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Business Associations/Corporations
University of Cincinnati School of Law
Huffman, Max

CHAPTER 1: AGENCY
 
To determine the structure of a relationship look to:
i.                     duration/termination
ii.                    control
iii.                  risk of loss
iv.                  sharing of gain
 
–          Agency: Agency is a consensual relationship where one person acts on behalf of another. Agent agrees to be subject to principal’s control, usually in exchange for compensation. Principal maintains the right to control the physical conduct of the servant (Rest. 2d Agency §§ 1-2). Agency is a fiduciary relationship.
o    Example: go to the bar and buy me a drink. The principal will be responsible for the cost of the drink.
–          Principal: the person/entity for whom the agent acts.
–          Agent: the person/entity who is acting for another.
–          Third Party (usually in context of suing the principal for agent’s act).
–          Respondeat Superior/Vicarious Liability: a “master” (employer) is liable for the torts of its servants (employees) as long as the torts were within the servants’ scope of employment.
–          These relationships are not limited to people, all types of business entities can be agents and principals.
 
Relevant sections of the Restatement (Second) of Agency:
§ 1—Agency; Principal; Agent
Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.
§ 2—Master; Servant; Independent Contractor
(1)     A master is a principal who employs an agent to perform service in his affairs and who controls or has the right to control the physical conduct of the other in the performance of the service.
(2)     A servant is an agent employed by a master to perform service in his affairs whose physical conduct in the performance of the service is controlled or is subject to the right to control by the master.
(3)     An independent contractor is a person who contracts with another to do something for him, but who is not controlled by the other nor subject to the other’s right to control with respect to his physical conduct in the performance of the undertaking. He may or may not be an agent.
§§ 219 and 220—When Master is Liable for Torts of His Servants; Definition of Servant.
§§ 228 and 229—General Statement and Kind of Conduct within Scope of Employment
§§ 230-31:    An act, although forbidden, or done in a forbidden manner, may be within the scope of employment. An act may be within the scope of employment although consciously criminal or tortuous.
 
CH. 1, SECTION 1: Who Is An Agent?
 
Gay Jenson Farms Co. v. Cargill, Inc.: Party A, by its control and influence over Party B, may become a principal with liability for the transactions entered into by Party B.
–          Principal will be bound by the Ks of agents if Ks are within the scope of the agency because agent is making K for the benefit of the agent and the principal.
 
CH. 1, SECTION 2: Liability of Principal to Third Parties in Contract
 
Authority
 
Authority: the Agent’s power to effect the Principal’s liability, rights, and duties; concerned with the contract and property rights
 
3 Types of Agency Relationships: Actual, apparent, and inherent
 
Actual Authority
 
Actual: authority that flows directly from principal to the agent. Principal manifests to an Agent that Agent had power to deal with others as representative of Principal. Agent’s actions bind Principal. When an Agent acts within the scope of his actual authority, his is not personally liable to 3d parties. (This can be contractually modified.)
a.       Express. “You go and do X.” Telling an Agent what to do OR knowingly acquiescing to an Agent’s actions.
b.       Implied. “You can do what you need to do to accomplish X.” This flows from express authority. It is the power to act in ways reasonably necessary to accomplish the purpose for which the express authority was granted. Custom and relations between the parties is relevant.
 
Mill Street Church of Christ v. Hogan:
–          Bill Hogan reasonably believed because of present or past conduct of the principal (Mill St. Church) that the principal wished him to act in a certain way (hire an assistant) or to have certain authority.
 
Apparent Authority
 
Apparent: power to affect the legal relations of another person by transactions with third persons, professedly as agent for the other, arising from and in accordance with the other’s manifestations to such third persons. Principal manifests to a third party, directly or indirectly, that another person is authorized to act as his agent. Rest. 2d (Agency) § 8: Depends on communications with the 3d party. There can be apparent authority by something agent does or says. Example: Joe has the authority to buy my textbooks. X tells this to a 3d party. Usually there is underlying actual authority.
–          The Principal’s actions must cause 3d party to reasonably believe that the purported agent has the authority to act for the principal; and 3d party must reasonably and in good faith rely on the authority held out by the Principal.
–          The Agent may have apparent authority even though no such authority was ever actually granted to him.
–          The Agent’s acts do not create apparent authority, only the principal can.
–          Unlike actual authority, which flows from direct instructions to the agent, Apparent Authority flows from the impression created or permitted by the Principal.
–          3 ways to establish apparent authority:
1.                   Prior talks: The Principal tells a 3d party that a person has the authority to act for them.
2.                   Prior acts: By allowing an Agent to carry on similar transactions in the past, a Principal impliedly creates the impression in 3d parties that the Agent is authorized to do so in the future.
3.                   Position: Principal allows an Agent to occupy a position, which according to locality, trade, or profession, carries a particular type of authority.
–          A third party has a duty of reasonable diligence to verify that the person they are dealing with is an agent.
–          Marital status does not automatically confer agency on one spouse from another. (Botticello v. Stefanovicz)
–          Ratification: a grant of authority after the fact. This occurs when a Principal gains knowledge of an unauthorized transaction, but then retains the benefit or otherwise takes a position of affirmation. This can be expressed or implied (long-term acquiescence or acceptance of the benefits).
HYPO: Board of Jenny Craig tells president of company to negotiate with Monica Lewinski to make commercials.  Remember: Corporations are principals. Officers are agents of a corporation.
a.       Authority: Actual Expressed & Implied
Express authority: to negotiate. Implied authority: go to Monica’s location to see her and company will reimburse.
b.       Agent: President
c.        Principal: Board
d.       Reasonable test: what is necessary to accomplish the express authority.
 
Lind v. Schenley Industries, Inc. 
Three-Seventy Leasing Corp. v. Ampex Corp.: 
 
Inherent Agency Power
 
Inherent: last ditch effort to hold the Principal liable.
1.       Rest. § 8A: When one holds out another as an agent, that agent can bind the principal on matters normally incident to such agency, even if he was not authorized for a particular type of transaction.
2.       Rest. § 194: Acts of General Agents: a general agent for an undisclosed principal authorized to conduct transactions subjects his principal to liability for acts done on his account, if usual or necessary in such transactions, although forbidden by the principal to do them.
3.       Rest. § 195: Acts of Manager Appearing to be Owner: An undisclosed principal who entrusts an agent with the management of his business is subject to liability to third persons with whom the agent enters into transactions usual in such businesses and on the principal’s account, although contrary to the direction of the principal.
4.       In the Rest. 3d, the ALI has abandoned apparent authority; instead, they state that inherent authority is just a form of estoppel. § 2.06—Estoppel. Under some circumstances, a principal should not be allowed to get out of liability. Usually, used when you have an undisclosed principal. Inherent authority exists when an agent’s position gives him the power or control to do certain things even though he does not have the actual authority or apparent authority to do so. 
5.       Policy: to protect individuals who have been harmed by an agent.
 
Use Inherent Agency when:
1.       General or managerial agents (authorized to conduct a series of transactions, President or General Manager)
2.       Undisclosed principals (3d parties don’t know there’s a principal)
3.       Weak apparent authority…agent is doing something that general agents in the same situation usually or normally do, but is doing so without actual authority
 
–          Undisclosed principal: if agent is doing acts within the normal scope (any deviate from those acts is minor). The undisclosed principal will be held liable.
–          Disclosed principal: a principal is disclosed if the third party knows, or can

2d Agency § 231.
–          A servant’s use of force against another is within the scope of employment if that use of force could be expected by the master. Rest. § 228(2).
 
Statutory Claims
 
Arguello v. Conoco, Inc.: 
–          To hold employer liable for racial discrimination of an employee, must show agency relationship. In Arguello, the Agreement signed by the stores specifically stated that there was no agency and no control. Guidelines and specifications for architecture and equipment are not sufficient to establish “control” for agency.
–          Scope of employment.
(1)                 time, place & purpose of act
(2)                 similarity of the act to those which servant is authorized to perform
(3)                 whether the act is commonly performed by servants
(4)                 extent of departure from normal methods
(5)                 whether the master would reasonably expect such act would be performed
–          Even where company could not have expected employee to act a certain way (e.g., shouting racial slurs), if it occurred while the employee was performing her normal duties while on the clock at her job, then the company may still be held liable. Similarly, even where the master would not expect the behavior, if the other factors are present, the company may still be liable.
–          The duty not to discriminate is not “non-delegable,” so π alleging it must establish a close relationship between employer and third-party engaging in the discrimination.
–          In order for an employer to have ratified the actions of an employee, the employer must (1) know of the act and (2) adopt, confirm, or fail to repudiate the acts of the employee. Lack of firing or suspending the employee does not constitute ratification where the company verbally corrected the employee.
–          Conoco-branded: tort issue. There is no per se rule either way. Tests:
i.      was the employee serving the employer? Then the employer could be liable;
ii.        policy (not as popular);
iii.      characteristic risk with intent to serve;
iv.      enterprise liability.
 
See Restatement (Second) of Agency § 219: When Master is Liable for Torts of His Servants.
 
Liability for Torts of Independent Contractors
 
Majestic Realty Associates, Inc. v. Toti: Contractees may be liable if they hire an incompetent contractor because they had the control over selecting the party to hire. Court in Majestic suggests that hiring a financially irresponsible contractor may be enough to expose a contractee to liability.
–          Contractee may also be liable where contractor hired negligently fails to take precautions when engaging in an inherently dangerous activity.
 
CH. 1, SECTION 4: Fiduciary Obligations of Agents
 
Agent’s Duties to Principal:
(1)                 Duty of Loyalty: Every action taken as an agent should be made to further or advance the interests of the principal.
a.       Duty to account to principal
                                                               i.      E.g., if you’re making money on behalf of principal, P can request an accounting of expenditures and incomes
b.       Cannot take money for himself, i.e., no kickbacks, no bribes
c.        Cannot make a “secret profit” by transacting things that could benefit the principal
(2)                 Duty of Reasonable Care
a.       In theory, if you cause your employer liability because you weren’t exercising reasonable care, your employer can sue you. But that doesn’t happen very often in reality.
(3)                 Duty of Obedience/Good Conduct
a.       You’re expected to follow the orders/instructions of the principal
(4)                 Indemnify the Principal