Select Page

Business Organizations
Temple University School of Law
Myers, Eleanor W.

v Introduction
Ø Beginning a Business (Restatemetn §§ 1, 26, 27)
§ The most important issue to plan for is dissolution. People enter business in good faith and do not anticipate the need for exit. This is a recurring theme.
Ø Agency
§ Restatement §1 defines agency.
§ Agency is extremely fact specific. You must look at the way the businesses operate as well as how they are structured on paper.
· The principal must control the agent with respect to the scope of the agency.
· Both parties must consent to the representation and control.
· The result is liability for the principal and fiduciary duty for the agent.
¨ The principal ultimately benefits so he is ultimately responsible for the agent’s actions.
¨ But for the agency relationship, the agency may never have acted as he did.
¨ The agent is usually the actor best able to bear the cost of the agent’s actions and best able to control the actions in the first place.
§ Kinds of Agency
· Actual: the principal directly authorizes the agent to act for her.
¨ Implied: an agent is authorized to act and he is additionally authorized to do those things necessary to accomplish the end goal that he is authorized to accomplish. All things reasonably implied by the authorization are included in the agency relationship.
Ø Note: it doesn’t matter what the third party thinks, it only matters what the nature of the actual relationship is.
· Apparent: what the third party thinks based on the manifestations of the principal to the agent. Based on whether the principal gave the agent enough trappings of authority, did the third party reasonably believe that there was an agency relationship?
· Ratification: the principal didn’t give authority to act in the first place, but the principal accepts the agent’s actions after the fact.
· Inherent: where people are normally considered to have a broad range of responsibility inherent in the role they are given (CEO), the principal is responsible for the actions taken within that range even if he didn’t grant the power to act in all of those circumstance.
v Who Is An Agent?
Ø Gorton v. Doty
§ Facts: Defendant volunteered her car to Garst to transport members of the local football team to an away-game. She told Garst he could use her car as long as he drove it.
§ Holding: The evidence supports the finding of the jury that the relationship of principal and agent existed between Doty and Garst because there was no discussion of the car being loaned and the fact of ownership of the car leads to the presumption that the driver is the agent of the owner.
§ Dissent: Agency requires more than passive permission, it involves request, instruction or command. Requiring that Garst drive the car was merely a precaution.
· There is very little control in this case – the only requirement is that the coach drive, Doty does not dictate any other details.
· Precautions against Liability:
¨ If the court found for Gorton on the theory that victims deserve compensation then the only protection is to carry sufficient insurance.
¨ The teacher should use the word ‘lend’ and not put any restrictions on the loan of the car.
¨ Draft an indemnity agreement making the driver of the car liable for any financial costs incurred through his driving.
Ø MJ & Partners Restaurant LP v. Zadikoff
§ Facts: MJ opened a restaurant in Chicago. Zadikoff acted as chief executive for the restaurant. MJ alleges that while working for the restaurant, Zadikoff made plans to open a new restaurant in Chicago using the same model and taking procedures, investors and employees from their restaurant.
§ Holding: The complaint stands because there is a question of fact as to if or how Zadikoff’s relationship to plaintiffs differed from the relationship defined by their contracts. The existence of an agency agreement is determined by actual practice, not contracts establishing the relationship.
· When you have an agency relationship, the agent has fiduciary duties (care, loyalty and confidentiality) to the principal. The basis for this duties is trust and power.
· Zadikoff is accused of breaching his fiduciary duties but he will only be liable if he is found to be an agent. In order to prove agency, MJ will have to show that they controlled Zadikoff’s actions.
Ø Rose v. Giamatti
§ Facts: Rose is manager of the Cincinnati Reds. The Commissioner of Baseball, Giamatti, initiated an investigation into Rose’s conduct. The Commissioner’s power is unrestrained with respect to the duty to investigate any activity ‘not in the best interests’ of baseball. Rose seeks to implicate MLB as Giamatti’s principal so he can prevent the case from moving to federal court on diversity jurisdiction.
§ Holding: Giamatti’s actions are completely independent of MLB, so diversity of citizenship exists between Rose (Ohio) and Giamatti (New York) and this action was properly removed from the Court of Common Pleas.
· Agency is important here to prevent diversity of citizenship. Rose wants his case to stay in a state court that will likely be more sympathetic to him.
· MLB is not liable for Giamatti’s actions because the Commissioner is completely independent of MLB under the terms of the Major League Agreement. Neither his power nor compensation may be diminished during his term in office.
· The behavior of parties must follow the contract involved in order for agency to exist. If it does not, a court may find agency regardless of any stipulations denying it. The power to hire, fire or lower salaries is all indicia of control and agency.
Ø Jenson Farms v. Cargill
§ Facts: Warren applied for financing from Cargill. Under the contract Warren would receive funds and pay expenses by issuing drafts drawn on Cargill, with drafts imprinted with the names of both companies. Later contracts gave Cargill access to Warren’s financial statements. Warren sold 90% of its grain to Cargill which had first right of refusal. When Cargill discovered that Warren was close to financial ruin, it took over control of Warren’s finances. When it ceased operation, Warren owed Plaintiffs, 86 farmers, $2 million.
§ Holding: Cargill, by its course of dealing with Warren, became a principal with liability for transactions entered into by its agent, Warren.
· When lenders become overly entangled with debtors, a court can find the lenders went too far and controlled the debtor.
· The aspects of Cargill’s relationship with Warr

hether Kaufman promised Lind a 1% commission.
¨ Apparent Authority: Lind must have reasonably relied on indicia from the VP that Kaufman had the authority to determine his salary. The apparent authority is based on the VP’s title and his delegation of that authority to Kaufman. The reasonableness of Lind’s assumptions is based on his experience and industry practice.
¨ Restatement §27 defines apparent authority.
§ Three-Seventy Leasing v. Ampex
· Facts: 370 was formed by Joyce. Kays was a salesman for Ampex. They met with Kays’s superior at Ampex to arrange a sale of six units. Joyce then arranged a lease of the six units to EDS. Joyce was sent a contract providing for the purchase of six units at $100,000 each, with a $150,000 down payment. The contract was never executed by anyone at Ampex, but on November 17th, Kays sent a letter to Joyce confirming delivery. While only a contract manager had the authority to contract, there is no evidence that this was communicated to Joyce.
· Holding: Kays had apparent authority to act for Ampex because he was employed by Ampex as a salesman and it is reasonable for people to assume that as a salesman, he had the authority to bind his employer to sell.
¨ Avoiding Liability:
Ø Ampex could have put a disclaimer on the contract that it is not valid unless signed by a member of the contract department.
Ø Kays’s superior could have forced Joyce to communicate with him.
Ø Compensation for salesmen could be restructured so that commissions attach only to authorized sales.
Ø Change Kays’s title so that it doesn’t look like he can authorize sales.
Ø Train employees very carefully so they know the proper procedure.
Ø Inherent Authority (Restatement § 161): This is based on public policy. It allows an agent to bind the principal despite lack of power from any other source. It is the best theory for holding an undisclosed principal liable for the unauthorized acts of his agent.
§ Kidd v. Edison
· Facts: Fuller made a contract with Kidd to sing in a series of tone test recitals to demonstrate phonograph records made by Edison for dealers. Edison contends that they were merely booking agents and that the dealers were to pay her and defendant would only guarantee payment. Kidd thought the contract was an unconditional engagement for a singing tour.
· Holding:Because the restrictions put on Fuller by his superior and the payment arrangements were atypical for such a circumstance, it is reasonable for the plaintiff to have assumed that Fuller had the unrestricted powers normally delegated to an agent.