Business Associations, Pages 48–52

Morris Oil Co. v. Rainbow Oilfield Trucking, Inc.

Court of Appeals of New Mexico, 1987

Facts:

Defendant Rainbow used defendant Dawn's certificate in a trucking enterprise. Dawn received all money and paid Rainbow after deducting its fee. Defendants also agreed that Dawn would have complete control over Rainbow's operation in Hobbs, but said that Rainbow was a subcontractor and not to become the agent of Dawn and could not incur debt for Dawn "other than in the ordinary course of business relative to terminal management." Rainbow was to be responsible for all fuel costs, but they were to be under the direct control and supervision of Dawn.

Rainbow operated the business and had plaintiff install a bulk dispenser at its terminal and periodically deliver diesel for use in trucking. The business was unprofitable however and Rainbow declared bankruptcy while owing plaintiff $25,000.

Plaintiff was unable to collect from Rainbow and was told by it to collect from Dawn instead. Plaintiff did so and wait told not to try to collect and that it would be paid from an escrow account holding $73,000 in receipts from the Hobbs operation. Dawn said it would do so once it was confirmed by Rainbow's parent corporation. However, Dawn disbursed all the funds without paying plaintiff anything, so plaintiff sued for the money.

Procedural History:

Trial court entered a default judgment against Rainbow and held that Rainbow had always been the agent of Dawn, making it liable for the balance.

Issue:

Was Rainbow an agent of Dawn?

Defendant's Argument:

The agreement literally said, "Rainbow is not appointed and shall not become the agent of Dawn and is not empowered to incur or create any debt or liability of Dawn other than in the ordinary course of business relative to terminal management. Rainbow shall not enter into or cause Dawn to become a party to any agreement without the express written consent of Dawn." Plaintiff also had constructive knowledge of the subcontract because it was filed with the Corporation Commission.

Rules:

  • LexisNexis IconWestLaw LogoGoogle Scholar LogoPage 51, Paragraph 3

    [A]n agent for an undisclosed principal subjects the principal to liability for acts done on his account if they are usual or necessary in such transactions. This is true even if the principal has previously forbidden the agent to incur such debts so long as the transaction is in the usual course of business engaged in by the agent.

  • LexisNexis IconWestLaw LogoGoogle Scholar LogoPage 52

    A principal may be held liable for the unauthorized acts of his agent if the principal ratifies the transaction after acquiring knowledge of the material facts concerning the transaction.

  • LexisNexis IconWestLaw LogoGoogle Scholar LogoPage 52

    Where the principal retains the benefits or proceeds of its business relations with an agent with knowledge of the material facts, the principal is deemed to have ratified the methods employed by the agent in generating the proceeds.

Reasoning:

  • The liability to plaintiff was incurred in the ordinary course of business of operating the terminal, for which Rainbow was allowed to create liabilities of Dawn.

  • Plaintiff did not know of the existence of the Rainbow-Dawn agency, let alone any claimed limitations by Dawn on Rainbow's authority. Nor did plaintiff have constructive knowledge because the mere filing of a document does not constitute constructive notice to the public of its contents unless one should reasonably anticipate that the information would be contained therein. Plaintiff had no reason to expect such a limitation in the subcontract.

  • Even if Dawn was not responsible for the debt, it still assured plaintiff that it would pay it, despite being informed of the material facts of the situation. Instead, Dawn paid its own clerical and legal fees. Dawn sought to retain the benefits of the agency but not take responsibility for its debts. This it cannot do.

Holding:

Yes, Rainbow was Dawn's agent, and Dawn also ratified the transaction with plaintiff. Affirmed.


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