Business Associations/Corporations Outline

BUSINESS ASSOCIATIONS
OUTLINE
Saturday, December 11
 
I. THE LAW OF AGENCY
 
            A. Creation of the Agency Relationship
 
i) Generally: The agent-principle relationship is the simplest business association. Agency law affects all other business associations, for example in the partnership context, the partners are “mutual agents” of each other, that is each partner (in a general partnership) is at once both a principal and an agent of all other partners, and any one of them can bind with others.
a) In the corporate context, agency is critical because the corporation can only act through its agents (its officers and employees). Thus, the agent – principal is a critical building block of all economic activity.
 
ii) Elements of Agency: Agency is 1) the fiduciary relation which results from 2) the manifestation of consent by one person to another that 3) the other shall act on his behalf and subject to his control, and 4) consent by the other to so act. The “controlling person” is the “principal” the “one who acts” is the “agent”. There doesn’t have to be any consideration here for an agency to exist.
a) Agency is a question of Law: The existence of a P-A relationship is a question of law.
i) There must be an agreement (but not necessarily a K), that one will act on behalf of another.
ii) An agreement may result in an agency even though the parties did NOT call it that and did NOT intend the legal consequences of the relation.
iii) The existence of an agency may be proved by circumstantial evidence that shows a course of dealing between 2 parties and consent by the principal that the agent was to act on his behalf. (An agency CANNOT be entered into unilaterally.
 
iii) Gordon v. Doty (1937)
Facts: P sues D for injuries suffered as a result of a car accident, where D was the owner of the car who loaned it to a third party to drive P’s football team to the game. Third party was the one who actually got into the accident. Was this third party an agent of the appellant while driving her car when the accident occurred?
Holding: Yes. There was evidence of a principal / agent relationship between the third party and the D. The agreement doesn’t have to be a K, doesn’t have to involve a matter of business, only that where one undertakes to transact some business or manage some affair for another by authority and on account of the latter, the agency arises. More importantly, she named the third party exclusively as the driver, and no one else. Court is more interested in the substance of the relationship rather than its form. She designated HIM as driver, that satisfies the “subject to control” element. Here, the D was the least cost avoider- perhaps should have asked for more proof of confidence in the driver.
 
                        iv) A Gay Jenson Farms Co. v. Cargill, Inc. (1981)
Facts: P farmers (the creditors / vendors) sued D financing company and D2 grain elevator plant because D2 couldn’t repay P’s for the grain. D had entered into arrangement with D2 to finance them, and D would make the decisions of D2 for them. D had stated that D2 (grain elevator) was in “strong need of paternal guidance”. Was the financier (D) by its course of dealings with (D2) liable for D2’s indebtedness by acting as principal for D2?
Holding: Yes. Cargill crossed the line to a “business partner” and principal when they took a very paternalistic control of the finances. Many factors demonstrated Cargill (D)’s control over D2, so they are not merely a debtor-creditor relationship, but agent-principal. This wasn’t a buyer-supplier relationship because it had to have been shown that the supplier had an independent business before it can be concluded that he is not an agent. The principal must be shown to have consented to the agency- this is a reasonably prudent person assessment objective standard to determine whether all the elements of an agency existed.
a) Course of Dealing: Agency can be proved by circumstantial evidence from a “course of dealing”, the party seeking to establish the agency must show:
            i) Consent by the P (express / implied)
            ii) Consent by the A (express / implied)
            iii) Action by  the A on the P’s behalf, and
iv) Positive control by the P of the A’s actions: there must be positive control, an affirmative management of the A’s actions on the P’s behalf. Negative control or veto of A’s actions is insufficient.
 
            B. Liability of Principal to Third Parties in Contract: Sources of Authority of Agents
 
i) Authority: An agent is “authorized” when the P has manifested to the agent (or third party) his consent for A to act on the P’s behalf. Authorityis the power of the agent to affect the legal relations of the principal by acts done in accordance with the principal’s manifestations of consent.
a) Thus, if acting within the “scope” of his agency (the ‘manifestations of consent’), the agent can bind the principal in contracts, subject him to tort liability by the doctrine of respondeat superior, and in certain cases subject the principal to criminal liability.
b) Actions by the A that exceed his actual / apparent authority are considered “outside the scope” of the agency and will not bind the P. Authority comes in 2 flavors- actual and apparent, the difference being to whom the manifestations of consent were directed. A principal can also ratify unauthorized action by the agent post hoc.
 
ii) Actual Authority: This is a manifestation by the P to the A that he has the power to act on his behalf. Where actual authority is created, the principal bears all risk for the actions of the agent- the agent is not liable to the principal or to others. However, if the agent breaches a fiduciary duty in acting, he will be liable to the principal for any detriment (subrogation). It may be created expressly or impliedly:
a) Express Actual Authority: Is created when the P expressly specifies the A’s task. It can be created by word or writing.
b) Implied Actual Authority: A manifestation of consent can, inferred by the A from acts, words, or other conduct of the P towards the A. The agent’s conduct is authorized if he was reasonable in drawing an inference that the P intended him to so act although this was not the P’s intent. When A’s intent was reasonable, P bears risk of mistake.
i) This implication may also be inferred from the customs of a particular business, or from general words by the P and A. Most authority in the P — A relationship is implied.
ii) Incidental Authority: An agent is generally always considered impliedly authorized to do those acts that are incidental to or are necessary and proper to accomplish or perform the task given him by the P. This implied incidental authority exists both in express and implied actual authority.
 
                                    c) Mill Street Church of Christ v. Hogan (1990)
Facts: A person was employed by Church to paint it – in the past, church had allowed the man to hire other people to help him. Man hired his brother to help. Brother got hurt, Church elder said they were uninsured, paid the brother his work. Now the brother suing church under worker’s comp act. Was the brother an employee of the church, and eligible to sue under workers comp. First have to ask whether man had the authority to hire brother in the first place, thus making him a legit employee of church.
Holding: Yes, implied actual authority here to hire brother. Bill had hired people in the past with the church’s knowledge. Implied authority- actual authority circumstantially proved where the principal actually intended the agent to possess the powers to carry out duties actually delegated. Bill had implied actual authority – has been allowed to do so in the past, 3rd party relied on it in the past, to now claim that he didn’t have the authority would be unfair.
 
iii) Apparent Authority: As distinguished from actual authority, results from manifestations by the P to third parties (not to the A), that the A has authority to perform the act in question. These manifestations create the appearance of authority, that is, they tell a third party dealing with the agent and the principal that the agent has the power to act on the principal’s behalf, whether or not the agent actually has the express or implied authority to so act.
a) Thus, a P can inadvertently expand the scope of his agent’s authority by such manifestations to the third party.
b) Liability: A P is liable to the 3rd party for actions by the agent that the third party was reasonable in believing were within the apparent authority of the agent. (The P will be estopped from denying the agent’s authority).
i) However: if the agent was acting outside his actual authority, he may be liable to the principal for breaching fiduciary duties.
c) The manifestations that create apparent authority can be made by a direct communication to the third party or by a general communication to the public at large.
d) Apparent authority can also be created by implication from the conduct of the P towards the third party (or conduct toward the agent in the third party’s presence).
 
e) Lind v. Schenley Industries, Inc. (1960)
Facts: P was employed by the D for years, then some reps from the D told him that he would be appointed to another firm and given a substantial raise. Was transferred, but the raise never happened. P sued D for compensation. D argued the rep (Kaufmann) who told P of the job had no authority to give him the raise anyway. There was no actual express authority here, because President of the Company was the only person who could bestow the authority, and didn’t do so. Usually common for V.P. to inform about raises. Did the rep have the apparent authority here to promise the raise, thus allowing the P to sue D for compensation when he wasn’t given the raise?
Holding: Yes. Apparent Authority arises when the Principal acts in a manner as to convey the impression to a 3rd party that an agent has certain powers even if he doesn’t. An objective standard is used for apparent authority- was it reasonable to assume that the agent has this kind of power?
i) Inherent Authority: Also could have held D for inherent authority, which arises solely from the designation by the principal of a kind of agent who ordinarily possesses certain powers.” Here, P’s direct superior told him of the raise opportunity, therefore someone like that could have had the direct inherent authority to do so.
 
                                    f) Three-Seventy Leasing Corp. v. Ampex Corporation (1976)
Facts: P (corp) formed by Joyce to purchase computer stuff. Kays, salesman of the D, talked with Joyce about buying D’s stuff. At the same time, Joyce contracted with EDS for them to lease D’s stuff from the P. A written doc was made but never executed by the D’s. P argues that the doc was an offer to sell from D to P, and Joyce accepted it. D contends that Kays never had the authority to accept Joyce’s acceptance on behalf of D.
Holding: Yes- Kays had the apparent authority. Apparent authority where principal acts in a way that would lead a RPP to suppose that the agent has the authority for the exercise, also if agent does things which are usual and proper to the conduct of the business which he is employed to conduct. Here, Kays a sales rep, a RPP would conclude he had authority to honor acceptances, also D did nothing to dispel this thought.
 
iv) Inherent Authority: A modern riff on apparent authority analysis, this doctrine holds that when a company holds out a person asa president or senior officer of the corporation, the officer has the “inherent authority” to conduct the ordinary course of the corporation’s business. The authority derives from the nature of the P — A relationship.
a) Limitation on Inherent Authority – The Ordinary Course of Business Rule: Some courts limit this form of authority by holding that a president or senior officer of a corp. may be found to have inherent authority to bind the corp. only by acts arising in the usual and regular (ordinary) course of business, but not for K’s of an extraordinary nature. An extraordinary contract is one that is so important to the welfare of the corporation, that third parties would naturally suppose that only the board of directors, or even the shareholders, could properly handle the matter.
 
b) Watteau v. Fenwick (1892)
Facts: Humble worked at beerhouse, then transferred the business to the D’s. Afterwards, Humble was the D’s manager but had no authority to buy goods for the business- but to be supplied by the D’s themselves. Action was brought against the D’s to recover the price of goods bought by Humble (wasn’t supposed to do this- he was the “agent”.) Was Humble an agent for the D’s, making them liable for what he did?
Holding: No. If you have apparent authority, try to argue inherent as well. There was no apparent authority here, so go to inherent authority. Inherent agency happens when you have a disclosed principal, who holds out a person as an agent. All about positionary power- what type of agent is the person, and what is customary for this agent to be doing? Once it is established that the defendant was a real principal, the ordinary doctrine as to principal and agent applies- that the principal is liable for all the acts of the agents which are within the authority usually confided to an agent of that character. Here, there was no holding out, the Plaintiff knew nothing of the Defendant.
            i) Inherent Agency is a Reasonableness Standard.
 
c) Kidd v. Thomas A. Edison (1917)
Facts: Fuller supposed to make a contract with the P to sing for the D for the purpose of D’s records. D contended that Fuller didn’t have the authority to contract. Industry agent usually didn’t have these kinds of responsibilities. Did Fuller have the authority to make these kinds of decisions for the D in general.
Holding: Yes. Can have actual implied authority here, because although the things that Fuller were doing were new, it was a common thing to engage singers for such recitas. Therefore, when an agent (like Fuller) is selected, the customary implication would seem to have been that his authority was without limitations (like he couldn’t be making contracts). Can also get on inherent agency doctrine- since he was selected by the agent to perform the recitals, we can assume that the principal chose Fuller to ‘act for him’ with some discretion, therefore he has vouched for his reliability. The very purpose of delegated authority its to avoid constant recourse by the 3rd parties to the principals, which would deny the agent latitude beyond his exact instructions.
 
v) Ratification: Ratification occurs when, although there existed no actual or apparent authority on the part of the agent to act, the principal consents to, or acquiesces to the agent’s conduct after the fact (sort of a post hoc apparent authority). Ratification can be made by express wordsendorsing the agent’s conduct, or by a course of conduct by the principal that is consistent with his approval.
            a) Botticello v. Stefanovicz (1979)
Facts: D husband and wife owned a farm. P wanted to buy it, husband accepted but wife refused. Purchase went thru, P paid money, made improvements on property, wife refused to exercise option by P to fully purchase. P sued for specific performance, alleging that Wife ratified Husband’s actions, even if he didn’t have the authority to do so. Was there ratification here? Was the husband even an agent of the Wife?
Holding: No agency- need all elements- husband was doing the financial work, but never signed any documents as an agent of Mary, Mary had been the one signing deeds and mortgages for the jointly-held property. Ratification? Just because Mary observed the improvements made by the P doesn’t mean she ratified the actions of her husband. There was no notice that the “agent” husband was acting for anyone other than himself, not acting for the “principal” wife. You need to be fully informed of the matter in order to ratify. Mary had to have known that P had paid for the land and didn’t take any action against it before she can be guilty of ratification.
 
vi) Authority by Estoppel: Even when no form of authority exists, the P may be estopped from denying liability because of the third party’s detrimental reliance on the actions of the agent and the principal’s failure to take action to correct the error (but need not ratify the actions). Closely related to the ideas of apparent authority and ratification.
            a) Hoddeson v. Koos Bros. (1957)
Facts: P tried to buy furniture at the store of the D, gave money to a “salesman” for merchandise, turns out salesman was an impostor. P sued D, seeking to impose liability on the “principal” D for actions of an alleged agent. Was the impostor an agent of D, and whether D was liable for injury to the third party for the agent’s actions.
Holding: Not an agent, but D is liable to third party for injuries for not exercising reasonable care. Cant get D for express / implied authority granted to agent, or apparent authority, where agent was “held out” by the principal. However, it is the D’s duty of care to exercise vigilance to protect the customer from losses occasioned by deceptions. If we had a rule that said you should bargain with everyone at own risk of not having apparent authority- seems impracticable. Agency by estoppel when the third party has reasonably relied to his detriment.
 
vii) Agent’s Liability on the Contract: If the third party to a transaction has notice that the agent is or may be acting for a principal but has no notice of the principal’s identity, the principal from whom the agent is acting is a partially disclosed principal. Unless otherwise agreed, a person purporting to make a contract with another for a partially disclosed principal is a party to a contract.
a) It is the duty of the agent, if he would avoid personal liability on a contract entered into by him on behalf of his principal, to disclose not only that he is acting in a representative capacity, but also the identity of his principal.
 
b) Atlantic Salmon A/S v. Curran (1992)
Facts: D did business w/ P as a distributor of seafood, purchased salmon to sell to other companies. D had another company started- then was dissolved in 1983. In 1987 declared that the company was running under the name “Boston Seafood Exchange” as well. Owed P lots of money in 1988. However, D claimed he was acting as an agent for “Marketing designs” (a company which the D started but was dissolved, never informed the P’s of this company), therefore he wasn’t individually liable for the money owed on the contracts. What is the personal liability of an agent who is at relevant times acting on behalf of an undisclosed or partially disclosed principal.
Holding: Duty rests on the agent to disclose his principal in order to avoid personal liability. The agent is the least cost avoider- had many opportunities to disclose the principles and avoid personal liability, but didn’t do so. Actual knowledge of the P is the test.
i) The duty rests upon the agent, if he would avoid personal liability, to disclose his agency, and not upon others to discover it. If he does not disclose, it will be presumed that he was trying to make himself personally liable.
 
            C. Liability of Principal to Third Parties in Tort
                                   
i) Servant vs. Independent Contractor:
a) Servants: Under the doctrine of respondeat superior, a “master” (employer) is liable for the torts of its “servants” (employees). Master not responsible for the actions of independent contractors. A master-servant relationship exists where the servant has agreed i) to work on behalf of the master and ii) to be subject to the master’s control or right to control the “physical conduct” of the servant.
            i) RS 219: Master is liable for the torts of his servants committed          whole acting in the scope of their employment.
b) Independent Contractors: These are “non-servants.” Independent Contractors are of 2 types
i) Agents: One who has agreed to act on behalf of another, the principal, but not subject to the principal’s control over how the result in accomplished (over the “physical conduct” of the task.)         
a) E.g.: Carpenter hired to build garage for homeowner and agrees to buy lumber for the project on credit account of homeowner- he is now acting on behalf of the homeowner.
ii) Non-Agents: One who operates independently and simply enters into arm’s length transactions with others.
a) E.g.: Carpenter hired to build garage for homeowner, carpenter simply responsible for getting the job done and is not to take directions from homeowner.
Most of these cases deal with whether the tortfeasors were servants or independent contractors, in order to decide whether the “master” or principle should be held liable by Respondeat Superior.
 
                                    c) Humble Oil v. Martin (1949)
Facts: Love left a car parked at the Humble service station, then it rolled away and hit the D. D sued Love and the Service station. Judgment entered against both, they both sought indemnity from each other. Issue of whether Humble is liable to either Love or D since the station was actually owned by Schnieder, an “independent contractor”. Issue of whether Schneider was an indep K’er or a servant of Humble Oil.
Holding: Court held that Schnieder was actually a servant, not an independent contractor, therefore Humble liable for his tort. Look to the element of control to determine if the independent contractor or master-servant relationship exists. Why is this a Master-Servant relationship? 1) Schneider must make reports and perform other duties in connection with the operation of said station as required by the company, 2) Humble furnished the stores, bought equipment / advertising, 3) Schneider had to do whatever Humble said, basically.
i) Possible Reasons why NOT a Servant: 1) employees know that Schneider is the boss. 2) Not all of the products sold are from Humble. 3) Schneider pays the rent himself. 4) Schneider was not paid directly by Humble.
 
                                    d) Hoover v. Sun Oil Co., (1965)
Facts: Fire started at Gas Station by an employee. Barone operated the gas station, and Sun Oil owned it. Plaintiff sued Barone and Sun Oil. Station has Sun advertising, Sun and Barone had a “dealers agreement”, where Barone had to purchase products from Sun. Uniforms had the Sun emblem, A Sun sales rep took orders from Barone, but Barone was under no obligation to follow his advice. Sun Oil argued that Barone was independent contractor and therefore they had no liability for negligence. Question was whether Barone and Sun were masters- servants or masters- independent contractors.
Holding: No master-servant relationship here- Sun had no control over the details of Barone’s day to day operations. The Dealer’s agreement fails to establish anything other than a landlord-tenant relationship or independent contractor. The greater the risk in the relationship, the greater the control. Sun had no control over Barone’s day to day operations, therefore no liability can be imputed to Sun from the allegedly negligent acts of Barone’s employee.
i) Arguments for an Indep. K’er Relationship: Barone could hawk competitor products, rented controlled hours of operation, employee compensation, and had a fixed rent. Sun had no control over the day-to-day operations.
ii) Arguments for a M-S Relationship: Equipment owned by Sun Oil. Periodic expenses were incurred by Sun Oil, and Sun had its trademark on the uniforms of Barone.
iii) Key Elements of Business Relationships: Duration, control, risk of loss, and return.
 
                                    e) Murphy v. Holiday Inns, Inc. (1975)
Facts: P sued D for damages and personal injuries resulting from a stay at one of the D’s owned and operated motels- slip and fall in the area where water was allowed to accumulate. Question of whether a Master-Servant or principal / agent relationship existed thereby holding the D liable for torts of the operator of the motel.
Holding: There was no agency or master-servant relationship here, therefore D is not liable for the torts of the operator of the motel. Agency = an element of continuous subjection to the will of the principal that distinguishes it from other fiduciary relationships. A critical test is the nature of the control agreed upon. P points out several provisions, including the franchise agreement, but this does not mean there was an agency. Agreement gave the D no control or right to control the methods of details of doing the work, therefore no principal agent or master servant relationship.
i) Key Distinction: Between the servant and independent K’er types of agents is the differing natures and degrees of control exercised by the principal.
a) RS 220: Can look at the extent of control that master can exercise, skill required in the occupation, kind of occupation, whether employer supplies own instrumentalities / tools, method of payment, whether or not the work is part of the regular business of the employer.
 
                        ii) Tort Liability and Apparent Agency
 
                                    a) Billops v. Magness Construction Co. (1978)
Facts: P’s entered into a K for a Hilton Hotel Conference Room, Hilton wrongfully requested more payments, mayhem ensued. P sued D arguing that the D franchisers were the “masters” and agents of Hilton therefore they should have been liable for torts of Hilton. Wanted to use the apparent agency theory to infer a master-servant relationship. Was there adequate control of Hilton by the franchisers to hold them as masters and therefore liable for torts?
Holding: Yes- franchisers had day to day control of Hilton, so are liable for their torts since Hilton is a servant of the D. Here, the F’ee kept records for review by the F’or, who inspected the Hotels for F’ee compliance. Ample evidence that F’ee is an agent of the F’or, any reasonable person would know they are dealing with a Hilton Hotel. So there is apparent agency here, and it goes over the line to Master-Se