BUSINESS ORGANIZATIONS – SPRING 2015 – GEIS
I. Agency & Partnership
A. Who is An Agent?
1.Elements of Agency
· Agent can bind principal to others (limited by contract law) and may be responsible for torts.
a. Agreement (between principal/agent)
i. Consent –doesn’t have to be explicit, circumstantial evidence works.
ii. Not essential to have a promise or contract.
iii. Not essential to have compensation.
b. Act on behalf of Principal (Gorton as a possible outer-limit on this)
c. Control by Principal (subject to principal’s control)
i. How much control?
1. Generally, just a right to control what they are doing. Control some level of what you are doing.
a. Ex. Replace this window, not that one. Sell my watch.
ii. Not a loan/borrow type thing.
d. Summary: “Agency is the fiduciary relationship that results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control.” Second party must also consent (I believe). (Gorton & Cargill)
ØGorton v. Doty (1973) (borderline cases – both Gorton, Gay Jensen)
Facts:
a. Teacher says football coach can use her car to drive the kids to the game if he will drive the car. He drives it, gets in an accident. Is Coach an agent of the Teacher?
Holding: Yes. Agency relationship.
Consent
a. Teacher consented that he drive her car according to her condition. She gave consent that he drive instead of her.
Act on Behalf
a. Teacher consented that Coach could act in her stead (court glosses over this – strong argument against)
i. Court says ownership plays a part.
Control by Principal
a. Required a condition of the coach that he drive, he then consents. (no condition, probably just a loan & no agency relationship)
b. Not essential to have compensation/promise/contract.
Geis: this case is a bit of stretch on Act on Behalf and Control. Geis thinks it’s wrong.
a. Dissent: agency means more than passive permission. Request, instruction, command.
b. This case almost seems like simply loaning of a car.
Ø
ØGay Jensen Farms & Co. v. Cargill (Minn. 1981)
Facts:
P’s farmers sold to Warren (W doesn’t pay them). Argue Warren is an agent of Cargill because W is storing it on Cargill’s behalf, Cargill financed Warren, Warren proceeds are deposited to Cargill. Cargill is Warren’s grain agent. 3 yr contract for 300k.
Consent/Agreement (no really good court analysis on this aspect)
By implementing Cargill’s recommendations, Cargill manifested its consent that Warren would be its agent.
Specific intent to create agency relationship not required. Circumstantial evidence enough.
Act on Behalf
Right of first refusal. Proceeds deposited to Cargill.
Control by Principal
Control your books or have an independent audit. Supervise. Right of entry. Cargill approval needed for certain actions (repairs over 5k, loaning money, etc.)
Creditor as Principal:
A creditor who assumes control of debtor’s business may become liable as principal for the acts of the debtor agent. (can move from lender to principal when you do more than lend)
Bank/Lender Safety from becoming a Principal to debtors:
Safe: insist on information, provide counseling on discrete matters, recommend consultants
Risky: accept veto power over important decisions, coerce debtor to put new officers in place, dividend limitations, require approval before actions taken
Examples
McDonalds: hot coffee lawsuit. Is franchisee an agent?
Yes, McDonalds has very strict procedures, limitations, processes, rules franchisee must follow
Starbucks: doesn’t franchise.
“Here is my watch” – NO agency. Donor/Donee relationship.
Here is my watch. Will you sell it for me?
o Probably an agency relationship. Need to look at control, but it is probably there. (sell it for at least 10 bucks-that establishes control)
Bank Loans money to slingshot company. Not an agent, unless there is A LOT more.
Auto Dealership/Manufacturer (inventory/management requirements)
Manufacture exerting enough control? Fact specific. More control, more principal.
CEO of corp. Of course they are an agent. Parking attendant of corp.? Yeah. Employees are agents.
B. Fiduciary Obligations of Agents
Duty of Loyalty (other duties: Act w/in, Obey Instruction, Duty of Care)
Agent may not put her interests/3rd party interests ahead of the interests of the principal.
i. No unapproved benefits (Reading)
1. Cannot use property/agency position to get benefit for you/3rd party.
2. RST Agency 802
ii. No divulging confidential info
iii. No competition w/principal (Rash)
iv. No acting for another if interest conflict.
v. No acting as adverse party to a transaction.
vi. Duty to disclose certain information relating to corporate business? (Rash?)
Three common situations where this comes up:
i. Agent receives payment from some third party in connection with some transaction between the principal and third party.
1. Not allowed side benefits, bribes, etc.
ii. Agent makes a secret profit for herself by secretly transacting with the third party.
1. Sell the watch for 100, only give principal 50.
2. I’ll buy from you supplier, but only if you give me extra money.
iii. Agent uses her position to make a personal profit from someone who has no relationship whatsoever with the principal.
1. Reading v. Regem.
Ø Reading (an old English case)
Facts:
British Soldier. Egyptian smugglers paid him 1k for riding on their truck with his uniform on. Kept doing it. Gov. takes his money. Reading sues for the
F aren’t exposed.
D. Fiduciary Obligations of Partners (Duty of Loyalty, Care, Full Disclosure, Good Faith/Fair Dealing)
Ø Meinhard v. Salmon (1928): The opportunity belongs to the partnership.
Facts:
One partner in a joint venture took advantage of an opportunity that arose from the partnership without informing his partner. P and D were partners in regards to a hotel property. Near the end of the lease, Elbridge Gerry became the owner of the reversion, and he approached D. Entered into a new lease, which is owned and controlled by D. Defendant did not tell Plaintiff about it. When Plaintiff found out about the new lease, he demanded that the lease be held in trust as an asset of the venture between Defendant and Plaintiff, which Defendant refused.
RULE: Members of a partnership owe duty of loyalty to each other and thus must disclose opportunities that arise in order for both to have an equal chance to take advantage of it.
The fact that Defendant was in control as the manager charges him with the duty of disclosure, since only through disclosure could opportunity be equalized.
It is alright that management was delegated. Split duties.
Is disclosure enough or can M demand to participate as well?
Cardozo doesn’t reach the issue. Equal opportunity is the concern. Not clear on what is needed for compliance. Revised Uniform Partnership: Loyalty (competition, no property for personal gain, conflict of interest), Care (gross negligence violates, Full Disclosure, Good Faith
Scope of Partnership: five block overs, probably still in scope. Land in FL, prob. not in scope. Depends. Purpose of purchase – buy apartment for family, not in scope. Opp. gotten from partnership role?
Not as broad anymore.
Duty of Loyalty – Competition
Duty of loyalty prevents a partner from competing with the partnership. After it ends, you are free to compete. Limitations:
· May be prevented from using confidential information
· Duty to get out “clean.” You can contemplate post-termination activities (office space, letterhead), but
i. Don’t start to compete while still a partner (customers, potential customers, other key agents)
ii. Don’t actively deceive partners (no duty to reveal but no lying either)
1. If you had a client come up, you would probably have to disclose it at this point.
· Abide by any valid non-compete agreement.
i. This is a contractual overlay of fiduciary agreements.
