BUSINESS ASSOCIATIONS OUTLINE
PROFESSOR BUTLER
SUMMER 2014
I. Overview
A. Major Course Themes
i. Authority – what is corporation legally empowered to do and at what point is a corporation overstepping its bounds?
ii. Responsibility – once authority has been established, what are the limitations of that authority – what is the duty of care?
iii. Liability – what actions should directors take to insulate themselves and when can they be held liable for breaching duty of care?
II. Agency Law – Definitions
A. Agency Generally – Restatement (3d) of Agency § 1.01 – Fiduciary relationship that arises when one person (a “principal”) manifests asset to another person (an “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 to the act.
i. Can have agency by default arise once the consent has been manifested. Agency relationship is there even if parties don’t know what agency is. Principal must manifest its consent to the agency, and agent must consent as well.
ii. Does not need to be made public that one is another’s agent. No filing is necessary.
iii. Compensation is not required.
iv. Agency is not a reciprocal relationship. Duty only flows one way.
v. Agents could be principals of other agents themselves.
B. Master, Servant, Independent Contractor – Restatement (2d) § 2
i. Master – principal who employs an agent to perform service in his affairs and who controls or has the right to control the physical conduct of the other in the performance of the service.
ii. Servant – agent employed by a master to perform service in his affairs whose physical conduct in the performance of the service is controlled or is subject to the right to control by the master.
iii. Independent Contractor – person who contracts w/ another to do something for him but who is not controlled by the other nor subject to the other’s right to control w/ respect to his physical conduct in the performance of the undertaking.
1. May or may not be an agent.
C. General Agent v. Special Agent – Restatement (2d) § 3
i. General Agent – agent authorized to conduct a series of transactions involving a continuity of service. Has general decision-making authority.
ii. Special Agent – agent authorized to conduct a single transaction or a series of transactions not involving continuity of service. Lacks decision-making authority – must keep returning to principal to ask for permission.
D. Disclosure of Principal – Restatement (2d) § 4
i. Disclosed Principal – at the time of transaction, 3d party has notice that agent is acting for a principal and knows of principal’s identity.
ii. Partially Disclosed Principal – if 3d party has notice that agent is acting for a principal but doesn’t know principal’s identity.
iii. Undisclosed Principal – if 3d party has no notice that agent is acting for a principal.
E. Authority
i. Actual Authority – Restatement (2d) § 7 – power of the agent to affect the legal relations of the principal by acts done in accordance w/ the principal’s manifestations of consent to him.
1. Creation of Authority – Restatement (2d) § 26 – can be created by written or spoken words or any other conduct by the principal which, reasonably interpreted, causes the agent to believe that the principal desires him to act on his account.
2. Creation of Liability by Authorized Acts – Restatement (2d) § 144 –If principal says to do something and the agent does it, the principal is bound.
3. Incidental Authority – authority which flows from agent’s actual authority, e.g., any expenses that normally result from carrying out an agent’s authority, so long as it is reasonable.
a. Inferring Incidental Authority – Restatement (2d) § 35 – includes acts that are incidental to the actual authority, usually accompany it, or are reasonably necessary to accomplish it.
ii. Apparent Authority – Restatement (2d) § 8 – power to affect the legal relations of another person by transactions w/ third persons, professedly as agent for the other, which arises from and in accordance w/ the other’s manifestations to 3d persons.
1. Creation of Apparent Authority – Some manifestation of principal which reasonably interpreted, causes 3d party to believe that the principal consents to have the act done on his behalf by the agent.
a. Examples: (a) If you tell Home Depot someone can use your account, but then tell agent not to, if he does use your account nonetheless, you have to pay; (b) If you give someone an office, uniform, and car, that expresses a certain amount of authority – moves beyond written and looks at actions to see how 3d party assesses manifestation of authority. It must be reasonable – you wouldn’t assume someone who does one thing, has authority to do something completely different.
iii. Inherent Agency Power – Res (2d) § 8A – used to indicate an agent’s power that is derived solely from the agency relationship and exists for the protection of persons harmed by or dealing w/ a servant or other agent.
1. Binds principal to any contract agent created.
iv. Estoppel; Change of Position – Res (2d) § 8B – If 3d party changes his position in belief that agent was acting on behalf of principal, principal is nevertheless liable even if he would otherwise not be, if the principal: (a) intentionally or carelessly caused such belief, or (b) if he knew that 3d party had such a belief and knew that others may change their position yet failed to take reasonable steps to notify 3d party of the facts.
1. Change of Position – e.g., payments of money, expenditure of labor, suffering a loss or subjection to legal liability.
2. Estoppel could also fade back into apparent authority, b/c if principal knows of first deal apparent agent made on his behalf and takes no action, then a 3d party may think that since principal didn’t stop apparent agent, he approved.
v. Determining Authority from Interpretation of Agreements – Restatement (2d) § 32 – In interpreting authority, you apply contract rules and apply them to your statements claiming authority.
vi. General Principles of Interpretation – Restatement (2d) § 33 – An agent is authorized to do only, what it is reasonable for him to infer that the principal desires him to do in light of the principal’s manifestations and the facts as he knows or should know them at the time he acts. Look at what was actually said or written first, and then add whatever reasonable inferences flow from the orders. Also consider any facts you know or should know at time you act.
1. Several factors: Situation of the parties, how parties are related, parties’ business relationship, interpretation of what principal likely wants, whether what principal would want is legal, formality or informality of the instructions – all must be examined within the scope of reasonability.
in quality of the act done to the act authorized; whether instrumentality used in committing harm is furnished by M to S; extent of departure from normal method of accomplishing an authorized result; and whether or not the act is seriously criminal.
E. Forbidden Acts – Res (2d) § 230 – An act, although forbidden, or done in a forbidden manner, may be within the scope of employment. M could still incur liability if under §§ 228-229 the action is within the Servant’s scope of employment.
i. Example: Employee who is required to sell a product, but must go and purchase the product first, elects to take the company car to go make the purchase, despite the fact that is expressly forbidden. M could still be liable for any torts committed in accidents that occur w/ use of the car.
F. Criminal or Tortious Acts – Res (2d) § 231 – An act may be within the scope of employment although consciously criminal or tortuous. Need to see if within scope under §§ 228-229.
G. Non-Liability for Physical Harm by Non-Servant Agents – Res (2d) § 250 – A principal is not liable for physical harm caused by the negligent physical conduct of a non-servant agent during the performance of the principal’s business, if he neither intended nor authorized the result nor the manner of performance, unless he was under a duty to have the act performed w/ due care.
H. General Rule of Thumb for Principal’s Hiring of Agents à should hire people you can trust, because even if they disobey you, you want them to think logically.
VI. Independent Contractor
A. Hired by principal, but not M-S relationship b/c no right to control actions.
B. Very autonomous – brings their own tools to the job.
C. IC may or may not be an agent. Three types of entities:
i. Servants who are always agents.
ii. IC who are also agents.
iii. IC who are not agents. Dealing w/ plain employers, not principals.
D. Determining whether an IC is an Agent – Factors: Degree of control over the work being done; character of control exercised over work being done; if the IC has authority to bind the principal to the contract.
E. Even though IC can be an agent, Principal is never liable for IC’s torts.
i. Contract law governs situations where IC is not an agent.
F. IC’s have no fiduciary duty. Only loyalty is to themselves.
G. Distinguishing Servant & IC:
i. Definition of a Servant – Res (2d) § 220(2) – lists factors for determining whether actor is a servant or an IC.
ii. Term of Relationship – longer the term, the less likely an IC, and more likely a Servant.
iii. Method of Payment – if being paid by the job or by hour, likely an IC.
iv. Rights of Service or Product – If IC, then you own the rights. If Servant, then Master owns rights.
