Business Associations
Professor Constance Wagner
Fall 2009
I. BASIC CONCEPTS OF BUSINESS ASSOCIATIONS
What Is A Business?
a. A business attempts to make profit. Its primary goal is not to advance the public good, although that may happen through its course of operation.
Who Are the Participants in Business Associations?
a. Business Associations is primarily concerned with owners, managers, and creditors
b. Owners
i. Own the business
ii. Includes “mom and pop” owners, shareholders of corporations, and Bill Gates
c. Inventors
i. Created the product
ii. Might also be the owner
d. Managers
i. Oversee the day-to-day operations of the business
e. Creditors
i. Contribute capital, but might not help operate the business
ii. Includes banks and suppliers
f. Employees
i. Responsible for the day-to-day operations of the business
g. Customers
i. Refers to other companies and private individuals
h. Government
i. Regulates corporate behavior
1. Including everything from how to form a corporation, to what a corporation can and cannot do, to how to dissolve a corporation
2. This regulation is needed because, left unchecked, the private market would not protect the greater good
ii. Regulates the sale of securities
iii. Taxes corporations
iv. Decides case law that regulates business associations
v. Contracts with businesses for everyday operations at home and abroad
i. General Public
i. We’re all affected by the market, even when we’re not consuming
ii. Our opinion influences how businesses act
iii. Our opinion influences how the government regulates businesses
iv. Businesses contribute to social institutions that we use everyday
What Business Issues Must Be Resolved In Business Enterprises?
a. Return on investment
i. How do we distribute the profits if we have a good year?
b. Risk or loss
i. How do we share the loss if we have a bad year?
c. Control of the Enterprise
d. Duration of the Enterprise
II. AGENCY
Basic Concepts
a. Agency law is designed for sole proprietors
b. Agency law is the only Business Association based exclusively on Common Law
What Is Agency?
a. Restatement (Second) of Agency §1(1) – Agency; Principal; Agent:Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.
Is This Person An Agent?
a. Gordon v. Doty (Idaho, 1937). Facts: Doty allowed Garst to drive football players to an away game in her car. Doty specifically instructed Garst to drive the car. Garst crashed, and Gordon sued Doty for injuries his son sustained. Question: Was Garst the agent of Doty? Answer: Yes Rationale: (1) The Court applies Restatement (Second) of Agency §1 and notes that a principal is responsible for the acts of his or her agent. (2) Agency exists when one undertakes to transact some business or manage some affair for another by authority and on account of the latter. (3) Agency can exist absent a contract, absent the parties using the agent and principal labels, absent the parties wanting the legal consequences of an agency relationship, and absent compensation. (3) Doty wanted the team to play the game, and Garst consented to act on her behalf to make that happen. Garst acted subject to Doty’s control because he drove the car. Dissent: (1) Agency involves more than passive permission. Garst was not acting on Doty’s behalf, and the condition does not amount to control. (2) One who borrows a car for his own use is a gratuitous bailee, subject to conditions, and not an agent of the owner.
i. General Notes
1. Agency liability is often used when the principal has more money than the agent, but the principal isn’t liable under traditional negligence theory.
2. A court is not bound by written disclaimers that an agency relationship does not exist
3. A contract does not guarantee the existence of an agency relationship
ii. Case Specific Notes
1. In terms of public policy, this decision is bad because it discourages people from making conditional loans
2. The Court may have found agency to compensate the father for the injuries or to encourage people to get automobile insurance.
3. Doty was in the best position to avoid the loss. She should have checked Garst’s driving record, repaired the car, or drove the car herself.
b. A. Gay Jenson Farms Co v. Cargill, Inc. (Minnesota, 1981). Facts: Starting in 1964, Warren and Cargill entered into several agreements, whereby Cargill loaned money to Warren. In return, Warren became Cargill’s grain agent, and Cargill took Warren’s profits, obtained a right of first refusal to buy Warren’s grain, and obtained a right to access Warren’s books for inspection. In addition, Warren could not make repairs, declare dividends, sell or buy stock, or become a guarantor on another’s debt without Cargill’s permission. Moreover, Warren was supposed to make repairs recommended by Cargill; Warren modified its business forms as directed. Eventually, Cargill sent an official to help run day-to-day operations. By 1977, Warren became insolvent, and Cargill refused to pay the farmers who had been selling their grain to Warren. Question: Was Warren the agent of Cargill? Answer: Yes Rationale: (1) Cargill manifested its consent that Warren be its agent, Cargill exerted control over Warren by interfering with Warren’s internal affairs, and Warren consented to act as Cargill’s agent because Warren bought grain on behalf of Cargill. (2) Additionally, Restatement (Second) of Agency §14(O) applies. (3) A buyer-supplier relationship under Restatement (Second) of Agency §14(K), Comment A does not exist because there was no independent business. (4) This decision will not negatively affect debtor-creditor relationships with reasonable constraints, such as those between businesses and banks.
i. General Notes
1. Restatement (Second) of Agency §14(O):A creditor who assumes control of his debtor’s business may become liable as principal for the acts of the debtor in connection with the business.
· A security holder who merely exercises a veto power over the business acts of his debtor by preventing purchases or sales above specified amounts does not thereby become a principal.
2. Restatement (Second) of Agency §14(K), Comment A:One who contracts to acquire property from a third person and convey it to another is the agent of the other only if it is agreed that he is to act primarily for the benefit of the other and not for himself. Factors indicating that he is a supplier include:
· He receives a fixed price for the property, irrespective of the price paid by him
· He acts in his own name and receives the title to the property which he thereafter is to transfer
· He has an independent business in buying and selling similar property
3. The following factors are reasonable constraints in a debtor-creditor relationship: requiring correspondence, limits on financial freedom, requiring routine financial statements to be published.
ii. Case Specific Notes
1. What could the farmers have done to better protect themselves?
· Have Cargill sign a guarantee that if Warren fails to pay, Cargill will
· Required direct cash payment
2. What should Cargill have done?
· Made loans conditional on the submission of proof of payment
· Exerted less control over the day-to-day operations of Warren
· Should not have called in the loans
o Would have lost its supply
o Would have prompted a lender-liability or libel lawsuit by Warren
Liability of Principal to Third Parties in Contract
a. Did The Agent Have Authority?
i. What Types of Authority Exist? (Address All Three in Exam Answer)
1. Actual Authority
· Actual Express Authority
o Restatement (Second) §7 – 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
o Restatement (Second) §26 – Creation of Authority:Authority to do an act can be created by written or spoken words or other c
Done To Protect Itself?
¬ Made it clear that Kays could not bind the company
¬ Talked to Kays about what he could and could not do
¬ Talked to Joyce about his understanding of the situation
¬ Don’t refer to Kays as a salesman
§ What Should Joyce Have Done To Protect Himself?
¬ Make the Electronic Data Systems contract conditional
¬ Do a simple inquisition on Ampex company contract policies
3. Inherent
· Restatement (Second) of Agency §3 – General Agent; Special Agent:
1. A general agent is an agent authorized to conduct a series of transactions involving a continuity of service
2. A special agent is an agent authorized to conduct a single transaction or a series of transactions not involving continuity of service
· Restatement (Second) of Agency §8A – Inherent Agency Power:Inherent agency indicates 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 (Second) of Agency §161 – Unauthorized Acts of General Agent:A general agent for a disclosed or partially disclosed principal subjects his principal to liability for acts done on his account which usually accompany or are incidental to transactions which the agent is authorized to conduct if, although they are forbidden by the principal, the other party reasonably believes that the agent is authorized to do them and has no notice that he is not so authorized.
· Restatement (Second) of Agency §194 – Acts of General Agents: A general agent for an undisclosed principal authorized to conduct transactions subjects his principal to liability for acts done on his account, if usual or necessary in such transactions, although forbidden by the principal to do them.
· Restatement (Second) of Agency §195 – Acts of Manager Appearing to be Owner: 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 businesses and on the principal’s account, although contrary to the directions of the principal.
· Watteau v. Fenwick (England, 1892). Facts: Humble sold his tavern to the defendants. Humble remained at the tavern as manager. Humble’s name stayed over the door, and Humble’s name remained on the license. Humble had authority to buy ales and water. Humble bought cigars and did not pay. Plaintiffs discover defendants’ existence and sue. Question: Did Humble have inherent authority to buy the cigars? Answer: Yes Rationale: (1) Defendants are undisclosed principals. Defendants have so conducted themselves as to enable their agent to hold himself out to the world as the proprietor of their business. Plaintiffs, therefore, had no knowledge that Humble’s actions were restricted. (2) These goods bought were such as were ordinarily used in the business. (3) Mischievous consequences would result if undisclosed principals could escape liability.
Nogales Service Center v. Atlantic Richfield Company (ARCO) (Arizona, 1980). Facts: ARCO lent Nogales 300,000 for a truck stop/motel/diner/gas station. ARCO’s agent, Tucker, said that an additional 100,000 loan was forthcoming and that ARCO would provide a
