BUSINESS ORGANIZATIONS
CHAPTER 1: Agency
1. Introduction
a. Sole proprietorship – a business organization that is owned by a single individual, and is not cast in a special legal form of organization
i. As a matter of law, a sole proprietorship has no separate identity from its owner
1. an individual who owns a sole p has unlimited personal liability for obligations incurred in the conduct of the business
b. Agency – the employment by one person, P, of another, A, to act on P’s behalf, and subject to her control.
i. Agent: a person who by mutual assent acts on behalf of another and subject to the other’s control.
ii. Principal: person for whom the agent acts
iii. Agency law governs:
1. the relationship between agents and principals
2. the relationship between agents and third persons with whom an agent deals, or purports to deal, on a principal’s behalf
3. the relationship between principals and third persons when an agent deals, or purports to deal, with a third person on the principal’s behalf
iv. “Agency: is the fiduciary relationship that arises when one person (a ‘principal’) manifests assent 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 so to act.” R.3d of Agency §1.01.
1. Although agency is a consensual relationship, how the parties to any given relationship label it is not dispositive.
2. Authority
c. Morris Oil Co v. Rainbow Oilfield Trucking, Inc., NM Ct App 1987
i. FACTS:
1. Rainbow eventually filed BK owing P $25,000 on an open account
2. Dawn claimed that the charges owing to P were incurred in the name of Rainbow and not Dawn
a. ***Dawn argues that Rainbow didn’t have apparent authority
ii. ISSUE:
1. Was there a principal-agent relationship between Dawn and Rainbow?
iii. HELD:
1. this was a case of undisclosed agency – Rainbow contracted in its own name and not in Dawn’s name
a. ***Morris never knew of Dawn during the time (they did after)
b. AGENT may bind the Principal even if the 3rd party is unaware they are dealing with an undisclosed principal.
c. ***THIS CASE DEALS w/relationship between the 3rd party and the agent. SoàDawn’s argument that it (principal) was not bound has very little to do with the case. Here apparent authority has bite – when the agent didn’t have the authority, but b/c of the appearance of authority vis-à-vis 3P, the Principal ends up getting bound.
iv. REASONING:
1. the language in the terminal management agreement specifically states that Rainbow may create liabilities of Dawn in the ordinary course of business of operating the terminal
2. the recitation of the parties in their contractual documents need not bind third parties who deal with one of them in ignorance of those instructions
3. ***an agent for an undisclosed principal subjects the principal to liability for acts done on his account if they are usual or necessary in such txn’s.
a. this is true even if the principal has previously forbidden the agent to incur such debts so long as the txn is in the usual course of business engaged in by the agent
b. the undisclosed principal (who entrusts the agent with the management of his business) is subject to liability to third parties with whom the agent contracts where such transactions are usual in the business conducted by the agent, even if the K is contrary to the express directions of the principal
4. Bloodgood Case: a principal may limit an agent’s authority, and the limitation will be binding upon a third party dealing with the agent if the third party has knowledge of the limitation of authority.
a. HERE, there is no evidence that P had any actual knowledge of the existence of the Rainbow-Dawn agency, let alone any claimed limitations by Dawn on Rainbow’s authority.
5. RATIFICATION***A principal may be held liable for the unauthorized acts of his agent if the principal ratifies the txn after acquiring knowledge of the material facts concerning the txn àaccepts the agent’s acts.
a. HERE, the material facts of P’s account were disclosed to Dawn. At no time did Dawn dispute the legitimacy or amount of the open account, and assured P that payment would be forthcoming
b. ***Where the principal retains the benefits or proceeds of its business relations with an agent with knowledge of the material facts, the principal is deemed to have ratified the methods employed by the agent in generating the proceeds
c. ***What Dawn did constituted acceptance of Rainbow’s obligations to Morris. Dawn said we are collecting the funds and we are going to try settle all claims.
d. ***WHAT Constitutes Acceptance? àthere isn’t much conduct here. The test for ratification is NOT very strong.
d. Terminology
i. Agent = a person who by mutual assent acts on behalf and subject to the control of another – the principal.
1. general agent = an agent authorized to conduct a series of txn’s involving continuity of service
2. special agent = an agent authorized to conduct only a single txn, or only a series of txn’s not involving continuity of service
ii. Principal = a person on whose behalf and subject to whose control an agent acts. Three classes:
1. disclosed = when an agent and a third party interact, the 3P has notice that the agent is acting for a principal and has notice of the principal’s identity
2. partially disclosed or unidentified = when an agent and a third party interact, the 3P has notice that the agent is acting for a principal but does not have notice of the principal’s identity
3. undisclosed = when an agent and a third party interact, the 3P has no notice that the agent is acting for a principal
iii. R2dà
1. Master = a principal who controls, or has the right to control, the physical conduct of an agent in the performance of the agent’s services.
2. Servant = an agent whose physical conduct in the performance of services for the principal is subject to the control of the principal.
iv. R3dà
1. Uses the terms principal and employee = an agent whose principal “controls or has the right to control the manner and means of the agent’s performance of work”
2. For principal’s vicarious tort liability:
a. An employer is subject to vicarious liability for a tort committed by its employee acting within the scope of employment.
b. An employee acts within the scope of employment when performing work assigned by the employer or engaging in a course of conduct subject to the employer’s control. An employee’s act is not within the scope of employment when it occurs within an independent course of conduct not intended by the employee to serve any purpose of the employer.
e. Liability of Principal to Third Person
i. ***Under the law of agency, a principal becomes liable to a third person as a result of an act or transaction by another, A, on the principal’s behalf, if A had 1) actual, 2) apparent, or 3) (traditionally) inherent authority to act on the principal’s behalf in the way that he did, or was an agent by estoppel, or if the principal ratified the act or transaction.
ii. Actual Authority
1. An agent has actual authority to act in a given way on a principal’s behalf if the principal’s words or conduct would lead a reasonable person in the agent’s position to believe that the principal wishes the agent so act. If an agent has actual authority and acts within the scope of that authority, the principal is bound.
a. Express actual authority – a principal specifies minutely what the agent is to do.
i. ***can be pages of actual instructions
ii. ***very clear
iii. ***There can be actual authority by virtue of position (president) without specifically stating what the powers are
b. Implied actual authority – most powers are implied or inferred from the words used (“sell my car”), from customs and from the relations of the parties
i. Incidental authority – the authority to do incidental acts that are reasonably necessary to accomplish an actually authorized txn, or that usually accompany a transaction of that type
ii. ***Says: what to do, NOT how àimplied actual authority to implement the actual instructions
2. ***if an agent has actual authority, the principal is bound even if the third person did not know that the agent had actual authority, and indeed even if the third person thought the agent was herself the principal, not merely an agent.
iii. Apparent Authority
1. An agent has apparent authority to act in a given way on a principal’s behalf in relation to a third person, T, if manifestations of the principal to T (or manifestations by the agent to T that the principal authorized the agent to employ) would lead a reasonable person in T’s position to believe that the principal had authorized the agent to so act. If an agent has apparent authority and acts within the scope of that authority, the principal is bound.
a. Power of position – apparent authority can be created by appointing a person to a position, such as that of manager or treasurer, which carries with it generally recognized duties; to those who know of the appointment there is apparent authority to do the things ordinarily entrusted to one occupying such a position, regardless of unknown limitations which are imposed upon the particular agent…..anyone dealing with this agent is justified in inferring that he has such authority, in the absence of reason to know otherwise
b. ***Where the agent does not have express authority, what the agent does w/3rd Parties – if the 3P thinks that the agent has authority – might bind the Principal
iv. Agency by Estoppel
1. 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 liable to a third party who is induced to make a detrimental change in position b/c the transcription is believed to be on the person’s account, if
a. The person intentionally or carelessly caused such belief, or
b. Having notice of such a belief and that it might induce others to change their positions, the person did not take reasonable steps to notify them of the facts
v. Inherent Authority
1. Section 194 of the R2d – a general agent for an undisclosed principal authorized to conduct txn’s subjects his principal to liability for acts done on his account, if usual or necessary in such txn’s, although forbidden by the principal to do them. àdoes not require that the 3P reasonably believes the agent is authorized to act
2. R3d – Sect
conducting that litigation ‘is plainly traceable’ to D’s wrong and he should make compensation accordingly.
a. P here recovered all expenses.
iv. REASONING:
v. RULE:
1. All profits made by an agent in the course of an agency belong to the principal, whether they are the fruits of performance or the violation of an agent’s duty. Actual injury (or lack of it) to the principal is not material.
a. It is enough to know that the agent in fact placed himself in such relations that he might be tempted by his own interests to disregard those of his principal.
b. The right to recover profits made by the agent in the course of the agency is not affected by the fact that the principal, upon discovering a fraud, has rescinded the K and recovered that with which he parted.
2. If an agent has received a benefit as a result of violating his duty of loyalty, the principal is entitled to recover from him what he has so received, its value, or its proceeds, and also the amount of damage thereby caused, except that if the violation consists of the wrongful disposal of the principal’s property, the principal cannot recover its value and also what the agent received in exchange therefor.”
a. General rule w/respect to damages for a tortuous act: the wrong-doer is answerable for all the injurious consequences of his tortuous act, which according to the usual course of events and the general experience were likely to ensue, and which, therefore, when the act was committed, he may reasonably be supposed to have foreseen and anticipated.
i. Such costs (taken to protect P’s interests or litigation costs) should be treated as the legal consequences of the original wrongful act and may be recovered as damages
b. ***With Bribe: there is a RISK that the agent will take into consideration interests other than the principle’s. We want the agent to serve the principal’s sole interest. If the principal doesn’t know about the bribe (other interest) the P is entitled to retrieve the bribe from the A. We don’t want the A to have more than 1 master.
c. ***the Principal suffered no economic loss, but we are letting the P take away the bribe. When measuring damages on duty of loyalty – we do not look at loss to the P, but gain to the A. This basically puts the A back in the position that he would have been in had he behaved à not that powerful a remedy as a deterrent. (If you can show losses, you get those too. If you can’t, you still recover what is in the D’s pocket).
4. Introduction to Financial Statements
k. Assets = Liabilities + Owner’s Equity
l. Double-entry bookkeeping
m. Debit – left side entry; Credit – right side entry
n. Balance Sheet –
i. Shows the present status of the Assets and their sources resulting from all transactions since the business was formed. Shows snapshot at point in time.
ii. The numbers on the balance sheet are historical costs: Purchase price 10 years ago. So, the bias is conservative in nature – reflects historical costs.
iii. A = L + OE
o. Income Statement –
i. Statement for results over a period of time, giving a summary of earnings between balance sheet dates
ii. Sales/Rev – Exp = NI
CHAPTER 2: Partnership
UP Act and Revised UPRA
Revised – clarifies problems in drafting of original
1. Partnership Formation
a. Hilco Property Services, Inc. v. United, (D.N.H. 1996)
i. Whether a partnership exists is a factual question
ii. The conduct of the parties and the circs surrounding their relationship and transactions control
iii. ***The key factor is NOT the subjective intent of the parties to form a partnership…It is immaterial that the parties do not call their relationship, or believe it to be, a partnership, especially where the rights of third parties are concerned
RUPA 101(6): “Partnership” means an association of two or more persons to carry on as co-owners a business for profit formed under Section 202, predecessor law, or comparable law of another jurisdiction.
RUPA 202 – FORMATION OF PARTNERSHIP:
(a) Except as otherwise provided in subsection (b), the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.
