A Smorgasbord of Boilerplate Provisions

• Jurisdiction: Maryland

II. A Smorgasbord of Boilerplate Provisions

A. Agency

Agency is created by a manifestation to someone by the principal.³ If the manifestation is to the agent, actual authority on the part of the agent to bind the principal is created, and the principal will be said to be a party to any contract entered into by the agent on the principal's behalf.⁴ An agent may also bind the principal when a manifestation has been made by the principal to the third party, even if that manifestation is inconsistent with the private instructions the principal has given to the agent. This is called "apparent authority," and if it exists, the third party has the same rights with reference to the principal as when the agent is actually authorized.

For example, suppose the principal sends a letter to the third party, informing the third party that the agent has authority to enter contracts on behalf of the principal. Subsequently, the principal instructs the agent (unbeknownst to the third party) not to enter into any contracts for the purchase of real property on his behalf. Contrary to these instructions, the agent enters into a contract on behalf of the principal to purchase real property from the third party. Despite the principal's specific instruction to the agent not to do this, the principal is bound to the contract.⁵ Of course, the principal would have a cause of action against the agent for breach of fiduciary duty, but that is not our concern for purposes of the present discussion.

The point is that agency can be created in two different ways: by the principal's manifestation to the agent, or by the principal's manifestation to a third party. A promise that no such manifestations will be made to third parties might be appropriate as a covenant, or perhaps even a representation and warranty. Often, however, the parties to a contract wish to make it clear that the contract itself is not intended to be a manifestation from one to the other such that an agency of the first type is created. This is commonly accomplished by a boilerplate provision denying any agency between the parties. Three examples of such language follow:

• Nothing herein contained shall be construed to constitute any Partner the agent, servant or employee of the other Partner, except as specifically provided in this Agreement. No Partner has the authority to act as an agent of the Partnership except as specifically provided in this Agreement.

• Contractor has no authority to enter into contracts or agreements on behalf of the Client. This Agreement does not create a partnership between the parties.

• The Salesman shall have no authority to bind the Broker by any promise or representation, unless specifically authorized to do so in writing.

The first example comes from a partnership agreement. A "no agency" or limitation on agency provision is particularly important in the context of a partnership, because, with respect to third parties, partners are automatically deemed to be agents of the partnership when acting in the ordinary course of business of the partnership.⁶ While this statutory provision vests each partner with apparent authority as to transactions in the ordinary course of business, a boilerplate provision like this one can eliminate or limit any actual authority with respect to a the partners. Presumably, the partnership agreement would contain specific grants of authority, so that the first example above may properly exclude all authority "except as specifically provided in this Agreement."

It should be noted in this regard that the Revised Uniform Partnership Act, contained in title 9A of the Corporations & Associations Article incorporates a procedure in which partnerships can record a public notice of authority. Specifically, § 9A-303 provides that a partnership may file a "statement of partnership authority" with the State Department of Assessments and Taxation which indicates the names of the partners authorized to execute an instrument transferring real property held in the name of the partnership. The statement of partnership authority may also indicate the extent of, or limitations upon, the authority of some or all of the partners to enter into other transactions on behalf of the partnership and any other matter.

Once a statement of partnership authority is filed, any grant therein of authority is conclusive in favor of a third party who gives value without knowledge to the contrary, and all third parties are deemed to know of any limitations on a partner's authority to transfer real property contained in such a statement. Statements of partnership authority are automatically cancelled five years after the date on which they are filed, unless otherwise cancelled earlier.

This ability to publicly notify third parties of a partner's authority or limitations thereon enhances, but does not eliminate the need for, limitations contained in the partnership agreement like the one shown in the first example.

Like partners in partnerships, members of limited liability companies are automatically deemed to have apparent authority to act for the limited liability company in the ordinary course of business.⁷ However, the limited liability company statute requires a disclaimer of authority be contained in the company's articles of organization to be effective.⁸ As is the case with partnerships, this procedure only works to limit or eliminate apparent authority; any disclaimer of actual authority should be contained in the written contract among the parties.

The last two examples are similar to the first, but in a different context. The second example is taken from an agreement to perform services, where the relationship is designed to render the service provider an independent contractor. The third example is typical of a sales representative agreement. While the partnership provision is designed to overcome the default rule concerning agency status (i.e., that all partners are automatically agents of the partnership absent an agreement to the contrary), the latter two examples are attempts to clarify the relationship between two otherwise unrelated parties. In other words, the last two examples are meant to define what the contractual relationship is not, as opposed to what it is.

Such contractual language, however, does not have any legal impact on third parties who are unaware of the provision. For example, "apparent authority" may operate to bind your client to a separate contract with a third party entered into by the initial contracting party if your client makes certain manifestations to the third party, regardless of the language contained in the initial contract.⁹ Thus, such prophylactic language serves only to create a cause of action against the initial party for breach and indemnification, but may not serve to protect the client from unwanted third party agreements.

Drafting Tip

In all contracts dealing with agency arrangements (i.e., an arrangement whereby one party will be acting in some manner on behalf of the other), be sure to specify the exact nature of the authority being granted (or withheld from) the agent. Parties may agree between themselves as to the extent of authority (if any) one party will have to act on behalf of the other vis-a-vis third parties. Failure to specify a limit to this authority could lead to unintended consequences.

On the other hand, language similar to the examples given above is sometimes misused in an attempt to achieve a favorable tax result in employment agreements. Pursuant to the Internal Revenue Code, a tax under the Federal Insurance Contributions Act (FICA) is imposed on an employer based on wages paid to employees.¹⁰ Furthermore, a federal unemployment tax under the Federal Unemployment Tax Act (FUTA) is imposed on wages paid to employees.¹¹ These two taxes are referred to as "employment taxes." "Employment," for purposes of applying the FICA tax provisions, is described as "any service, of whatever nature, performed . . . by an employee for the person employing him."¹² An employee is defined, inter alia, as any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee.¹³ The FUTA tax provisions adopt that same definition of employee.¹⁴

Counsel for employers sometimes try to construct agreements so that the person performing the services will not be considered an "employee," thus not subjecting the principal to employment taxes. As in most tax matters, however, what governs this issue is substance, not form. Merely reciting that the service provider is not an employee does not change the tax result; a service provider is either an employee or is not. Courts have identified various factors relevant for determining whether an employer-employee relationship exists¹⁵ and the IRS uses a 20-factor test for making the determination.¹⁶

Distinguishing a service provider as an independent contractor rather than an employee may be relevant for other issues as well, such as employee benefits. A case involving American corporate goliath Microsoft Corporation illustrates this point. Prior to 1990, Microsoft hired several workers to work on specific special projects. The projects included functions such as editing, proofreading, indexing, and formatting related to various Microsoft software products. Microsoft considered these workers to be temporary, special independent contractors, not part of the regular Microsoft workforce. Rather than being paid through the payroll department, these workers submitted invoices for their time and were paid through the accounts payable department, just like any other third-party vendor.

Each of the workers signed an agreement with Microsoft which stated that the worker was "an Independent Contractor for [Microsoft]," and nothing in the agreement should be construed as creating an "employer-employee relationship." As a result, the worker agreed "to be responsible for all of [his] federal...