Lao_Business_Associations_Outline__Fall_2010
AGENCY
I. Background
a. Agency = a fiduciary relationship that arises by mutual assent between the agent and the principal
i. RESTATEMENT 1.01: definition of agency: “Fiduciary relationship that arises when one person (principal) manifests assent to another person (agent) that the agency 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”
1. example: employer = principal, employee agent
b. Agency is a THRESHOLD question
c. Why is the concept of agency so important?
i. Businesses rely on agents to get things done
ii. The agent’s acts with a third party can bind the principal (i.e. the agent makes arrangements with a third party on the principal’s benefit)
II. Main Issues of Agency:
a. Is there an agency relationship?
i. Look at the nature of the relationship
1. There must be mutual consent form each party
a. Mutual consent = objective standard—consider the parties’ outwards manifestations, NOT their subjective thoughts
i. we do NOT care whether or not the parties consider themselves an agency—there is an OBJECTIVE question
2. What if contact says: “this is NOT an agency relationship”?
a. this does NOT control (remember: objective standard)
i. As long as they agree to factual circumstances that the law would say is an agency relationship
ii. Test to distinguish between agency and non-agency relationship
1. For agency relationship, there must be:
a. CONTROL (Principal must have control over agent);
b. MUTUAL ASSENT; AND
c. A FIDUCIARY responsibility (cannot be an arm’s length transaction)
b. Source of Authority: Was the act authorized: Is Principal bound by Agent’s (or purported agent’s) act?
i. If there is an agency relationship, was there AUTHORITY for the agent to act?
1. If the acts of agent can be attributed to the principal, the third party is bound to the principal and the principal is bound to the third party.
ii. There are SIX (6) ways that a principal will be bound to a third party
1. Note: you can have more than once source of power to bind
a. Actual authority
b. Apparent authority
c. Agency by estoppel
d. Inherent authority
e. Ratification
f. Acquiescence
iii. (1) ACTUAL AUTHORITY:
1. When agent acts with actual authority on the principal’s behalf
a. Actual authorityà gives the agent the power AND right to bind the principal
b. §2.01: “an agent reasonably believes” based on P’s manifestations to A, that P wants A to so act
i. example: P says to A, sell my book for $10à A must reasonably interpret that manifestation
2. TWO KINDS:
a. EXPRESS: straightforward à P tells A, “Do X for me”
b. IMPLIED: inferred from custom and the past dealings
i. Example: selling a car might entail more than just transferring title—the prospective buyer might be able to take car to his own mechanic—A might have actual authority to allow third party to do so
3. Once we know principal authorized A, we don’t care whether the third party has knowledge of principal
a. **the Third Party’s (TP’S) lack of knowledge is IRRELEVANT
iv. (2) APPARENT AUTHORITY:
1. when agent acts with apparent authority on the principal’s behalf
a. TEST: (§ 2.03)
i. (1) A third party reasonably believes that the agent has authority; AND
ii. (2) belief is traceable to P’s manifestations (focuses on Ps manifestations to outside world that A has certain authority)
2. Usual derivation of apparent authority
a. By position: position (i.e. manager, treasurer) comes with certain authority by custom (generally recognized duties)
3. We are dealing with the power to bind, not the right to bind
4. Consider the perspective from the outside world à
a. Would the TP think that the agent has the apparent authority to act as he did?
5. Rationale for apparent authority:
a. Protect innocent TP, who likely do not know that a principal has told an agent to do something
i. Principal is in best position to prevent the TP’s potential loss
b. We want smooth commercial transactions
i. Without apparent authority, a TP would have to call principal and ask if agent has power to do something
v. (3) AGENCY BY ESTOPPEL: (§2.05)
1. when there is no actual agency relationship, (i.e. no manifestation from principal)
a. BUT third party (TP) justifiably changed position to his/her department because TP believed “A” was acting for “P” if:
i. “P” intentionally or carelessly caused TP’s belief; OR
actions conducted for P
a. No injury to P necessary
b. No breach of duty of loyalty necessary
2. A has a duty to not compete with the P with respect to matter within the scope of the agency
ii. RULE: absent principal’s consent, the agent CANNOT derive benefits from third party in connection with the transaction conducted for the P, other than the amount promised to agent by the principal
1. EXCEPTION: Gratuity
a. The problem à what constitutes gratuity?
i. Agent is supposed to disclose it to the principal—most relationships the P will let the A keep it
2. Example: Agent was P’s purchasing agent. A purchased 50 trucks on behalf of P from TP. TP was very grateful to agent for making purchase, TP gives A one truck as a gift.
a. Holding: agent holds the truck in trust for the principal, based on idea that agent cannot benefit from TP in connection with transaction conducted for P
iii. Rationale:
1. we don’t want to create a conflict of interest;
2. agent is supposed to step into shoes and work on behalf of principal
v Tarnowski: P (the principal) hired D (the agent), so that D could investigate the purchase of coin machines. D lied to P telling him that he had investigated music machines, when he had not. P purchased business from sellers, then discovered D’s misrepresentation. D also collected a secret commission from the sellers after P purchased the machines (P did not authorize such a commission). Even though P was able to rescind the K with sellers, D was still liable.
o Fiduciary rule applies: absent P’s consent, the agent cannot derive benefits from an agency relationship other than the amount promised by the principal
o Holding: D breached his fiduciary duty to P, and P can thus recover the commission D received and damages because of D’s breach.
PARTNERSHIP
I. Background
a. There are two types of partnerships:
i. General partnerships (**this is our focus**)
1. Default form of business organization
2. Two or more individuals decide to co-own a business for profit
ii. Limited partnerships
b. GENERAL PARTNERSHIP RULES
i. Uniform Partnership Act (UPA)—**our focus**
