Mendales Business Associations Spring 2011
CHAPTER 1- AGENCY
A. Introduction
a. Four Principle Ways of Organizing A Business
i. sole proprietorship- a business organization that is owned by a single individual and has no separate identity from its owner.
ii. partnership- two or more people who have voluntarily agreed to carry on a business for profit (only intend to run business for profits – can have losses)
iii. association
iv. corporation
b. AGENCY IN GENERAL
i. Agent- a person who by mutual assent acts on behalf of another and subject to the other’s control. (R.2d of Agency §1 the one who is to act)
ii. Principal- the person who controls the agent (R.2d of Agency §1 the one for whom action is to be taken)
iii. Agency law governs:
1. The relationship b/n agents and principals
2. The relationship b/n agents and third persons w/ whom an agent deals, or purports to deal, on a principal’s behalf
3. The relationship b/n principals and third persons when an agent deals, or purports to deal, with a third person on the principal’s behalf
iv. Agency is the fiduciary relationship that arises when one person (a principal) manifests assent to another person (an agent) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act. DON’T HAVE TO HAVE INTENT TO CREATE AN AGENCY RELATIONSHIP!!!
c. ANALYSIS OF AGENCY PROBLEMS- three questions to ask
i. is the problem b/n the agent and the principal?
ii. does it involve a third party trying to hold the principal to an agreement based on the agent’s conduct or on an express agreement?
iii. does it involve a third party trying to hold a principal liable for the agent’s torts?
d. TYPES OF AGENCIES
i. Master-servant- form of agency where a servant, under the control of her master, renders some sort of service (also known as “employer-employee”) (key here is control) (R.2d uses master-servant, R.3d uses employer-employee)
ii. Principal-agent- agent acting on behalf of the principal (ex: agent having power of atty to sign for principal)
iii. Independent contractors- principal retains an individual to do a certain job or achieve a specific objective. PRINCIPAL HAS NO RIGHT OF CONTROL OVER THE INDEPENDENT CONTRACTOR (ex: general contractor hires an electrician to wire a house)
1. independent contractors are free to hire their own employees and complete the task how they choose
2. CAUTION: if the principal places too many restrictions on the independent contractor you may create a master-servant form of agency
e. PROVING AGENCY- the person wishing to assert the existence of the agency has the burden of proof to show that the agency actually exists
***see section i. of this chapter
f. TERMINATING AGENCY- Principal has the power to terminate the agency relationship AT ANY TIME, even if it violates contract law and even if it had been agreed that the agent’s authority was irrevocable. Principal is not subject to specific performance.
g. FIDUCIARY RELATIONSHIP- every agent is a fiduciary and owes a high standard of care to her principal. She must avoid conflicts of interest, self-dealing, disloyal acts, etc. (similar to trustee and trustor) DUTY OF LOYALTY
h. GRATUITOUS AGENTS- agents who perform services without gain. Gratuitous agents cannot be compelled to perform the duty they have undertaken but the principal may still be liable for the torts of the gratuitous agents. (ex: pro bono real estate agent)
i. PRINCIPAL’S DUTY TO HIS AGENT- principal has a duty to:
i. compensate and reimburse his agent
ii. cooperate and aid agent in her performance of her duties
j. CREATION OF THE AGENCY RELATIONSHIP
i. Consent
1. Agency by Agreement
a. agreement MUST be based on some indication by the Principal to the Agent that the Principal consents to have the agent act on her behalf
b. Can either be Expressed or Implied Consent
2. Agency by Ratification
a. whenever the Principal accepts the benefits or otherwise affirms the conduct of one purporting to act on the Principal’s behalf, even though there is no agency agreement
b. Objective Determination- in order to find that an agency exists, the MUST be some objective evidence that the Principal knew of the act in question and elected to be bound thereby
c. NO PARTIAL RATIFICATION- principal CANNOT ratify the beneficial aspects of the Agent’s conduct while refusing to affirm the rest. RATIFICATION = Ratifying the ENTIRE agreement
d. Tort Liability- ratification CAN expose the principal to tort liability for the Agent’s misrepresentations
3. Agency by Estoppel or Apparent Agency
a. whenever the Principal intentionally or negligently causes a third person to believe another to be her agent, and the third person relies in dealing with the supposed Agent.
b. Limitations- the acts relied upon to establish the apparent agency MUST be the acts of the principal and NOT those of the Agent. To recover against the Principal, the reliance MUST be reasonable
ii. Capacity- person appointing the Agent MUST have capacity to contract (Minors, Incompetents)
iii. NO Consideration- consideration is not necessary for either party to create an agency
iv. GENERAL RULE- NO Writing is required to form agency
1. keep in mind Statute of Frauds and the sale of land
2. If the Agent’s authority is required to be evidenced by a writing, but it is not, any contract executed by the Agent is unenforceable against the Principal, even though the contract itself is in writing.
a. Principal’s Option- the contract is voidable at the option of the Principal. Thus, if the Principal decides to accept the contract, he can subsequently RATIFY it in writing
b. Exception: Corporate Executives: an executive officer of a corporation need not have written authority from the corporation to act on its behalf
v. Proper Purpose- agency may be created only for a LEGAL purpose. Where the purpose is illegal or contrary to public policy, the purported agency will be disregarded.
1. Public Policy- a principal cannot delegate to an Agent acts that public policy requires the Principal to perform personally (ex: voting)
2. Personal Services- performance in a personal services contract with a third person CANNOT be delegated to an Agent (ex: a singer cannot delegate her duty to sing at a concert to another singer)
3. Acts Delegable by the Principal- a principal MAY delegate any act to an agent which the principal could perform
4. Acts Delegable by the Agent- Normally, an Agent has no right or power to delegate to another the obligation to perform for the Principal in his stead.
B. Authority of the Agent- after establishing that an agency exists, the third party wanting to hold the principal liable must demonstrate the scope of the agent’s authority to act for the principal. There are several sources of authority.
a. Terminology-
i. AGENTS
1. General agent- agent who is authorized to conduct a series of transactions involving continuity of service. It is reasonable to assume that the general agent has the authority to act on a wide variety of matters
2. Special agent- agent who is authorized to conduct only a single transaction or only a series of transactions not involving continuity of service. This type of relationship must be stated EXPRESSLY in the agreement. (R.2d of Agency §3)
ii. PRINCIPALS (R.2d of Agency §4)
1. Disclosed principal- when an agent and 3rd party interact, the 3rd party has notice that the agent is acting for a principal and has notice of the principal’s identity (3rd party knows they are dealing with an agent acting on behalf of a known principal)
2. Partially disclosed or unidentified principal- when an agent and 3rd party interact, the 3rd party has notice that the agent is acting for a principal but does not have notice of the principal’s identity (third party knows they are dealing with an agent but they don’t know the identity of the principal)
3. Undisclosed principal- when an agent and 3rd party interact, the 3rd party has no notice that the agent is acting for a principal (third party is dealing with an agent, but is unaware the party they are dealing with is an agent acting for someone else)
b. Actual Authority- either EXPRESSLY conferred or REASONABLY IMPLIED (by custom, usage or by the conduct of the principal to the agent) (w/ implied actual authority- R.2d §7 Cmt C, R.3rd §2.02 Cmt B)
i. if the principal’s words or conduct would lead a reasonable person in the agent’s position to believe that the principal wishes that the agent so act
ii. Incidental Authority- authority to do incidental acts that are reasonably necessary to accomplish an actually authorized transaction, or that usually accompany a transaction of that type. (this is a common type of “implied actual authority”)
c. Apparent Authority- results when the principal manifests to a third party that some person is his agent. (would lead a reasonable person in third parties position to believe that the principal had authorized the agent to so act or the agent acts in such a way that the third party would believe the agent had authority to engage in the transaction)
i. Power of position- (R.2d of Agency §27 Cmt A and §49 Cmt C) if the principal appoints an agent to a position normally understood to include the power to do things that are performed by a person in that position. The agent has apparent authority to bind the principal to third parties by engaging in those transactions. (ex: treasurer may sign checks)
d. Authority by Estoppel- When a principal negligently or intentionally causes a 3rd party to believe that his agent has authority, and the 3rd party detrimentally relies thereon, the principal is estopped from denying the agent’s authority. This type of authority creates no enforcement rights in the principal against
tisfaction of the judgment (R.3d § 6.09)
iii. partially disclosed principal: general rule is that the agent as well as the principal is bound to the 3rd person (R.2d § 321)(R.3d § 6.02)
1. principal not bound: general rule is that agent is liable to the 3rd person; under liability on the K theory, the 3rd person will recover the gains he would have obtained under the K; implied warranty theory: reliance damages, accepted in both Restatements but they both provide for expectation damages as well (R.2d § 329)(R.3d § 6.10)
d. Liability of Agent to Principal: if an agent takes an action that he has no actual authority to perform, but the principal is nevertheless bound, b/c the agent had apparent authority, the agent is liable to the principal for any resulting damages to the principal (R.2d § 383 comment e) (R.3d § 8.09 comment b)
e. Liability of Principal to Agent: if an agent has acted within his actual authority, the principal is under a duty to indemnify the agent for payments the agent made that were authorized or made necessary in executing the principal’s affairs (R.2d § 438-440) (R.3d § 8.14)
f. Tort Liability
i. vicarious liability traditional test: master controls the physical activity of servant
ii. vicarious liability modern test: principal controls or has the right to control the manner and means of agent’s performance of work; an agent acting in scope of employment (R.3d § 7.07(3)(a))
D. THE AGENT’S DUTY OF LOYALTY
a. Secret Commission
i. Tarnowski v. Resop
1. Facts: When an investor purchases a business on his agent’s recommendation and is defrauded, he sues the agent after learning the agent accepted a bribe.
2. Rule: An agent who violates his duty of loyalty is liable to the principal for any secret profit earned, as well as his principal’s consequential damages, including attorney fees.
3. Holding- Disloyal agent liable for secret profit and consequential costs
ii. Reading v. Attorney General
1. No matter what you do as an agent, you cannot take any compensation from anyone else unless the principal gives express permission and is fully aware of all facts and circumstances.
E. INTRODUCTION TO ACCOUNTING
a. Accounting- the recording, classification, summary, and interpretation in money terms of transactions affecting the accounting unit.
b. Accounting Terms
i. The fundamental accounting equation
1. ASSETS = LIABILITIES + OWNER’S EQUITY
2. Assets- things of value owned by the business entity
3. Liabilities- claims on assets by creditors of the entity
4. Owners’ equity- the difference b/n assets and liabilities (assets- liabilities = owners’ equity). In effect, it represents the stake or claims of the entity’s owners on the company’s assets and is also called “proprietorship”.
ii. Balance Sheet
1. Presentation- a restatement of the accounting equation in a chart form with assets listed on the left hand side and the sources of the assets (the liabilities and equity) listed on the right hand side.
2. Purpose- the balance sheet shows the financial conditions of the entity as of some specific moment in time
iii. Income statement-
1. Revenue- revenue or income is derived from the sale of things of value (services or goods) for money
2. Expenses- are costs associated with producing revenue
3. Losses- are costs that do not result in producing revenue, e.g., buying a building for $1,000 and selling it for $500
4. Purposes- The income statement indicates what has happened to the accounting entity over some period of time (e.g., January 1 to December 31) – how much revenue was produced and the expenses associated with producing that revenue. At the end of the accounting period, the net effect of the transactions for the period (either net income or net loss) are transferred to the balance sheet. All accounts making up the income statement are cleared, and the process of tracking income and expenses for a new period begins all over again.
