BUSINESS ASSOCIATIONS
Scarlett, Spring 2006
I. AGENCY
Summary
First, did an agency relationship exist?
If so, did the agent have authority (actual, apparent or inherent)?
A. Does an Agency Relationship Exist?
“Agency”: The principal is responsible for the acts of his agent. Gorton
Two-Step Test for Agency: Agency is the fiduciary relation which results from
i. the manifestation of consent by one person (the principal) to another (the agent) that the other shall a) act on his behalf and b) subject to his control, AND
1. “Manifestation”: doesn’t have to be written or oral (nor aware that relationship constitutes an agency). Can be inferred from conduct. But the manifestation by or attributable to the principal must somehow reach the agent.
a. Agreement, but no K necessary: In order to create an agency there must be an agreement, but not necessarily a K between the parties. The relationship of the parties does not depend upon what the parties themselves call it, but rather in law what it actually is.
ii. consent by the other to so act. Gorton (Look at circumstantial evidence to determine if these two steps have been met.)
1. Objective standard for determining consent: The courts use an objective standard for determining consent: Has the “principal” done or said something that the “agent” reasonably interpreted as consent that the “agent” would act for the “principal”? Has the “agent” done or said something that, reasonably interpreted, indicated agreement to act?
2. Compensation: It is not essential to the relationship of principal and agent that either receive compensation. Gorton.
Burden: Where a party seeks to impose liability upon an alleged principal on a K made by an alleged agent, the party must assume the obligation of proving the agency relationship. It is not the burden of the alleged principal to disprove it.
Creditor/ Debtor relationship v. Principal/Agent relationship: The point at which a creditor becomes a principal is that at which he assumes a de facto control over the conduct of his debtor, whatever the terms of the formal K with his debtor may be. Factors must be viewed in light of all the circumstances. Cargill.
B. Liability of Principal to Third Parties in Contract
Summary: To hold principal liable on contract, plaintiff (third party) must prove
agency relationship existed AND
what kind (or kinds) of authority agent possessed
i. Hierarchy of authority: An agent can have the power to bind a principal through:
1. actual authority (express or implied);
2. apparent authority;
3. inherent authority;
4. estoppel; AND/OR
5. ratification.
“Authority”: Authority is 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 to him. RS §7.
Do the legal consequences of an agent’s acts depend on the type of authority the agent possessed? No. Authority is authority. If the agent was authorized (under any of the forms), then the principal is bound.
Three Types of Authority: EXAM: All of these categories overlap. A lot of times you will find more than one.
Actual authority: “Actual authority” is authority that the principal, expressly or implicitly, gave the agent.
i. Elements:
1. an objective manifestation by the principal;
a. Express actual authority: look at agreement
b. Implied actual authority: Implied actual authority is the act of putting agent in such a position leads agent to reasonably believe he has authority
i. Incidental: agent has authority to use all means reasonably necessary to carry out result mandated by principle
ii. Custom: if it is customary in trade/community for this type of agent to have certain powers, then the agent has it
iii. Pattern of conduct: if P knows A has engaged in pattern of behavior and P fails to object to continuance of it, then A has authority to continue it
2. followed by the agent’s reasonable interpretation of that manifestation;
3. which leads the agent to believe that it is authorized to act for the principal. RS §26.
Apparent Authority: An agent has apparent authority sufficient to bind the principal when the principal acts in such a manner as would lead a reasonably prudent person to suppose that the agent had the authority he purports to exercise. Lind; Ampex; RS §8. (Apparent authority can co-exist with actual authority.)
i. Elements: Creation of apparent authority involves:
1. an objective manifestation from one party (“apparent principal”),
a. “Objective manifestation”:
i. direct communication by P to T
ii. inaction by principal
iii. *placing agent in position with customary powers (“implied apparent authority”).
iv. principal authorizes agent to state he is authorized
v. course of conduct
b. Issue: What were principal’s manifestations? This will factor into whether it was reasonable for third party’s belief was reasonable.
2. which somehow reaches a third party, AND
3. which causes the third party to reasonably believe that another party (“apparent agent”) is indeed authorized to act for the first party (i.e., for the apparent principal). RS §27
ii. Implied apparent authority: the act of putting agent in such a position that leads third party to reasonably believe agent has authority
Inherent Authority: “Inherent agency power is the power of an agent which is derived not from authority, apparent authority or estoppel, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent.” Restatement § 8A.
i. Elements: Under the doctrine of inherent agency power:
1. if a general agent,
a. “General agent”: If a principal authorizes an agent “to conduct a series of transactions involving a continuity of service,” the law calls the agent a general agent. RS §8A, cmt a. (Example: copy clerk has inherent authority to order supplies of paper.)
b. “Specific agent”: If a principal authorizes the agent only to conduct a single transaction, or to conduct a series of transactions that do not involve “continuity of service,” then the law calls the agent a special agent.
2. acting in the interests of the principal,
3. does an act usual or necessary with regard to the authorized transactions, AND
4. the third party reasonably believed the agent had authority,
5. then the act binds the principal regardless of whether the agent had actual authority and even if the principal has expressly forbidden the act. RS §161; RS §8A.
ii. When used: Two classic situations in which inherent authority has been found
1. Undisclosed principals
a. RS §194: An undisclosed principal is liable for acts of an agent done on his account, if usual or necessary for such transactions, although forbidden by the principal.
b. RS §195: An undisclosed principal who entrusts an agent with the management of his business is subject to liability to third persons with whom the agent enters into transactions usual in such business and on the principal’s account, although contrary to the directions of the principal.
2. Agent exceeds authority
Estoppel: In estoppel cases, the principal will say, “I don’t know who the person was who entered into a K with you.”
Elements: Elements of estoppel:
i. acts or omissions by the principal, either intentional or negligent, which create an appearance of authority in the purported agent;
ii. the third party reasonably and in good faith acts in reliance on such appearance of authority; AND
iii. the third party changed her position in reliance upon the appearance of authority. RS §8B; Hoddeson.
Ratification: Ratification is “the affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account.” RS §82.
Elements: Ratification requires:
i. valid affirmation by P, express or implied; AND
1. Implied Affirmation by Principal:
a. *The principal accepts the benefits of the K at a time when it is possible to decline
b. Silence/inaction
c. P must know/have reason to know all material facts
d. All or nothing – cannot ratify part of contract
2. Ratification requires acceptance of the results of the act with an intent to ratify, and with full knowledge of all the material circumstances. RS §62.
ii. principal must know or have reason to know of all material facts. RS §62.
**Innocent third party: Law will deny legal effect to ratification where necessary to protect the rights of innocent third party. It will be the third party’s option to elect to be bound by contract. Innocent third party occurs when material change in circumstances between time of contract and ratification
When used: Ratification will only occur where Agent acts without authority (of any kind) and there are no grounds for estoppel, but Principal will only be bound if P ratifie
he agency. RS §17.
i. Competing with employer: The agent is under a duty not to compete himself, or to act for persons who are in competition with his principal, unless he has the consent of the principal. RS §18;.
1. After termination: After termination of his employment, the agent can compete with the employer, unless he has agreed otherwise and the agreement is valid. However, a former agent cannot use or disclose trade secrets or other confidential information obtained during his employment. Newberry.
a. Example: Employee quits, then forms a cleaning service similar to Employer. He takes Employer’s customer list with him. Court: breach.
ii. Acting adversely to employer’s interest: An employee has a fiduciary duty to his employer to exercise good faith and loyalty so that he does not act adversely to the interests of the employer by serving or acquiring any private interest of his own. Singer.
1. Example: Employee sold car parts for Employer. On the side, without Employer’s knowledge, Employee referred customers to other manufacturers for a fee. Court held: breach of fiduciary duty to Employer.
iii. Secret profits, advantages, benefits: Anything which an agent obtains by virtue of his employment belongs to his principal. T/f, the retention of any benefit or profit which he derives through or from his employment, without his employer’s consent, is a breach of fiduciary duty. Reading.
1. Example: Military officer gets paid to transport civilians. Court held that Officer was able to do this only by virtue of his being an Officer. Thus, he privately profited off of his position of employment and had to give the money to the Army.
Duty to inform: The fiduciary obligation requires an agent to notify his principal of all matters which come to his knowledge affecting the subject of the agency. RS §16.
Duty to act within authority: An agent has a duty to act only as authorized. An agent who violates this duty is liable to the principal for any resulting damage.
Duty to follow instructions: If the principle tells Agent something, he must obey it.
II. PARTNERSHIPS
**Note: If not specified, it “UPA” refers to the 1914 version.
A. Has a Partnership Been Formed?
“Partnership”: A partnership is an association of two or more persons to carry on as co-owners a business for profit. Fenwick; UPA §6(1).
Elements: The essential characteristics of a partnership are:
i. an unincorporated business, intended to make profit;
ii. which has two or more participants, who may be either individuals or entities;
iii. each of whom “brings something to the table,” such as efforts, ideas, money, property, or some combination;
iv. each of whom co-owns the business;
v. each of whom has a right to co-manage the business; AND
vi. each of whom shares in the profits of the business. Martin.
1. Right to profit sharing – prerequisite: (It is not necessary that the business actually have profits, and profit sharing is not irrefutable evidence of partner status, but the right to share whatever profits exist is a necessary precondition to being a partner.)
2. Receiving profits – presumption: Under UPA §7(4), a person who receives a share of the profits of a business is prima facie evidence that he is a partner, unless the profits were received in payment:
a. of a debt by installments or otherwise;
b. as wages of an employee; OR
c. as interest on a loan.
Liability: Generally, partners are jointly and severally liable for everything chargeable to the partnership. Young; UPA §15. (For dissolution, see §40.)
