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Business Associations/Corporations
Temple University School of Law
Wells, Harwell

Wells, Corporations Fall 2012
 
I. Agency
            A. What is an Agent, and how does a Principal-Agent relationship form?
1. agency=separate type of law—when 1 person acts on behalf of another (principal & agent)
2. corporation=artificial person, person the law sets up—natural persons act on its behalf so agency law imp b/c corp acts through agent (artificial person governed by bd of directors)
3. agency=fiduciary relation which results from the manifestation of consent by one person (P) to another (A) that the other shall act on his behalf and subject to his control, and consent by the other so to act (2nd Restatement)
                        4. 2 important elements:
                                    a) acts on behalf of another
                                    b) under another’s control
5. if agency relationship exists, principal is responsible for agent’s actions (legal relationship of agency will not be formed every time you ask another person to do something for you)
6.  would be economically inefficient to make ppl enter into Ks for every rel so law provides default rules (agency law)—rules the law supplies so long as parties have not agreed otherwise (e.g. principal should compensate agent but parties can agree not to compensate)
7. every employee is an agent of his employer
8. must first determine if agency relationship exists but determination does not tell you if him acting as agent binds you to his actions (must also look at authority)
                        9. Gordon v. Doty
a. Facts: P’s son injured in accident; car driven by coach who borrowed from teacher
b. Holding: The relationship of principal and agent existed between teacher and coach
c. Gordon claims Doty designated Garst as her agent when she loaned her car on the condition that he drive it
d. Doty was not required to specifically say to him that he is her agent, not required to sign an agreement, not required to compensate him
e. “behalf of” element here seems attenuated b/c would think to look at school district instead of teacher (didn’t sue school b/c of sovereign immunity, school was part of state of Idaho and couldn’t sue state)
f. “control” element is rather thin b/c all she says is that she wants him to drive car (one argument is that he wasn’t her agent, she just loaned him her car)
g. ct still willing to find agency relationship even though elements are attenuated
h. did not sue Garst b/c he is dead but if he were alive, even if he were found to be an agent, he would be liable for his negligence in addition to principal being liable
i.  P’s attorney accused of misconduct b/c during closing argument he implied Doty had insurance—jury maybe more likely to find against her b/c insurance would pay
                                    j.  policy behind holding owner liable instead of driver
·   Some states have statutes that presume driver of someone else’s car is acting as agent of owner (owner might be more cautious about loaning car, would encourage owner to purchase insurance)
k. Harms that flow from holding owner liable instead of driver
·   Might discourage people from loaning car
·   Might raise insurance premiums
l.  in tort law, if agent commits tort, agent & principal are both liable; in contract law, agent is not liable when acting on behalf of principal
m. don’t have to have K bet principal & agent or that either receives compensation
                        10. Gay Jensen Farms Co. v. Cargill, Inc.
a. Facts: farmers sold grain to Warren, firm that operated storage facility, Cargill, dealer in grain, said W bought grain from farmers & sold to C, W says bought grain as agent for C; Warrant became insolvent w/o having paid farmers, sued Cargill
b. Holding: Cargill, by its control and influence over Warren, became a principal with liability for the transactions entered into by its agent Warren
c. ongoing business relationship, not just one time deal—think about power & dependency, suppliers & buyers, why companies chose to remain separate
d. Jenson suing b/c claiming C owes it $ b/c lent $ to Warren which Cargill claims was Cargill’s agent (Cargill was Warren’s largest customer & financed Warren)
e. If bank loans $ to comp, doesn’t become agent; if someone is comp’s largest customer, he is not an agent
f. Control
·   Cargill extended credit to Warren, later extended credit line
·   Warren would provide Cargill with annual financial statements
·   C would keep books for W or audit would be conducted by independent firm
·   Cargill was given right of access to Warren’s books for inspection
g. Behalf
·   By end of relationship, if Warren had a good year, benefits would flow to Cargill so ct feels comfortable finding an agency relationship
h. just b/c W acted as agent in 1 transaction doesn’t mean C liable for all W’s actions
i. ct focuses on control aspect—factors listed by ct do not indicate control in isolation, must be viewed in light of circumstances surrounding C’s aggressive financing of Warren and being largest customer (different than normal business relationship)
j. “subject to control” in definition indicates control doesn’t have to be great; other can attempt to control even if other one doesn’t take advice or implement suggestions
l. When is it fair to say that although C & W are sep corps C liable for W’s actions?
·   Ct may say W acting as agent of C (agency law gets around other areas of law)
m. How would you advise Cargill to prevent this situation with suppliers?
·   Tell Cargill not to get so entangled in Warren’s business
·   Draw lines so control would not be so direct
·   Limit financing for use in certain department
·   Back off and don’t exercise enough control to be liable for behavior (opposite idea might be to go in and fix issues to prevent bankruptcy)
n. jury willing to find agency relationship because case was tried in town in which Ps were local farmers and D was corporate giant, might want to punish Cargill
o. in situation of franchises, parent comp exercises huge amount of control to ensure that business succeeds, problem is that sometimes there are negative consequences because parent comp liable for franchisee’s actions (e.g. McDonald’s hot coffee)
p. agent relationship can be formed accidentally (Cargill didn’t intend to create agency relationship, Gordon didn’t either but ct willing to decide that agency relationship existed)—can have definite & severe consequences
q. ct says to create an agency, must have agreement (does not necessarily have to be a contract between the parties—agreement may result in the creation of an agency relationship even though the parties did not call it an agency & did not intend the legal consequences of the relation to follow)
r. agency may be proved by circumstantial ev showing course of dealing bet parties
s. when agency rel is to be proven by circumstantial ev, principal must be shown to have consented to agency b/c 1 can’t be agent of another except by consent of latter
t.  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
           
 
 
B. Authority (Ways Agent Can Bind Principal)
1. once agency rel determined, must look at agent’s authority (i.e. limits to how agent can bind principal)
2. one of benefits of agent is that he acts without principal’s constant supervision but would not be good if agent immediately had ability to bind principal to everything
3. 2.5 types of authority
a. Actual authority=agent doing something he’s supposed to be doing—arises by communication from principal to agent where agent reasonably understands that the principal charged him with a task
i. express actual authority: agent enters into agreement under exact instructions of principal (“you are my agent, go out and sign contract”)
ii. implied actual authority: agent given authority to act in ways that are incidental to carrying out task (e.g. if transporting oil, implied that have authority to rent tanker to transport oil)
®    Look at whether agent reasonably believes b/c of present or past conduct of principal that principal wishes him to act in certain way or to have certain authority
®    Look at nature

o solve it
f. hands down special rule b/c otherwise principal could choose to enforce contracts it liked & disclaim responsibility for contracts it didn’t like & that would be unfair
g. ct says once it’s established D was real principal, ordinary doctrine re: principal & agent applies: principal liable for all acts of agent which are w/in authority usually confided to agent of that character notwithstanding limitations put on that authority
                       
 
                       
            C. Fiduciary Obligation of Agents
1. fiduciary rel puts beneficiaries’ interests ahead of fiduciary’s (rel a bit diff in each sit—bd member can enter into business rel. w/ corp., trustee banned from entering rel. w/ trust/beneficiary, agent can enter rel. w/ principal)—duty of loyalty; duty is unflinching
2. Restatement (Third): agent has duty not to acquire material benefit from 3rd party in connection w/ transactions conducted or other actions taken on behalf of principal or otherwise through agent’s use of agent’s position (has duty not to use property of principal for agent’s own purposes or those of a 3rd party)
3. Reading v. Regem
a. Facts: sergeant hired to wear uniform & ride on trucks in wartime Cairo to get past road blocks
b. Holding: The mere fact that his service gave him the opportunity for getting the money would not entitle the Crown to it, but if, as here, the wearing of the King’s uniform and his position as a soldier is the sole cause of getting the money and he gets it dishonestly, that is an advantage which he is not allowed to keep
c. probably broke crim laws but issue here whether British gov. can take $ he was paid
d. gov. claims sergeant was a disloyal agent
e. doesn’t appear to be basis for damages—only based on breach of duty of loyalty
f. crown has claim to all payments on basis of disloyalty b/c was his job to put all interests of crown ahead of his own & he violated that duty (prevents disloyalty)
g. draconian punishment b/c don’t want ppl to violate duty of loyalty
h. ct says if servant takes advantage of his service & violates his duty of honesty & good faith to make profit for himself, if his service plays predominant part in obtaining $, he is accountable for it to master—does not matter that master has not lost any profit or suffered any damage or that master could not have done act himself
                        4. Rash v. J.V. Intermediate, Ltd.
a. Facts: agent of comp negotiating w/ comp in which he had an interest
b. Holding: By failing to inform his employer specifically of his ownership stake in the subcontractor company he hired, he violated his fiduciary duty
c. found to have violated duties that flowed from his agency position
d. agent also has duty to render info to principal re: matters affecting comp’s business
e. If employee of comp does insider trading, does he have a fiduciary duty to shareholders? Clearer if he were a direct employee of one of the shareholders but cts would probably find that he has attenuated fiduciary duty
f. employee has a duty to deal openly with the employer and to fully disclose to the employer information about matters affecting the company’s business
g. employee’s independent enterprise can’t compete or contract w/ employer w/o employer’s full knowledge