Morris Oil Co. v. Rainbow Oilfield Trucking, Inc.
741 P.2d 840, 106 N.M. 237 (1987)
Rule of Law:
An undisclosed principal is liable to a third party for acts done by an agent on the principal's account if such acts are usual or necessary in the ordinary course of business, even if the principal has privately forbidden the agent from incurring such liability. A principal who, with knowledge of the material facts, retains the benefits of a transaction is also deemed to have ratified the agent's actions.
Facts:
- Dawn Enterprises Inc. (Dawn), which held a certificate of public convenience and necessity, contracted with Rainbow Oilfield Trucking, Inc. (Rainbow) to operate an oilfield trucking business in Hobbs using Dawn's certificate.
- The agreements gave Dawn the right to 'full and complete control' over Rainbow's operations and stipulated that Dawn would collect all revenues.
- One agreement stated that Rainbow was an independent contractor and was not empowered to create any debt for Dawn 'other than in the ordinary course of business relative to terminal management.'
- While operating the business, Rainbow established an open account with Morris Oil Company, Inc. (Morris) for diesel fuel used in the trucking operation.
- The trucking enterprise proved unprofitable, and Rainbow ceased operations, owing Morris approximately $25,000 for fuel.
- When Morris sought payment, Rainbow's representative directed Morris to Dawn.
- Dawn, which was holding over $73,000 in receipts from the Hobbs operation, acknowledged the debt to Morris and indicated payment would be forthcoming from an escrow account it had established, asking Morris to forbear collection efforts.
- Dawn did not pay Morris from the funds, instead using them to pay itself fees and settle other claims.
Procedural Posture:
- Morris Oil Company, Inc. instituted an action against Rainbow Oilfield Trucking, Inc. and Dawn Enterprises Inc. in a New Mexico trial court.
- The trial court entered a default judgment against Rainbow, which did not defend the action.
- After a trial, the court concluded that Rainbow was the agent of Dawn and entered a judgment against Dawn for the outstanding account balance.
- Dawn, as appellant, appealed the trial court's judgment to the New Mexico Court of Appeals, the intermediate appellate court.
- Morris, as appellee, responded to the appeal.
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Issue:
Is an undisclosed principal liable to a third party for a debt incurred by its agent when the debt was usual and necessary for the business, even if a private agreement between the principal and agent limited the agent's authority to incur such debt?
Opinions:
Majority - Garcia, Judge
Yes, an undisclosed principal is liable for such debts. The court held that this case is governed by the principles of undisclosed agency, not apparent authority, because Rainbow contracted in its own name and Morris was unaware of Dawn's existence. An undisclosed principal is subject to liability for an agent's transactions that are usual or necessary in the business, even if those acts contradict the principal's express directions. The purchase of fuel was a necessary act in the ordinary course of operating a trucking business. Any secret limitations on Rainbow's authority in the contracts were not binding on Morris, a third party who had no knowledge of them. Furthermore, even if the initial action was unauthorized, Dawn ratified the debt by retaining the proceeds of the business with full knowledge of the material facts of the open account, assuring Morris of payment, and yet failing to pay while disbursing funds to itself and others.
Analysis:
This decision reinforces the legal principle that a principal cannot use secret contractual limitations to shield itself from liability for an agent's actions that are within the ordinary scope of the business. It highlights the distinction between apparent authority and undisclosed agency, emphasizing that in the latter, the principal's liability stems from the agent's actual authority to conduct the business, not the third party's perceptions. The court's application of the ratification doctrine provides an alternative basis for liability, preventing a principal from accepting the benefits of an agent's work while disclaiming the ordinary expenses incurred to generate those benefits. This case serves as a strong precedent protecting third-party creditors who deal in good faith with an agent of an undisclosed principal.
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