Matter of: Scott Coffee Import & Export, S.A. File: B-249869 Date: January 25, 1993

B-249869: Jan 25, 1993

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That the individual was suspected of fraud in connection with the company's management. That he was improperly representing that his new company was a successor to the former principal. McGrath was now Scott Coffee's president and legal representative. Was suspected of fraud in his management of Scott Coffee. Which were made out to Scott Coffee. Both the apparent and implied authority of an agent to bind his principal with regard to a third party are extinguished when the third party receives notice of the termination of the agency relationship. Its actions therefore have no effect on Scott Coffee's rights. Scott is irrelevant. The contract was in the name of the company. Releasing the checks to him was of no legal effect.

Matter of: Scott Coffee Import & Export, S.A. File: B-249869 Date: January 25, 1993

APPROPRIATIONS/FINANCIAL MANAGEMENT Claims Against Government Government liability Fraud Contractor misrepresentation Where the government has received notice of the termination of an agent's association with a company; that the individual was suspected of fraud in connection with the company's management; and that he was improperly representing that his new company was a successor to the former principal; the improper subsequent delivery to him of checks made out to the former principal does not serve to discharge the government's obligation to the company, and the government therefore remains liable for all sums due.

DECISION Scott Coffee Import & Export, S.A., appeals the Army's denial of its claim for $3,861.36. That sum represents three checks in payment for coffee Scott Coffee delivered to Army commissaries in Panama; the Army had given the checks to the company's former president, who then evidently converted the funds to his personal use. We conclude that Scott Coffee's claim should be allowed.

By letter of June 26, 1990, Eugene McGrath advised the installation finance officer that Mr. McGrath was now Scott Coffee's president and legal representative, and that no checks for coffee can or should be delivered "without written authority of the undersigned." In a second letter, dated June 29, Mr. McGrath advised the commanding officer (with a copy to the finance officer) that Dino Scott, former president of Scott Coffee, no longer had any relationship with the company, and, moreover, was suspected of fraud in his management of Scott Coffee. The letter also advised that Dino Scott had formed a new company, Scott Masdeau International, and under the guise of representing that Scott Coffee had merely changed its name had been trying to take business and assets from Scott Coffee. For reasons not clear from the record, on July 12 the Army gave the three checks in question, which were made out to Scott Coffee, to Mr. Scott.

The Army denied Scott Coffee's subsequent claim for payment on its coffee contract on the grounds that nothing in the written contract with the company prohibited releasing checks made out to Scott Coffee to Mr. Scott, and that Mr. Scott's actions as agent bound Scott Coffee as principal.

We disagree with the Army's analysis. Mr. Scott had no authority to accept payment on behalf of Scott Coffee, and his acceptance of the checks can neither bind Scott Coffee nor extinguish its right to collect on the contract. Both the apparent and implied authority of an agent to bind his principal with regard to a third party are extinguished when the third party receives notice of the termination of the agency relationship. Restatement (Second) of Agency, Sec. 125.

The Army had written notice of the termination of Mr. Scott's agency prior to the time it released the checks to him, and its actions therefore have no effect on Scott Coffee's rights. The fact that the written contract did not prohibit releasing checks to Mr. Scott is irrelevant. The contract was in the name of the company, not of Mr. Scott as an individual, and the Army had received clear notice from Scott Coffee of Mr. Scott's situation. In the absence of an agency relationship between Mr. Scott and the company, releasing the checks to him was of no legal effect; the obligation of the Army to make payments to the company under the contract remains until the Army has paid the company for goods the Army received from it.

It is not clear from the record that Scott Coffee remains in business. Also, it appears that legal proceedings are pending against Mr. Scott in Panama. If the Army determines that Scott Coffee still is viable, the firm's claim should be paid, conditioned on the company's assignment of any funds that might be recovered from Mr. Scott in connection with the litigation.