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Business Associations
Rutgers University, Newark School of Law
Gatti, Matteo

Business Associations


Spring 2015

I. Law of Agency

a. Formation

i. Restatement 3rd Agency: 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.

ii. Agency is a concensual relationship between

1. the principal, who grants authority to another to bind her in certain respects; and

2. the agent, who accepts this responsibility.

iii. Thus, an agent holds a power to affect the principal’s legal relations within the scope of the agent’s agreed-on appointment and beyong this scope in some circumstances.

iv. Types of Agents:

1. Special agents: agency is limited to a single act or transaction;

2. General agent: the agency contemplates a series of acts or transactions.

v. Types of Principals:

1. Disclosed: when third parties understand that an agent acts on behalf of particular principal;

2. Undisclosed: when third parties believe an agent to be the principal

3. Partially disclosed: when third parties deal with an agent without knowing the identity of their principal

vi. Principal’s control of the agent is an essential aspect of an agency.

1. Employee/Servant: when a principal secures from her afent the right to control in detail how the agent performs his task-for example, the time he devotes to his tasks or the precautions that he uses.

2. Independent Contractor: when the principal’s control rights are limited and the agent exercises considerable discretion- for example, when the agent is a professional who is bound ti provide independent judgment or when the agent is an established business in its own right such as a building contractor.

b. Termination

i. Either the principal or the agent can terminate an agency at any time.

ii. Contract: if contract between P and A fixes a set term of agency, then the principal’s decision to revoke or the agent’s decision to renounce gives rise to a claim for damages for breach of contract.

iii. Damages: the rule that either party may freely terminate is the equivalent to limiting the remedy for breach of an agency contract to monetary damages RATHER than specific performance.

c. Parties’ conception does not control: agency relationships may be implied even wen the parties have not explicitly agreed to an agency relationship.

i. An important context in which agency relationsgips are implied is when a party such as a bank assumes too much control under a contract that osensibly makes for a debtor-creditor relationship

ii. Jenson Farms Co. V. Cargill

1. Issue: whether Cargill, by its course of dealing with Warren, bcame liable as a principal on contracts made by Warren with Plaintiffs.

2. Rule: Agency is a fiduciary relationship that results from the manifestation of consent by one person to another that the other shall ct on his behalf and subject to his control and consent by the other so to act.

3. Formation of Agency:

a. In order to create an agency there must be an agreement, BUT NOT necessarily a contract between parties.

b. Ann agreement may result in the creation of an agency relationship athough the parties did not call it an agency and did not intend the legal consequences of the relation to follow.

c. Existence of agency may be proved by circumstantial evidence which shows a course of dealing between the two parties.

4. Holding: We hold that all 3 elements of agency could be found in this particular circumstances of this case.

5. Analysis:

a. by directing warren to implement its recommendations, Cargill Manifested its consent that warren would be its agent, warren acted on cargill’s behalf in procuring grain for Cargill as the part of its normal operations which were totally financed by Cargill.

b. A number of factors indicate cargill’s control over warren, including the following:

i. (1) Cargill’s constant recommendations to Warren by telephone;

ii. (2) Cargill’s right of first refusal on grain;

iii. (3) Warren’s inability to enter into mortgages, to purchase stock or to pay dividends without Cargill’s approval;

iv. (4) Cargill’s right of entry onto Warren’s premises to carry on periodic checks and audits;

v. (5) Cargill’s correspondence and criticism regarding Warren’s finances, officers salaries and inventory;

vi. (6) Cargill’s determination that Warren needed “strong paternal guidance”;

vii. (7) Provision of drafts and forms to Warren upon which Cargill’s name was imprinted;

viii. (8) Financing of all Warren’s purchases of grain and operating expenses; and

ix. (9) Cargill’s power to discontinue the financing of Warren’s operations.

c. Although these factors could be found in an ordinary debtor-creditor relationship, they cannot be considered in isolation, but, rather, they muyst be viewed in the light of all the circumstances surrounding Cargill’s aggressive financing of Warren

d. The decision in this case should not affect firms and banks future willingness to make future loansà we deal here with a business enterprise markedly different from an ordinary bank financing, since Cargill was an active participant in Warren’s operations rather than simply a financier.

e. Cargill’s course of dealing with Warren was a paternalistic relationsgip in which Cargill made the key economic decisions and kept Warren in existence.

6. Conclusion: tjere was sufficient evidence from which the jury could find that Cargill was the principal of Warren within the definitions of agency set forth in Restatement.

d. Liability in Contract

i. Actual Authority and Apparent:

1. an agency is an arrangement that confers legal power on the agent and fives rise to duties by both the P and A.

2. Both Parties must manifest their intention to enter an agency relationship.

3. What is necessary is for the agent to reasonably nderstand from the action or speech of the principal that she has been authorized to act on the principal’s behalf.

4. Actual Authority:Thus, the scope of the actual authority conferred on the agent is that which a reasonable person in the position of A would infer from the conduct of the Principal

a. Actual authority includes (unless specifically withheld) incidental authority- that is, the authority to do those implementary steps that are ordinarily done in connection with facilitating the authorized act.

5. Apparent authority: authority that a reasonable third party would infer from the actions or statements of P.

a. Protecting third parties: Thus, apparent authority is in the nature of an equitable remedy designed to prevent fraud or unfairness to third parties who reasonably rely on P’s Actions or statements in dealing with the Agent.

6. Whitev. Thomas

ii. Inherent Authority: also described as inherent power. It is not conferred on agents by principals, but represents consequences imposed on principals by law.

1. Easiest to conceptualize in the context of undisclosed principal transaction. à since the principal can force a 3rd party to complete a transaction imposed by an agent, the principal should not be able to walk away from her obligations.

2. Traditional approach (2nd restatement of agency §161,194): doctrine of inherent power gives a general agent the power to bind a principal, whether disclosed or undisclosed, to an unauthorized contract as long as a general agent would ordinarily have the power to enter such a contract and the third party does not know that matters stand differently in this case.

3. 3rd Restatement: provides same result for the particular case of an undisclosed principal. (§2.06). More generally, 3rd restatement provides agency by estoppel and restitution.

4. Gallant Ins. Co v. Isaac

e. Liability in Tort: in most circumstances, principals are liable for torts committed by a class of agents known as “employees”, as distinguished from another class of agents known as “independent contractors”

i. Put differently, only a particular kind of agency relationship, the employer-employee relationship, ordinarily triggers vicarious liability for all torts committed within the agent’s scope of employment.

ii. Restatement 3rd Agency §2.04:

iii. Restatement 3rd Agency §7.07:

iv. Humble Oil and Refiing Co. v. Martin

1. HoldingL the lower court properly held Humble responsible for the operation of the station, which admittedly it owned, as it did also the principal products there sold by Schneider under the so-called Commission Agency Agreement between him and hum;;e which was in evidence.

2. Important to holding:the facts that neither Humble, Schneider nir tge statuib employees were paid and directed by Schneider individually as their “boss”sdd

v. Hoover v. Sun Oil Co.

f. Liability in Tort Under Apparemt Authority

i. Doctrine of respondeat superior, is not only basis for imposing vicarious liability in tort on an agent’s principal.

ii. Apparent authority: is also a basis for imposing vicarious liability in tort without regard to the tempora

ditors of individual partners if the firm is liquidated.

a. Creditors of partnershipàcreditors of individual partners

4. Because the firm owns its assets, a partnership can be a trustworthy counterparty for its third party suppliers, customers, and employees.

b. Why Joint Ownership?

i. To raise capital if two individuals cannot go into business alone.

ii. Also, after a certain point, selling an ownership stake may be cheaper than borrowing money. àthe costs of co-ownership may be lower than the agency costs of debt.

c. Agency Conflict Among Co-Owners

i. Meinhard v. Salmon:

d. Partnership Formation

i. Vohland v. Sweet:

1. Plaintiff brought action for dissolution of an alleged partnership and for an accounting against defendant-appellant Vhohland.

2. Facts: Sweet, as a youngster, commended working in 1956 for Chales Vohland, father of defendant, as an hourly employee in anurery. After military services he resumed former employment. Charles Vohland retired and business became defendant’s.

3. Sweet received a 20% share of the net profit of the enterprise after all of the expenses were paid; no partnership taxes were paid. Vohland listed money paid to Sweet as a business expense under commissions. Vohland listed all other expenses of the nurery. Sweet’s tax returns declared that he was a self-employed salesman at Vohland. (more pertinent facts listed page 44-45)

4. Issue: whether the arrangement between Sweet and Vohland created a partnership, or a contract of employment

5. Rules

a. UPA §7(4): receipt ny a perso of a share of the profits is prima facie evidence that he is a partner in the business…lack of daily involvement for one partner is not per se indicative of absence of a ppartnership. A partnership may be formed by furnishing skill and labor by others. Contribution of labor and skill by one of the partners may be as great a contribution to the common enterprise as property or money.

b. Common law: partnership can commence only by voluntary contract of parties

i. Bond: a partner pne must have an interest with another in the profits of a business, as profits.

6. Analysis: Commisison was used to described Sweet’s portion of net profits, and the receipt of a share of the profits is prima facie evidence of a partnership.

7. Holding: there is evidence from which it can be inferred that the parties intended to do things which amount to the formation of a partnership, regardless of how they may later characterize the relationship. In authorities cited aove it seems the cewntral factor in determining existence of a partnership is a division of profits.

8. Disposition: We cannot say that the court erred in finding existence of a partnership[.

e. Relations with Third Parties

i. Since general partnership imposes personal liability, general partnership is partly defined by the rights of creditors vis-à-vis the assets of partners.

ii. Problems page 47**

f. Partnership Creditors’ Claims Against Departing Partners:

i. When a partner withdraws from a partnership but other partners continue the business, the continuing liability for existing obligations leaves the withdrawing partner in an uncomfortable situationàshe is liabile for partnership obligations incurred prior to her departure, BUT she no longer exercises control over the capacity of the continuing business to satisfy those obligations.

ii. Sections 36(2) and 36(3) of the UPA are designed to mae life easier for departing partner:

1. §36(2) of UPA: releases departing partner of partnership debts if the court can infer an agreement between the continuing partners and the creditor to release the withdrawing partner.