## Facts

- Rainbow Oilfield Trucking, Inc. (Rainbow) operated a trucking business.
- Rainbow and Dawn Enterprises, Inc. (Dawn) entered a series of agreements restructuring Rainbow’s business relationship with Dawn.
- Under those agreements, Dawn obtained full control over Rainbow’s operations.
- Dawn agreed to collect all money owed for Rainbow’s trucking work, keep an agreed percentage, and remit the remainder to Rainbow.
- The agreements stated that Rainbow was not Dawn’s agent and that Rainbow was not authorized to incur debt in Dawn’s name except in the ordinary course of business.
- In operating the trucking business, Rainbow purchased diesel fuel from Morris Oil Company (Morris) on credit.
- Rainbow did not disclose to Morris that Dawn controlled Rainbow’s operations or that Dawn collected the revenues from those operations.
- Rainbow’s business failed, and Rainbow filed bankruptcy still owing Morris approximately $25,000 for fuel.
- At the time of Rainbow’s failure, Dawn still held about $73,000 it had collected from Rainbow’s operations.
- After Morris learned of Dawn’s involvement, Dawn assured Morris the debt would be paid, but later declined to pay.
- Morris sued Rainbow and Dawn to collect the unpaid fuel account; the trial court entered judgment against both defendants, finding Dawn vicariously liable because Rainbow acted as Dawn’s agent.
- Dawn appealed.

## Issues

1. Whether Dawn was liable to Morris for Rainbow’s unpaid fuel purchases because Rainbow acted as Dawn’s agent (including as an agent for an undisclosed principal) when it incurred the debt in operating the business Dawn controlled, despite contract language denying agency and limiting Rainbow’s authority.
2. Whether Dawn’s conduct after learning of the fuel debt—while retaining revenues collected from Rainbow’s operations—supported liability by ratification or affirmation of the obligation.

## Decision

- The appellate court affirmed the judgment holding Dawn liable for Morris’s unpaid fuel account.
- The court agreed that the evidence supported a finding that Dawn exercised control over Rainbow’s operations sufficient to support an agency relationship for purposes of third-party liability.
- The court treated Rainbow’s fuel purchases as transactions connected to operating the trucking business and therefore within the type of activity for which an agent running the business would ordinarily have authority.
- The court rejected Dawn’s reliance on private contract terms denying agency and restricting Rainbow’s authority as a defense against a creditor who was not told of those limits and extended credit in the ordinary course of dealing.
- The court also relied on Dawn’s post-discovery assurances and its retention of funds collected from the operations as support for holding Dawn responsible for the debt.

## Legal Principles

- A principal may be liable to third parties for obligations incurred by an agent acting on the principal’s account in transactions that are ordinary for the business being conducted, including when the principal is not disclosed to the third party.
- Agency for third-party liability turns on the parties’ actual arrangement and control, not merely contractual labels stating that “no agency” exists.
- Private restrictions on an agent’s authority, contained only in agreements between principal and agent, generally do not defeat a third party’s claim when the third party lacked notice and the transaction is of the sort normally incident to the business.
- A principal may be bound by ratification when, after learning material facts, the principal affirms the obligation or accepts the benefits of the transaction while refusing the associated burden.

## Conclusion

The court held Dawn liable for Rainbow’s unpaid fuel debt because Dawn controlled Rainbow’s operations and benefited from the revenues generated by those operations, making the fuel purchases a normal incident of running the trucking business for an undisclosed principal; Dawn’s later assurances to Morris and retention of collected funds further supported binding Dawn to the obligation.


Morris Oil Co. v. Rainbow Oilfield Trucking, Inc., 741 P.2d 840 (1987)