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Business Associations
Rutgers University, Newark School of Law
Eakeley, Douglas S.

Business Associations Eakeley Fall 2014

·         Agency:
·         Actual authority
o   Principal must manifest consent to have agent act for principal
o   When an agent acts on principal’s behalf AND subject to their control.
o   3 key parts: Manifestation (of consent from Princ to agent), Principal controls, and agent manifests consent.
o   ** Must be some form of agreement or understanding (does not need to be a K).
o   All cases revolve around 3 players: Principal, Agent and Third Party.
o   Agent has duties and responsibilities to Principal.
o   Princ has D & R to agent.
o   P is responsible for tortious acts committed by agent that fall within scope of the agency (zone of endeavor).
o   Agent can enter into agreement AS LONG AS it can be trace to the Pric Auth.
o   For A to have Auth, they must believe they have Auth, and believe most be based on manifestation from Princ. And it must be reasonable.
o   Exercise of control: NOT the actual, but ability to… See 7.07
o   Employee Q:   Agreement of control, (extent of control exercised is relevant), customarily done, distinct business, skill required in agents occupation, supplies the tools and place, length to time, paid by the job or the time, is or is not a biz, whether they think they are creating an employee/employer relationship, integral to biz and employee.
o   ** Question of fact if employee.
o   Principals NOT responsible for TORTS of independent contractors.
o   Princ. NOT responsible for Agent’s intentional tort if outside of scope of employment, UNLESS some part, MIGHT BE characterized as serving Principal (i.e. bouncer), OR if the IT is foreseeable (exact harm does not have to be foreseeable) – see if the tort is a “characteristic risk.”
o   Frolic and Detour -> ASK QUESTION.
o   When non-employee, Princ. Is usually NOT liable.
·         Apparent Agency
o   “Apparency” applies to both principal and agency
o   Rest 3d 7.08
o   Principal’s  responsibility is based on control and vicarious responsibility rather than appearances
o   3 things for apparent agency – (1) reasonable belief held by 3, (2) action or inaction by P allowing this reasonable belief, (3) 3’s injury could have been avoided had P exercised control over A
o   In K’s – bound v liable
o   Binding can happen through:
§  Actual authority (express & implied)
§  Apparent authority
§  Ratification
§  Liability of undisclosed principal
§  Estoppel – may only be used against a P (P can not use it against 3)
·         Actual Authority – When P communicates with the A; can be written or oral; silence or implied by the job
o   Actual Express Authority –  P gives excplicit directions
o   Actual Implied Authority –  the gap-filling steps that need to be completed in order to complete the task
·         Apparent Authority – not about what P wants A to do; its about what 3 reasonably thinks the P has authorized A to do
·         Ratification
o   Ratification – granted after K has been made – A has entered into an agreement for P w/o actual or apparent authority.
o   Questions to ask, (1) did P manifest assent to the deal? AND (2) given the situation would the law give effect to that assent. (Did P accept the benefits of the transactions?)
o   Limits on ratification:
§  At the time of ratification P must know the material facts
§  P may not partially ratify
§  If 3 withdraws, then P can’t ratify
§  Ratification denied when necessary to protect innocent 3’s
o   Retroactive
§  Unless – P had no capacity to enter into the K at the time it was made (ex: minor)
o   Liability of Undisclosed P – 3d Rest 2.06 – Undisclosed P’s sometimes liable for unauthorized transactions when 3 has made a
detrimental change in position” IF P did or should have known it could happen and didn’t act
o   Normally: Undisclosed P’s are liable if A is acting w/ actual express or implied authority
·         Estoppel
o   Estoppel – (equitable doctrine, not a form of authority)
§  3rd party MUST alter position based on reliance
§  Can only be used against P
·         Difference b/w apparent authority and Estoppel
o   Estoppel – 3’s position has to change
o   Apparent authority – requires manifestation by P to 3

·         Principal’s liability Flow Chart:
o   is there a principal agency relationship?
o   if so, is it tort or K
·         Tort:
o   Is there an employee-employer relationship?
§  Did P have right to exert control over A?
o   If yes, was it while working?
§  Ie – no frolic or detour
§  If the tort was intentional – was it to serve the employer or forseeable? (bouncer issue)
o   If no, was there agency?
o   If not an agent – does it fall under exception?
§  Inherently Dangerous
§  Non-delegable
§  Negligent hiring
o   If not exception, then apparent agent? (ie – reasonable reliance)
o   If yes – liability
o   If no – no liability
·         Contract:
o   Did P give actual (express or implied) authority to the agent?
o   If no, did P make some manifestation to 3?
o   If no, was P undisclosed?
o   If no, did P ratify?
o   If no, do any exceptions apply?
§  P knows all facts
§  P partially ratifies
§  Unfair to 3
·         Agent’s liability:
o   If P is disclosed and A has authority à P is bound and A is not bound
o   If P is undisclosed or unidentified and the agent works w/ authority à P and A are bound
o   If P is undisclosed or unidentified and the agent works w/o authority à P may/may not and A is bound
o   If P is disclosed and A has no authority à P may/may not be bound and A although probably not bound, could be liable to 3 for a breach of

ty duty to LLC and to the memebers.
§  Apparent authority,
·         UNLESS lacks the actual auth, and the 3rd party knew that!
§  HOWEVER, Members, who are not managers CAN NOT BIND.
o   Profits and losses are passed though to members.
o   LLC DOES NOT pay its own taxes
§  However many states impose some small taxes and fees.
o   Piercing the LLC veil.
§  Same standard as corp veil
·         Unity of interest, fraud, injustice, disregard for separate existence, corp formalities (LESS formalities needed than a regular corp).
§  Member in LLC might still co-mingle funds, not separate accounts, failing to respect the separate existence of the LLC, or undercapitalization.
o   Transferability
§  Not usually OK without consent of members
§  Attempt to transfer, results in economic transfer BUT NOT management interest (and, in transfer, no management rights), can’t become member w/o ok of other members.
§  Transferee would only receive the funds that are economically based.
§  When member leaves, it is called a DISSOCIATION, same term used in partnerships.
·         Can be voluntary (I am leaving) or
·         Involuntary (Been expelled).
·         IN EITHER, the member gets value of her interest, less damages caused by disassociation.
§  If for a term, or a specific undertaking, disassociated member might have to wait.
§  THIS IS usually deal with in Operating agreement.
·         LLP
o   Partnership required to have ONE limited and ONE general (but can have many, many limited).
o   General partners manage the operation, and limited are not involved in the day-to-day.
o   Governed by a partnership agreement, and there are default rules.
o   NOT subject to piercing.
§  Limited partners are protected from unlimited liability.
§  HOWEVER, still in trouble based on fraudulent transfer, or the amount of money received, IMPROPER DISTRIBUTION.
o   Limited partners risk losing their limited status, and could become Generals, and thus could be personally liable. (you lose status by managing).
§  BUT, usually does not happen unless they purposely take other action.
§  OR, a limited acts as general and a 3rd party knows that.
·         BUT ONLY to the specific 3rd party.