Interstate Electric Co. v. Frank Adam Electric Co.
136 So. 283, 173 La. 103, 1931 La. LEXIS 1833 (1931)
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Rule of Law:
A principal is bound by the acts of an agent under the doctrine of apparent authority when the principal's course of conduct leads a third party to reasonably believe the agent has authority, irrespective of any private instructions to the contrary. When such a contract for unique goods is breached, the measure of damages is the buyer's lost profit if the seller knew the goods were for a specific resale.
Facts:
- Frank Adam Electric Company (Frank Adam), a manufacturer, maintained a New Orleans office managed by W.J. Keller.
- For years, Interstate Electric Co. (Interstate) had purchased goods from Frank Adam through its New Orleans managers, who set prices and made contracts that Frank Adam always honored.
- Frank Adam had previously informed Interstate that the prior manager, Reed, had full authority to bind the company and did not inform Interstate of any change in authority when Keller succeeded Reed.
- Interstate secured a contract to sell specific Frank Adam electrical equipment to the Douglass Electric Construction Company for $6,464.55.
- Interstate placed an order with Keller to purchase this equipment from Frank Adam for $4,275.
- Keller, aware of Interstate's resale contract with Douglass, accepted the order on behalf of Frank Adam.
- After accepting the order, Frank Adam refused to fulfill it.
- The specific electrical equipment was manufactured only by Frank Adam and was not available for purchase on the open market.
Procedural Posture:
- Interstate Electric Co. sued Frank Adam Electric Company in a Louisiana trial court for damages from breach of contract.
- The trial court rendered a judgment in favor of Interstate Electric Co. for $2,189.55.
- Frank Adam Electric Company, as appellant, appealed the judgment to the Supreme Court of Louisiana.
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Issue:
Is a principal bound by a contract entered into by its agent under the doctrine of apparent authority when the principal has consistently honored similar contracts in the past, and if so, are lost profits the proper measure of damages when the goods are unique and intended for a specific resale known to the seller?
Opinions:
Majority - Odom, J.
Yes. A principal is bound by its agent's contract when its long course of dealings creates apparent authority, estopping the principal from denying that authority, and the proper measure of damages is the buyer's lost profits when the seller knew the unique goods were for a specific resale. Frank Adam held Keller out as having full authority by consistently honoring his prior contracts and by failing to notify Interstate of any limitations on his authority after he replaced a manager who explicitly had such power. This course of conduct led Interstate to reasonably believe Keller could bind the company. Because Keller knew the goods were for a specific resale to the Douglass Company and the goods were otherwise unobtainable, the damages reasonably contemplated by the parties were Interstate's lost profit on that resale, not the difference between contract and market price.
Dissenting - St. Paul, J.
No. [No reasoning was provided in the opinion text.]
Analysis:
This case solidifies the commercial importance of the doctrine of apparent authority, emphasizing that a principal's course of conduct is more significant than secret internal instructions when establishing an agent's power to bind. It establishes that a history of honoring an agent's agreements can estop the principal from later denying that agent's authority in similar transactions. Furthermore, it carves out an important exception to the standard 'contract-market' rule for calculating damages, allowing for recovery of lost profits in situations involving unique goods and a foreseeable resale, which better protects the expectation interest of a buyer in a back-to-back contract scenario.
