Business Associations Outline
Mendales, Spring 2013
Agency: 1-26; 38-106
The Sole Proprietorship
· (1) Firm owned by single individual
· (2) Not cast in a legal form that can be utilized only by filing an organic document with the state under an authorizing statute
· 2 reasons a sole proprietorship is a business organization
o (1) firm is likely to have an identity separate from the individual (in property, cash investments and financial records)
o (2) sole proprietor usually engages various agents to conduct business as well
· Legal identity of sole proprietorship
o No separate identity from its owner
o All of a sole proprietors wealth is effectively committed to the firm because an individual who owns a sole proprietorship has unlimited personal liability for obligations incurred in the conduct of the proprietorship’s business
Agency
· Asking when one party is responsible for the actions of another and what rights and obligations do those parties have to one another.
· One person acting on behalf of another
· Don’t need a contract
· Existence of agency may be determined by
o What parties did
o How they acted
o Course of dealing
o Silence may even be used to show party’s consent
o Not essential that an agent even receive compensation
· In general interested in 3 players:
o The principal
o The agent
o The third party
Basic issues that arise
· Agent has certain duties and obligations to the principal
· Principal has certain duties and obligations to the agent
· The principal is responsible for tortious acts committed by the agent and that fall within the scope of the agency
· The agent has the ability to enter into binding agreements on the principal’s behalf, as long as the agreement may be traced to the principals authority
· The agent’s knowledge (in the subject matter of the agency) is imputed to the principal
Tort or contract?
· Tort issue: Who is responsible?
· Contract issue: Who is bound?
Question in agency law is: whether the principal may be found liable for the torts of an agent, even though the principal was not negligent?
The Authority of an Agent
Morris Oil Co. v. Rainbow Oilfield Trucking, Inc.(1987)
· Morris (P) sued to recover funds due for the delivery of diesel fuel from Dawn (D), who held receipts from a bankrupt Rainbow (D) operation
· Rule: An undisclosed principal is subject to liability to third parties with whom the agent contracts where such transactions are usual in the business conducted by the agent, even if the contract is contrary to the express direction of the principal
· This case is governed by the principals of undisclosed agency. An agent for an undisclosed principal subjects the principal to liability for acts done on his account if they are usual or necessary in such transactions. This is true even if the principal has previously forbidden the agent to incur debts so long as the transaction is in the usual course of business engaged by the agent.
Agent can be the following:
· Disclosed – principal is disclosed if the 3rd person is on notice both that the agent is acting on behalf of the principal and of the principals identity
o Has power to bind principal
o Agent not liable
· Partially disclosed – (or unidentified) if the 3rd person is on notice that the agent is acting on behalf of a principal but is not on notice of the principals identity
· Undisclosed – 3rd person has no notice that the agent is acting on behalf of a principal rather than on his own behalf
o Principal and agent liable to 3rd party
The Agent’s Duty of Loyalty
Tarnowski v. Resop (1952)
· Agent misrepresented coin operated machine business profits; P bought the machines and lost money, sued D
· Issue: Whether a Principal may recover of an Agent, who has breached his trust, the items of damage mentioned after a successful prosecution of an action for rescission against the third parties with whom the Agent dealt for his Principal
· Rule: RST, Agency §407
o It makes no difference that the principal rescinds the transaction and gets him money back, or even that he makes a profit. The agent has a duty of loyalty to the principal, and the principal can recover any unauthorized profits made by the agent on the transaction. §407(2)
o If the agent violates the duty of loyalty, the principal is entitled to receive the value of what he put into the transaction plus any damages caused as a result of the transaction. §401(1) (including attorney’s fees)
o Wrongdoer is responsible for all the reasonable foreseeable injurious consequences of his tortious act.
Reading v. Attorney-General (1951)
· Agent cannot receive compensation from anyone else unless Principal has been fully notified
· Seargent in Royal Army Medical Corps during WWII, helped sell whiskey and brandy for money
· Wore uniform and used military status to move alcohol
· The crown was able to take all the money back
Rash v. J.V. Intermediate, Ltd. (2007)
· Agency relationship existed where employee was hired to introduce manufacturer’s brand in new market with little direct oversight, with result that employee owed manufacturer fiduciary duty; employee breached duty by failing to inform manufacturer of ownership stake in third-party business that subcontracted with manufacturer
Employee agents
· Respondeat superior: principal/employers are vicariously liable (responsible) for the torts of their employee/agents that arise within the scope of the employee’s employment
Did the principal have the right to exert control over the manner and the means by which the agent performed his duty?
Factors:
· The extent of control that the agent and the principal have agreed the principal may exercise over the details of the work (the extent of control the principal actually exercises is relevant as well)
liable for the torts of the agent/service provider
· However, some circumstances where they might be
Various forms of authority:
§ Actual authority
o Express
o Implied
§ Apparent authority
o Ratification (authority grated after the fact)
o Liability of an Undisclosed Principal (Inherent Authority)
o Estoppel – not really a form of authority but a doctrine that prevents a principal from arguing that no authority existed (doctrine may not be used independently by that principal to enforce the agreement against a third party)
Actual Authority
§ Exists when the principal communicates to the agent about the activities in which the agent may engage and the obligations the agent may undertake
§ Communication may be spoken or written
§ It may be through silence or implied in the job
§ Two forms:
o Express: involves examining the principals explicit instructions
o Implied: involves examining the principal’s explicit instructions and asking what else might be reasonably included in those instructions (implied) to accomplish the job.
§ Actions necessary to accomplish the principals original instructions to the agent
§ Also includes actions an agent reasonably believes the principal wishes him to do, based on the agent’s reasonable understanding of the authority granted by the principal
Apparent Authority
§ Don’t look to interaction between “agent” and “principal”
§ If there are circumstances which led the injured 3rd party to reasonably believe that an employment or agency relationship existed between the principal and the alleged agent and those circumstances existed because of some action or inaction (i.e. manifestation) on the part of the principal, then the principal might still be liable, even if no employment relationship existed, under a theory of apparent agency.
§ Apparent agency involves:
o A reasonable belief by the 3rd party that the alleged agent is an agent of the principal (reasonable reliance)
o Some action or inaction by the principal to create (or fail to dispel) that reasonable belief on the part of the third party
o Some showing (in many cases) that the third party’s injury could have been avoided had the alleged principal exercised control over the alleged agent. In other words, the third party’s injury arose out of that 3rd party’s reasonable belief that an employee/agency relationship existed.
