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Healthcare Services Group, Inc. v. Royal Healthcare of Middlesex, LLC

276 F. Supp.2d 255, (D. N.J. 2003)

CONTRACTS; AGENCY—Even though an agreement between a customer and a contractor may disclaim a contractual relationship between them with the intention that the customer be insulated from the debts its contractor incurs in the course of performance, if the agreement actually or impliedly makes the contractor an agent of the customer, the customer may be liable for those debts under agency principles.

A government improvement agency owned a healthcare facility and held its Certificate of Need. It was legally responsible for the center’s management operation, but authorized a management company to run the center and to retain subcontractors. That management company hired a subcontractor to manage the housekeeping and laundry departments and to provide food services. Although the management agreement stated that the agency and the management company were not partners, joint venturers or legal representatives of the other, it contained an expressed provision stating that the management company acted as the agency’s agent, on the agency’s behalf, and for the agency’s account. Subcontractors required the agency’s prior written consent. Notwithstanding any subcontracting, the management company was to remain liable to the governmental agency. The management agreement also stated: “Nothing in this agreement shall create or be construed to create any contractual relationship between the [governmental agency] and any such subcontractor, agent, person or organization.”

The management company failed to fully pay its subcontractor. To settle that dispute, it gave a promissory note to its subcontractor, but defaulted on that note. The subcontractor then sought to collect from either the management company or the governmental agency, or both.

The subcontractor argued that the government agency was liable for its management company’s default because of the agency relationship that would hold a principal liable for the act of its agent. It argued that the language in the management agreement reading, “as [the agency’s] agent,” “for [the agency’s] account,” and “on [the agency’s] behalf,” set forth an implied agency relationship.

The governmental agency argued that because the management agreement specifically said that there would be no contractual relationship between it and the subcontractor, it should have no responsibility. The Court concluded otherwise. It found that the management company “had implied authority to enter into the Service Agreements on [the agency’s] behalf with [the subcontractor] pursuant to the Management Agreement.” The subcontractor was neither asserting a third-party nor a direct contract claim against the agency. Instead, it argued that the management company acted on behalf of the governmental agency, and therefore the governmental agency was directly liable for the obligation. In response, the governmental agency asserted that the subcontractor was absolutely indifferent to the existence of the governmental agency, but, instead, entered into the contract with the management company based on already providing services at other locations that were operated by the same management company. Further, the subcontractor entered into this particular agreement with the management company at a time when the management company was seriously in default on those other service agreements. In essence, the governmental agency argued that because the subcontractor had already developed a business relationship with the management company, it would have entered into the service agreement regardless of the governmental agency’s status as the management company’s principal. That argument was unavailing.

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