Business Associations Outline
Fall 2008: Professor Lao: Eisenberg Text
I. Agency: Agency is the fiduciary relationship that arises when one person “Principal” manifests assent to another person “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. 3rd Rest. of Agency § 1.01.
a. Three Issues in Agency:
i. Who is the Agent and who is the Principal
ii. When is the Principal bound by actions taken by the Agent with respect to third parties
iii. What duties does the Agent owe to the Principal
b. Proving Agency: Agency is a question of Law. The person asserting that there is a principal-agent relationship has the burden of proving that it exists. Existence of a principal-agent relationship is not dependant on the intent of the parties involved. There must be:
i. An agreement between Agent and Principal, but not necessarily a K, that one will act on behalf of the other.
ii. An agreement may result in agency although the parties did not define that an agreement or agency existed, and did not intend the legal consequences of the relationship.
1. Morris Oil v. Rainbow Oilfield. A K specifying the legal relationship between two parties is not determinative of their true agency relationship. The actions of the parties is more dispositive.
iii. Agency may be proved by looking to the actions of the parties, to determine if a course of dealing between the parties resulted in there being an Agent acting on behalf of a Principal.
iv. Elements of Agency
1. Consent by Principal: Express or Implied
2. Consent by Agent: Express or Implied
3. Action by Agent on Principal’s behalf
4. Positive control by Principal over Agent’s actions:
c. Creation of Agency Relationship:
i. By agreement or contract:
ii. By Ratification: Occurs when Principal accepts the benefits or affirms the conduct of someone purporting to act for the Principal even though no independent agency agreement exists
iii. By Acquiescence: Agent takes unauthorized action on repeated occasions, and Principal subsequently ratifies such actions. The actions become commonplace so as to be generally authorized, rather than isolated incidents of ratification. The Agent gains the ability to bind the Principal through such action.
iv. By Estoppel: Principal acts in such a way as to allow a third party to reasonably believe that someone is the Principal’s Agent. The Principal becomes bound to agreements or actions reached by third party and Agent where third party reasonably believes Agent has authority to bind Principal. Principal is estopped….
d. Agency Relationships PrincipleàAgentàTP:
i. Disclosed Principle: Where the principal is disclosed to TP for the purposes of arranging a contract between Principal and TP
1. Agent Liability: The Agent is not liable on the contract because the TP knows that the agent is a mere representative of the Principle.
2. Principal Liability: The Principal is liable to TP.
3. Third Party Liability: TP is liable to Principal
ii. Partially Disclosed Principal: At time of transaction TP knows the agent is acting on behalf of a Principal, but does not know the identity of the principal.
1. Agent Liability: Agent is almost always liable on the K. Without knowing the identity of the Principal, TP is relying on trustworthiness of the Agent.
2. Principal Liability: Principal is liable to TP
3. Third Party Liability: TP is liable to the Principal.
iii. Undisclosed Principle: At time of transaction TP does not know that the Agent is acting on behalf of a Principal, and does not know the identity of the principal.
1. Agent Liability: Agent is always liable on K, as the TP believes they are entering to K with the Agent.
2. Principal Liability: Principal is liable to TP.
3. Third Party: TP is liable to Principal. There is an exception for personal service work where TP entered believing the services would be rendered to Agent.
e. Authority of the Agent
i. Actual Authority: An Agent acts with actual authority when, at the time of taking action that has legal consequences for the Principal, the Agent reasonably believes, in accordance with the Principal’s manifestations to the Agent, that the Principal wishes the Agent to Act. 3rd Restatement of Agency § 2.01.
1. Liability:
a. Where actual authority is created, Principal bears all risk for the actions of the Agent. The Agent is not liable to the Principal or to others.
b. If Agent breaches a fiduciary duty in acting, he will be liable to the principal for any detriment
2. Express Actual Authority: Principal expressly specifies that Agent has authority to take specific actions. This can be created by oral or written instruction.
3. Implied Actual Authority: A manifestation of consent can be inferred by Agent from acts, word or conduct of the Principal toward the Agent. The Agent is authorized if reasonable in drawing an inference that Principal intended him to act, although it was not actually Principal’s intent.
a. Incidental Authority: An Agent generally has the implied authority to take actions that are incidental to or necessary and proper to accomplish the job assigned by the Principal.
i. Consider customs in industry and job title.
ii. Apparent Authority: Apparent authority is the power held by an Agent or other actor to affect a Principal’s legal relations with third parties when a TP reasonably believes the would-be Agent has authority to act on behalf of the Principal and that belief is traceable to the Principal’s manifestations. 3rd Restatement Agency § 2.03.
1. Inherent Authority: Exists when a Principal holds out a person as having a title such as “President” or “Senior Officer” of the corporation. The person in their capacity has inherent authority to perform conduct ordinary to the course of business for a person in such position.
2. Liability:
a. A Principal is liable to TP for actions by the Agent that the TP was reasonable in believing were within the apparent authority of the Agent.
b. If the Agent was acting outside his actual authority, he may be liable to the Principal for breaching a fiduciary duty.
3. Creation by Employment: Apparent Authority can be formed by one’s employment.
a. Ex: If employee salesman (would be Agent) conducts a sale with TP on behalf of employer (would be Principal), and the TP reasonably believes employee salesman had the authority to conduct the sale based upon employers empowerment of employee salesman, P employer is bound.
iii. Agency by Estoppel: 3rd Rest. Agency § 2.05. A person who has not made a manifestation that an actor has authority as an Agent and who is not otherwise liable as a party to a transaction purportedly done by the actor on that person’s account is subject to liability to third party who justifiably is induced to make a detrimental change in position because the transaction is believed to be on the person’s account, if
1. The person intentionally or carelessly caused such belief, or
2. Having notice of such belief and that it might induce others to change their positions, the person did not take reasonable steps to notify them of the facts.
iv. Ratification: The affirmation of a prior act done by another, whereby the act is given effect as if done by an Agent acting with actual authority. 3rd Rest. Agency § 4.01. Ratification occurs by
1. Express words endorsing the Agent’s actions
2. Course of conduct by Principal that is consistent with approval
v. Acquiescence: If A performs a series of acts that are similar in nature, the failure of P to object to those acts is an indication that such acts are within the scope of A’s authority as vested by P.
f. Duties of Agent & Principal: In addition to the following duties, there is a principle of disclosure imposed. Where an Agent does not disclose the relationship to Principal when acting on behalf of Principal, the actions of the Agent are binding to Principal. Morris Oil v. Rainbow Oilfield.
i. Agent’s Fiduciary Duty: The Agent has a duty to act solely for the benefit of the Principal in all matters connected to the Agency relationship. Any br
g their property, labor, skill, experience, or money.
8. Martin v. Peyton: Is A a partner in B partnership where A extends a loan to B in exchange for profits, a right to inspect financial books, and the right to veto partnership actions?
a. No Partnership: The rights afforded A were merely collateral to secure the loan made. A had a right to veto, but did not have a right to direct Partnership activities in a positive manner.
iii. Partnership by Estoppel: UPA § 16 Where a person represents to a third party that he is a partner in an existing partnership or with one or more persons who are not actually partners, he may be estopped from denying partnership liability if the third party has extended credit to the actual or apparent partnership.
f. Partnership Interests
i. Partnership Property:
1. Each Partner is co-owner of Partnership property. UPA § 25
2. Partnership property may be used by partners only for partnership business, unless the other partners consent to personal use
3. Partnership property may not be used to secure a personal obligation.
4. Interest in Partnership property is not assignable
ii. Interest in Partnership:
1. Each partner owns an interest in the Partnership. Each is entitled to an equal share of the profits and surplus. UPA § 26.
2. Interest in a Partnership is transferable and assignable. The assignee of a Partnership interest is only entitled to receive profits. He does not become a partner unless other partners consent, and is not entitled to management powers unless consented to. UPA § 27
iii. Interest in Management of Partnership:
1. Each Partner has an equal interest in governing partnership affairs. UPA § 18.
2. The management interest is not assignable without consent of other partners. UPA § 27.
3. Summers v. Dooley: Partnership acts must be performed by majority authorization. Where there are 2 partners and 1 objects, the act is not authorized by the Partnership. If a Partner carries out an act that has expressly not been authorized, they are personally liable for that act.
g. Partnership Finances:
i. No capital is required to form a partnership. If capital is used, there is no obligation for each Partner to make a capital contribution.
ii. Each Partner must contribute some asset, although not necessarily monetary. A partnership may be formed when one Partner contributes capital and others contribute skill and labor.
iii. Default Finance Rules: UPA § 18: The default provisions for Partnership finances follow. All default provisions of § 18 may be altered by contract of parties.
1. Indemnification: Partner’s are entitled to indemnification for Partnership liabilities from each Partner. Liabilities, as losses are to be shared among Partners equally, or in accordance with the contracted method of sharing profits. Indemnification is a Partnership Liability.
2. Contribution: Each Partner is entitled to be repaid the amount of their contribution. Each Partner may be required to provide contribution for Partnership necessities such as paying off creditors, or funding a partnership obligation to indemnify a partner. Contribution is a liability of individual Partners.
3. Partnership Profits & Losses: Each partner, regardless of contribution amount, is entitled to an equal share of profits and surplus of the Partnership once liabilities are satisfied. Losses are afforded the same treatment and are shared equally.
