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Free Agent: When a Proxy Goes Rogue

Adapted from the writings of Dayan Yitzhak Grossman

April 22, 2021

 

Last week’s article on Citibank’s $900 million wiring error[1] considered the question of whether a transfer of money made in error is binding. In this article we consider the question of whether the erroneous action of an agent binds his principal.

“I sent you to act for my benefit and not to my detriment”

While the secular law of agency will generally allow an agent to bind his principal even in the absence of actual authority, as long as mere apparent (ostensible) authority is present, the halacha is that a principal cannot be bound by the actions of even an actual agent who deviates from his instructions, because the principal may say “I sent you to act for my benefit and not to my detriment (letikunei shedartich velo leivusei),”[2] absent an explicit stipulation that the agency is valid “for either benefit or detriment (bain letikun bain leivus).”[3]

In the context of an agent authorized by his principal to purchase something, there is an opinion that unless the agent’s principal can prove otherwise, the seller is entitled to claim that the appointment may have included such a stipulation of bain letikun bain le’ivus.[4] The Shach rules that this is limited to errors that are not of sufficient magnitude to have granted the principal himself the right to void the sale, but it does not extend to egregious errors, such as selling something for a hundredth of its true value, “for [the principal] is presumably not such a fool as to stipulate that even if [the agent] acts extremely detrimentally, it should be valid.”[5] But the Nesivos Hamishpat challenges this, arguing that the (putative) stipulation is that “he has made him like himself,” which should be interpreted to mean that he has full  authority to act as though he were the principal himself.[6]

Partners

The above discussion refers to an agent. The Shach maintains that a partner is different, and is able to bind his partner even where he is acting detrimentally, because

with partners, where it is customary that each has the power to do whatever he wants, it as though they stipulated with each other “bain letikun bain le’ivus.”

This is based on pragmatic considerations:

for if this were not so, no one would do business with a partner until the other partner agrees.”[7]

Other Acharonim espouse similar positions.[8]

The Urim Vetumim and the Nesivos Hamishpat, however, reject the Shach’s position (at least with regard to the specific case they are discussing, that of a partner who—without authorization from the others—forgives a debt owed to the partnership), arguing that “not on this basis was the covenant of the partnership made.”[9]

The Bais Meir suggests that even if we accept the Shach’s basic premise that partnerships contain an implicit stipulation of bain letikun bain le’ivus, this applies only to actions taken in the course of normal business operations, where in the interest of generating profits, the partners agree to grant each other broad latitude to act on behalf of the partnership, “for if this were not so, no one would do business with him.” It does not, however, extend to an act of debt forgiveness.[10]

The Citibank case

Applying these rules to a bank employee who makes an erroneous wire transfer, the bank could argue that “I sent you to act for my benefit and not to my detriment.” There is an opinion that the burden of proof would rest on the bank to establish that it did not explicitly authorize the employee to act “for either benefit or detriment,” but given the detailed records typically maintained by financial institutions, assuming the bank did not make such an explicit authorization, it could very likely establish this with as much certainty as any principal is able to establish the negative of not having made such a stipulation.

According to the Shach, who maintains that partners are implicitly granted authorization to act “for either benefit or detriment,” since otherwise business would be impossible, this might apply to employees of businesses as well. Although employees are agents and not partners, the same argument for implicit authorization to act “for either benefit or detriment” may apply to them, because once again, it would be impossible to do business if no transaction is final until endorsed by the owners. But not all Acharonim agree with the Shach’s doctrine.

As mentioned in the previous article, these are some of the native halachic considerations involved, but standard business customs and norms are obviously relevant as well.

[1]More recently, Charles Schwab Corp. accidentally transferred $1.2 million to an account of Kelyn Spadoni, rather than the $82.56 she had requested. Chris Dolmetsch. Schwab Accidentally Puts $1.2 Million Into Customer’s Fidelity Account. Bloomberg. https://www.bloomberg.com/news/articles/2021-04-13/schwab-accidentally-put-1-2-million-in-woman-s-fidelity-account.

[2]Kesubos 85a and 99b and Kidushin 42b.

[3]Shulchan Aruch C.M. 182:2-3.

[4]Ibid. se’if 4.

[5]Shach ibid. s.k. 4.

[6]Nesivos Hamishpat ibid. biurim s.k. 6.

[7]Shach ibid. siman  77 s.k. 19.

[8]Bais Hillel E.H. siman 86 se’if 2, cited and apparently accepted by Bais Shmuel ibid. s.k. 19.

[9]Urim Vetumim ibid. Tumim s.k. 9 and Urim s.k. 20; Nesivos Hamishpat ibid. biurim s.k. 8 and chidushim s.k. 15.

[10]Bais Meir E.H. ibid. Cf. Mishpat Shalom and Pa’amonei Zahav C.M. 176:14; and see Erech Shai ibid. and Shu”t Maharsham cheilek 5 siman 28 s.v. Umah shesha’al.

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