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Business Organizations
Rutgers University, Camden School of Law
Sablove, Herb

The Firm and the Law of Agency
Key Concepts

What is a firm?

A set of resources that are allocated by an entrepreneur to employees, as opposed to resources that have been allocated to contracts

It is possible to have a single person sole propriotirship firm!

What is a business association?

A kind of firm that is created when two or more people come together and pool their money to create a company

Adaptability: One Extreme

The ability to adapt to changes in business over time

The more flexiable the organization in the way they are governed, the more adaptable they are.

Opportunism: The Other Extreme

Taking advantage of others by having a monopoly on information

Unfairly taking advantage of a disparity of information

How do adaptability and opportunism relate?

The more ADAPTABLE a company is the more open it is to OPPORTUNISM.

The key is attempting to create a structure which will allow for optimal adaptability along with minimal opportunism

Private Ordering

The rules people choose to adopt in order to govern themselves.

Look for agreements about

What majority of partners are needed to enact a major change

the power of the board against the power of the shareholders

How someone can exists a company

How someone exists a partnership

The Law and Private Ordering: 4 ways they relate

The law establishes voting and other rules in state statutes

The federal government is also becoming more active through securities law

Judge-made common law developing the meaning of “fiduciary duty” as applied to specific transactions ex post facto

This helps put restraints on future opportunism

Federal law’s disclusre rules for IPOs, ect

Remedies to be applied in disputes

Appraisal and appraisal rights


Default v. Immutable

Some rules are default rules, which apply in the absence of an agreement

Some rules are immutable and apply whether or not the parties would choose or have agreed otherwise


Who is the PRINCIPLE?

The owners


Boards of directors

Who is the AGENT?

Employees of owners or partners

Partners (in some cases)


Case: Community Counselling Services Inc. v. Reilly

RULE: Prior to severing the employment relationship, an employee cannot solicit for himself future business which his employment requires him to solicit for his employer

Fact Summery:

Salesman solicited work for himself as a director when he should have been soliciting same for employer, using his contacts as an employee and while acting for his employer.

What was the issue?

Did he violate his fiduciary duties to his principle by doing so?

Was he being disloyal?

There is a duty of loyalty: putting the interests and duties of his employer before his own.

Did he violate his duty of candor?

Yes. Look at the absence of accountings. If he was candid, he could have avoided some of these problems by admitting people were expressing interest in his services.

How is it resolved?

Decision in favor of the former employer.

Case: Hamburger v. Hamburger

RULE: An employee is free to make logistical arrangements, such as financing and lease plans, for a new company while he is still employed by another. He is also entitled to use his general knowledge, experience, memory, and skill in establishing his new company.

Fact Summery:

Son went into family business, which he grew by his sales efforts. Family feud with uncle caused him to split, form his own company, which he developed by using funds provided by a client. He took many clients away from parent company after he split.

What was the issue?

Did he breach his fiduciary duty by doing so?


Not in this case.

Company lists were not considered a trade secret

No non-competition clause in his employment contract that would have barred his action.

Is this a non-variation of a default rule problem?

Who might be asked to sign one?


Doctors, detinsts




They are scrutinized to see if they are reasonable.

Employees may make logistical arrangements prior to terminating their employment.

Fiduciary Duty

This is a judge-made common law rule

This tends to substitute for contractural undertakings

Option 1: “obliges the fudiciary to act in the best interests of his client or beneficiary and to refrain from self-interested behavior not specifically allowed by his employement contract.”

Option 2: Socially optimal fudiciary rules approximate the bargain that investors and agents would strike if they were able to dicker at no cost.

Case: Foley v. Interactive Data Corp

RULE: The presumption that an employment relationship of indefinate duration is intended to be terminable at will may be overcome by evidence of contrary intent, either express or implied.

What was the procedural posture of this case?

It’s an appeal from a demurrer.

This case has not yet been tried on the facts.


y Rule: Exception

If an agent has been given authority to enter into a written contract, then the authority granting him that power must also be in writing.

Principles and Agents Visa Vi Each Other

Duty of Agent to Principle

Act in a professional manner to carry out mandate given by the principle

Notify the principle of ANY material fact bearing on the nature of the agency

NOTE: any knowledge that comes to the agent while performing an agency task is IMPUTABLE VICARIOUSLY TO THE PRINCIPLE as a matter of law.

Duty of Principle to Agent

Pay the Agent

Indemnify for liabilities engendered during the scope of the agency

Cooperate with the agent in carrying out the agent act

CANNOT force agent to involve self in dangerous or criminal activities

Case: Blackburn v. Witter

RULE: A principle who puts an agent in a position that enables the agent, while APPARENTLY acting within his authority, to commit a fraud upon third persons is subject to liability for the fraud.

Basic Facts: Widow bilked out of money by duplicitious agent who, although priorly trustworthy, convinced her to invest in a false company. Widow wants to hold stock company agent worked for responsible for her losses.

Posture of Case: Trial court found in favor of the widow. This court, an appeals court, affirmed.

Why did Witter lose?

They profited from the sale of the stock that was invested.

There is a statute of agency here, which created ostenisable authority in the stock agent.

See pg 35 for text of the statute.

Basically, he was employed to go out and give investment advice.

It is true she probably should have known better, given that the certificate and reciets were not on proper letterhead and she know it didn’t appear on Witter’s monthly statement of accounts to her.

Case: Sennott v. Rodman and Renshaw

RULE: A partnership will NOT be vicariously liable for the actions of its partner if the partner did not knowingly assist and participate in efforts to defraud and the f