Business Associations
Professor McCrary – Fall 2012
I. Basic corporate forms
a. Proprietorships
i. Most common, but small
b. Corporations (characteristics)
i. Limited liability (don’t want personal assets to be at risk)
ii. Independent legal status (something akin to personhood)
iii. Infinite life (unless otherwise specified, or disbanded)
iv. Centralized management
v. Internally complex
vi. Separation of ownership and control
1. Leads to agency costs
II. Agency
a. Ask about
i. Is there an agency relationship
ii. What type of agency is it (how is it demonstrated)
iii. What is its scope
iv. What are the rights and obligations between the parties
b. Who is an Agent?
i. Agency is the relationship which exists where one person acts for another
1. Agent is a fiduciary, and thus owes a standard of care to the principal.
ii. Three Principle Forms of Agency
1. Master-servant/ER-EE
a. Servant/EE/agent may bind master/ER/principal in both contract and tort
b. BUT certain conditions must be fulfilled; see scope
2. Hirer/independent contractor
a. IC is also an agent
i. May bind hirer in contract, if given authority
ii. Only bind in tort if hirer was negligent, inherently dangerous, etc.
b. IC is NOT an agent
i. No binding
c. Elements: Manifestation, Behalf, Control, Consent
i. Manifestation of consent by principal
1. On the part of one party [principal] to another [agent];
a. Somewhat objective; only matters what the agent thought the principal intended
ii. That agent shall act on behalf of principal
iii. Subject to the principal’s right of Control.
iv. And Consent by the agent to so act.
d. Types of Agency
Actual Express Authority (“go do this for me”)
1. Agent and Principal explicitly agree that Agent may act on Principal’s behalf and subject to his control.
a. Usually contained within agreement, expressly granted by principal
2. Gorton v. Doty
a. Doty (Def) allowed Garst (coach) to use car to transport players; accident
b. Ct found agency rel’ship
i. D volunteered use of car
ii. Express condition that Garst would drive it
iii. Presumption that person borrowing vehicle for purpose is agent of vehicle’s owner
1. Condition attached makes it look more like agency – doing something for D
Actual Implied Authority (doing X requires doing Y)
3. Agent reasonably believes he has authority to act on principal’s behalf
4. Implied authority may come from:
a. Incidental to express authority;
i. P gives A express authority to do X, but Y is necessary to do X, so it’s implied that A also has authority to do Y
b. Implied from conduct;
c. Implied from custom and usage; or
d. Implied b/c of emergency.
5. Mill St. Church of Christ v. Hogan (conduct, maybe also incidental to express, see b3)
a. P’s brother hired to paint church, also hired P (though church didn’t want him to)
b. Pl’s bro could reasonably believe he had this authority
i. Had been allowed to hire Pl or other persons in past
ii. Not told otherwise (though church had discussed this internally)
iii. Clear from the project that Pl would need assistance
6. Gay Jenson Farms v. Cargill
a. Cargill had extensive control over Warren, so Warren was agent of Cargill
i. W needed C’s permission to do things a business would normally do on own
1. Make capital improvements over $5k
2. Declare dividend
3. Sell/purchase stock
ii. C oversaw W’s activities
1. Reviewed operation, expenses
2. Kept books for W
3. Recommended certain actions
iii. C received was involved in W’s finances
1. W’s profits deposited w/ C
2. C paid W’s expenses
3. C had right to enter W’s premises to check on things
b. C consented to rel’ship by giving W directions & instructing W to implement them; W consented by allowing C to control its operations
Apparent Authority (principal manifested authority to 3rd party)
7. P manifests, to 3rd party, that A is authorized; based on manifestations, 3P reasonably believes A has authority; 3P relies on this manifestation (usu to detriment)
a. Ex: salesman tells 3P he can enter into contracts on behalf of corp; 3P doesn’t know salesman lacks this authority; normally a salesman would have this authority
8. Manifestation can be made directly or through a reliable intermediary (even the public)
a. In limited situations, manifestation can come from agent
9. Created for policy; 3P lacks information that P is likely to have, P should have taken care not to so manifest
10. Dweck v. Nasser
a. Shiboleth had apparent authority to negotiate contract
i. Def told Shiboleth he would sign when Shiboleth told him to do so
ii. Shiboleth had represented Nassar for 20 years, reasonable assumption from Pl
iii. Shiboleth used in negotiations –looks like authority
11. BUT if agent is lying about authority, principal not liable
e. Liability in contract
Ratification
1. If person isn’t agent, or is agent but acts outside scope of authority, P still liable if ratifies
2. Ratification causes agent’s act to be treated as authorized from beginning
3. Existence: P must exist at time of initial K formation b/t 3rd party and alleged agent
4. Purported Benefit: A must enter into K purportedly on P’s behalf
5. Affirmance: P must make subsequent manifestation WITH FULL KNOWLEDGE OF CIRCUMSTANCES indicating a choice to treat act as authorized;
a. Can take the form of:
i. Communication / conduct that evidences intent to affirm;
ii. Receipt / Retention of benefits by P to which he would be entitled only if there were a binding K;
iii. Silence when reasonable.
b. Affirmance need not be communicated to agent or 3rd party.
6. Persistence: 3rd party can’t w/draw before P’s ratification.
7. NOTE: Two critical questions concerning Ratification
a. What types of acts constitute an affirmation by the principal
i. The affirmance doesn’t need to be expressly communicated
ii. Can be silence
b. What effect should we give to that affirmation.
Inherent Agency Power
8. Principal is liable if agent’s actions are usual/necessary in such transaction even though forbidden by principal; test is whether principal could reasonably foresee agent’s actions
9. Principal may be disclosed or undisclosed
10. Principal Undisclosed (3rd party knows of neither the identity nor existence of principal)
a. The agent is a general agent;
i. Restatement (Second) of Agency § 195: An undisclosed principal who entrusts his agent with management of his business liable to third persons with whom the agent enters into transactions in the usual course of business even if the agent’s actions are contrary to the principal’s directions.
b. The agent had at AEA/AIA to conduct at least some transactions;
c. The transactions were usual or necessary in the business;
i. Restatement (Second) of Agency § 194: If a principal is undisclosed, he is liable for the acts of an agent “done on his account if usual or necessary in such transactions” even if forbidden by the principal.
d. The agent was acting in the principal’s interest
i. Actual acting on principal’s behalf, not just appearance
ii. Ask: what does principal get from transaction?
e. Watteau v. Fenwick
i. A bought cigars from Pl, even though A not authorized to enter this agreement
1. Business carried on in A’s name, cigars bought on A’s credit
2. Pl had never heard of Def (undisclosed Principal)
iii. The job involves a non-delegable duty.
iv. Directed contractor to intentionally do something violative of the law.
9. Humble Oil & Refining Co. v. Martin
a. Customer didn’t set handbrake, car rolled down hill & hit people
b. Humble set hours, paid for utilities – principal, liable
i. If gas station owner had acted outside scope of rel’ship, Humble may not have been liable
10. Hoover v. Sun Oil Co.
a. EE lit cigarette near back of car, it caught fire
b. Gas station owner had control over hours, etc., so M-S rel’ship
11. Murray v. Principal Financial
a. Murray filed sexual harassment lawsuit; company said she didn’t come w/in Title VII, b/c independent contractor
b. Set own hours, worked in own office, got no vacation/sick leave, paid on commission, reported as self-employed to IRS, sells products beyond those of purported ER
Tort Liability and Apparent Agency
12. Test For Apparent Agency
a. Whether the putative principal held the 3rd party out as an agent; and
b. Whether the plaintiff relied on that holding out.
13. Difference Between Apparent Authority and Apparent Agency
a. Apparent Authority: holding out an employee who works for you as having authority to do a particular action.
b. Apparent Agency: the person does not work for you, but you are holding them out to look/act like they do.
14. Murphy v. Holiday Inns, Inc.
a. Licensing agreements not enough to create agency rel’ship between Def & operator of motel
b. Agreement gave system-wide standardization of business identity, uniform service, optimum good will
c. Agreement didn’t give Def control over maintenance of premises
i. Franchisee in best position to observe leaks
15. Miller v. McDonald’s
a. Customer bit into burger, hit sapphire
b. Ct: Licensing agreement created agency rel’ship between Def & operator of franchise
i. Def retained tight control over day to day operations; everything about restaurant identified it w/ Def
1. Designed to make public think every McD’s part of same system
2. Exerting control over ongoing operations indicates principal
ii. Def maintained tight control over food & food prep
Scope of Employment
16. Restatement § 219
a. Master is subject to liability for the torts of servants committed within the scope of their employment;
b. Masters are not subject to liability for the torts of servants acting outside the scope of employment, UNLESS:
i. M intended the conduct or the consequences;
ii. M was negligent or reckless;
iii. The conduct violated a non-delegable duty of M; or
iv. Servant purported to act on behalf of the principal and there was reliance upon the apparent authority, or he was aided in accomplishing the tort by the existence of an agency relationship.
17. Scope of Employment Tests
a. Restatement (Second) of Agency § 228
i. Conduct is within the scope of employment if and only if
1. The conduct is of the kind that the agent is employed to perform;
a. Look at time, place, purpose of act
b. Similar to authorized acts of servant?
c. Commonly performed by servant?
d. Did S depart from normal methods? How much?
e. Reasonable expectations of master?
2. It occurs substantially w/in time and space limits;
3. Actuated in part by a purpose to serve master; and
4. If force is used intentionally against another the use of force is foreseeable by the master.
