, at 104 says:
The information received by the third person may come directly from the principal by letter or word of mouth, from authorized statements of the agent, from documents or other indicia of authority given by the principal to the agent, or from third persons who have heard of the agent's authority through authorized or permitted channels of communication. Likewise, as in the case of [actual] authority, apparent authority can be created by appointing a person to a position, such as that of manager or treasurer, which carries with it generally recognized duties; to those who know of the appointment there is apparent authority to do the things ordinarily entrusted to one occupying such a position, regardless of unknown limitations which are imposed upon the particular agent.
- Smith v. Hansen, Hansen & Johnson, 63 Wn. App. 355, 818 P.2d 1127 (1991).
14 Again, these rules are well summarized in the Restatement. In SS 8, comment c, it states:
"Apparent authority exists only to the extent that it is reasonable for the third person dealing with the agent to believe that the agent is authorized. Further, the third person must believe the agent to be authorized. In this respect apparent authority differs from [actual] authority since an agent who is authorized can bind the principal to a transaction with a third person who does not believe the agent to be authorized."
- Brown v. MacPherson's, 86 Wn.2d 293, 545 P.2d 13 (1975). .2d 1127 (1991).
related rule is "agency by estoppel," which occurs when one intentionally or carelessly causes the belief in third persons that an act is committed on behalf of the estopped party. As a corollary to that rule, "estoppel by silence" exists where one knows that another is acting or will act under a misapprehension yet remains silent. Restatement (Second) of Agency SS 8B, comment (b) (c) (1958).
In the case of a public entity, where its authority is limited by statute, which in itself is notice to the public, there is no rule of apparent authority or agency by estoppel and the public entity can only be bound to the extent of the true agency. G. Reenhard, Law of Agency SS 472 (1902)
Lábjegyzetek:
[1] The Author is Professor of Business Law Central Washington University Fulbright Fellow, Faculty of Business and Economics University of Pecs.
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