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Agency as An Affirmative Defense

Fri, 02/20/2015 - 11:57 -- jsmith

by Hugh A. Fuller

It is well settled in Texas that the law does not presume agency. An often overlooked result of this doctrine is that agents signing contracts on behalf of their business entities principals put themselves at risk of individual liability when a contract does not disclose the full legal name of their principal.

Agents may sign contracts for disclosed, undisclosed and partially disclosed principals. If an agent signs a contract for an undisclosed or partially disclosed principal, both the agent and the principal are liable on the contract, though the plaintiff must elect to take a judgment against just one. Disputes arise when the parties disagree whether the agent’s principal was fully disclosed or partially disclosed. In these cases, the defendant has the affirmative burden to plead the defense of agency and to prove that the plaintiff had actual knowledge of the true identity of the principal at the time the contract was signed. This burden is not obvious to many practitioners because agency is not listed as an affirmative defense in the Texas Rules of Civil Procedure.

The seminal case setting forth the affirmative defense and elements of agency is Southwestern Bell Media, Inc. v. Trepper, 784 S.W.2d 68, 71 (Tex.App.—Dallas 1989, no writ). In Trepper, the defendant, Elliot Trepper, signed a contract for yellow-pages advertising in his capacity as “President” of a corporation. The contract stated the trade name of the corporation, not its true legal name. Southwestern Bell sued Trepper in his individual capacity and prevailed in a jury trial when Trepper failed to obtain a jury finding on his defense of disclosed agency.

On appeal, the Fifth Court of Appeals held that (1) agency is an affirmative defense and is never presumed, and that (2) an agent, to avoid personal liability, must disclose (a) that he is acting in a representative capacity, as well as (b) the true legal identity of his principal. The agent is not relieved of liability merely because the person with whom he deals has the means of discovering his principal’s true identity. Instead, only the plaintiff’s actual knowledge of the principal’s true legal identity at the time the contract was entered will absolve the agent from liability on the contract.

This doctrine was expanded one step farther in Patel v. Whiteco Industries, Inc., 1991 WL 134576, at *4 (Tex.App.—Dallas 1991, no writ), where the Fifth Court of Appeals held that the defendant Vino Patel, the president of “Delux Management Company,” was individually liable under an advertising contract which he signed on behalf of “Delux Inn Management Company, Inc.” —even though Whiteco, the plaintiff, had drawn up the contract and was responsible for the misnomer.

A recent case showing the dangers of this doctrine to agents is John C. Flood of DC, Inc. v. SuperMedia, LLC, 408 S.W.3d 645 (Tex.App.—Dallas 2013, pet. denied). There, a business owner was held personally liable under several contracts he signed on behalf of his company John C. Flood of DC, Inc. Again, the contracts did not state the business’s full legal name – instead, listing the name as, among others, “Flood, John C Plumbing & Heating,” and “John C. Flood Inc.” The business owner both failed to plead agency as an affirmative defense and to present competent summary judgment evidence regarding the plaintiff’s knowledge of the company’s identity. Both the business and the business owner were held liable on the contracts on summary judgment. The plaintiff then elected to take its judgment against the business owner in order to collect on his personal assets—including the business.

Practitioners, especially those focusing on collections cases, should make note of these decisions and plan their cases accordingly. Contracts for goods and routine services are often prepared by the parties without input from counsel and errors regarding the true legal name of one party are common. For plaintiffs prosecuting such suits, it is a simple matter to include the agent as a co-defendant. In collection cases when the agent is a high-ranking officer or the owner of a financially-strapped business, it may be preferable to elect to take the judgment against the agent. Defense counsel, in cases where an individual agent is sued on a contract along with their principal, should affirmatively plead the defense of agency and seek discovery to prove that the plaintiff knew the true, legal identity of the individual agent’s principal at the time the contract was signed.

 

Hugh Fuller is an associate at Gray, Reed & McGraw, P.C. He may be reached at afuller@grayreed.com.   

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