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Business Organizations
University of Connecticut School of Law
Mocsary, George A.

Business Organizations Outline

AGENCIES

3 Principal Forms of Agencies: 1) principal/agent; 2) master/servant; 3) employer/proprietor or independent contractor

Principal and Agent: does not necessarily involve some matter of business, only that one undertakes to transact some business or manage some affair for another by authority and on account of the latter.

Gorton v. Doty (Id. 1937) – Doty loaned car to high school coach to drive players to game on condition that he drive; school paid for gas, Doty not paid; Gorton (team member) injured in car crash. Agency results from the manifestation of consent by Principal to Agent that A shall act: 1) on P’s behalf; and subject to P’s control; and A’s consent to so act. Where one undertakes to transact some business or manage some affair for another by authority and on account of the latter, the relationship of principal and agent arises. By setting condition that the coach drive her car, Doty consented that coach act for her and in her behalf. Coach’s driving her car shows his consent to act for Doty. Car’s ownership gives prima facie presumption that driver is agent. Encourages people to buy insurance, not loan their car.

Principal/Agent Liability: If one person is an agent of another, the person is chargeable with the acts of the agent as fully and to the same extent as though he had committed the act himself.

Burden of Proof: Party bringing an action under theory of agency liability bears burden of proving that agency relationship exists to establish liability by alleged principal – as long as action was within “authority” granted by P.

A. Gay Jenson Farms Co. v. Cargill, Inc. (Minn. 1981) – Cargill: huge international grain trader & Warren: the little tiny grain farm. Cargill loans Warren to stay afloat & supply Cargill w/ grain, loans continue to get larger. Cargill takes more control of Warren: access to Warren’s books, control over major decisions, sets pay of officers, daily control of operations. A creditor who assumes control of his debtor’s business may be held liable as principal for the acts of the debtor in connection with the business. 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. If a security holder takes over the management of the debtor’s business and directs what contracts can be made, he becomes a principal. A creditor becomes a principal when he assumes de facto control over the conduct of his debtor. In order to create an agency there must be an agreement, but not necessarily a K b/t the parties. An agreement may result in the creation of an agency relationship although the parties didn’t call it an agency and didn’t intend the legal consequences of the relations to follow.

9 Factors indicating Cargill’s control over Warren: Cargill’s constant recommendations to Warren, right of first refusal, etc. (p. 11) – only the ones about financing actually go to Cargill’s control of Warren.

Agent’s Authority

Liability of Principal to Third Parties in Contract

1. Authority

a. Authority is power of the agent to affect the legal relations of the P–Pal by acts done in accordance w/ P–Pal’s manifestations of consent to him Rest 2nd of Agency § 7

2. Three Types of Agency Authority:

a. Actual Agency: authority that the alleged P–Pal explicitly or implicitly assigned to the alleged agent.

Ø Actual Expressed Authority: Actual authority given explicitly by a P–Pal to his agent. Gordon v. Doty (teacher explicitly gave football coach authority to drive her car, and thus was liable as a principal for damages resulting from subsequent car accident). Same test as AIA.

Ø (Actual) Implied authority: Actual authority given implicitly by a P–Pal to his agent. Authority implied from circumstantial evidence. E.g., evidence of past practice: Mill Street Church of Christ v. Hogan (finding implied authority based on course of dealings b/t P–Pal and agent; hire anyone you like, it is implied that Bill is authorized to hire Sam). Focus on A’s understanding of his authority: whether A reasonably believes because of P’s past or present conduct that P wishes him to act in a certain way or to have certain authority (signal from P to A). Important Factors: prior similar practices, specific conduct by P in past permitting A to exercise similar powers.

b. Apparent Authority: Authority that the P–Pal represents that the agent possesses, but that the agent doesn’t actually possess. Apparent authority arises where the P–Pal acts in a manner that conveys the impression that an agent has certain power which he may or may not actually posses. Principal bound by Agent’s AA which P knowingly permits A to assume of which P holds the agent out as possessing. [Lind v. Schenley Industries, Inc. (finding apparent authority where the executive mgt led employee to believe that his direct supervisor had authority to set the employee’s compensation); Rest (2nd) of Agency § 8.

Ø IMPORTANT: apparent authority looks at authority from the perspective of outside 3rd party, usually the injured party. Signal received by T from P and/or through A. If P authorizes A to make such statements, P liable to T for statements made by A. T must reasonably believe and rely on the signals from P.

c. Inherent Authority (usually when principal is not disclosed): Inherent authority arises simply from the designation by the principal of a type of agent who ordinarily would posses certain powers, regardless of whether the particular alleged agent in question has been authorized by his alleged P–Pal to so act. If the alleged agent’s actions relate to transactions that he would generally be authorized to conduct & 3rd party believes the agent is authorized and has no notice to the contrary, the P–Pal will be bound by the agent’s conduct. Watteau v. Fenwick (enforcing a contract to purchase cigars entered into by agent–pub manager against undisclosed principal–pub owner, despite the fact that the principal had expressly forbade the agent from entering into such Ks).

Ø IMPORTANT: judged solely from 3rd party point of view  usually the injured party and “reasonable” appearance of authority

Ø Undisclosed P–Pal: who entrusts an agent with the mgnt of his bus is subject to liability to 3rd persons w/ whom the agent enters into usual in such bus and on the P–Pal’s acct, although contrary to the directions of the P–Pal. Watteau v. Fenwick; Restatement (2nd) of Agency § 195.

Liability of a principal to third parties for acts of an agent can be proven by disclosing:

Express or real authority which has been definitely granted;

Implied authority to do all that is proper, customarily incidental and reasonably appropriate to the exercise of the authority granted; and

Apparent authority, such as where the principal by words, conduct or other indicative manifestations has held out the person to be his agent.

Mill Street Church of Christ v. Hogan (Ky. 1990) AIA – Church hires Bill to paint church, with assistance of Petty if needed. In past, Church allowed Bill to hire brother Sam if needed. Bill talks to church elder about help (elder suggests Petty, but doesn’t tell Bill to). Sam injured working. Church didn’t know Bill had hired Sam. A person possesses implied authority as an agent to hire another worker where such implied authority is necessary to implement the agent’s express authority. The existence of the prior similar practice of the church allowing the painter to hire his brother created the basis of implicit authority of the agent to hire him again. Basis of Agency: implicit authority of the agent to contract on the principal’s behalf to hire his brother to help him paint the church. Sam also believed Bill had the authority to hire him as he had in the past. Sam relied on Bill’s representation and the church treasurer even paid Sam for the work he had done.

Lind v. Schenley Industries Inc. (3rd Cir. 1960) AA – Lind worked in various positions, informed he would receive 1% commission for all sales of men who worked for him. Negotiated sale of warehouse, his boss agreed to 1% commission. Did boss have authority to offer Lind that commission? Yes – apparent authority. Lind was told to see his boss about salary; not unusual to offer commission to a salesman habitually working on commission. Even if boss had no authority to set salaries, it would be irrelevant to apparent authority.

Dweck v. Nasser (Del. Ch. 2008) – Controversy over which lawyer was representing Nasser (Heyman – Nasser’s attorney of record; or Shibboleth – Nasser’s primary attorney for 20 years and colleague of opposing counsel). Shibboleth (with Nasser’s consent) agrees to settlement, Heyman also thinks Shibboleth has power. Nasser then rejects settlement saying Shibboleth didn’t have authority. Nasser is bound. An attorney who is not an attorney of record in litigation has authority to settle the litigation where a party to the litigation has had a longstanding relationship with the attorney, has granted authority to the attorney, has permitted the attorney to “speak in his name,” and has informed others of the attorney’s authority.

Three-Seventy Leasing Corporation v. Ampex Corporation (5th Cir. 1976) – Agreement between salesman and his friend to buy computer equipment. Buyer signs contract, but seller never does (seller does issue memo highlighting agreement and that salesman will be contact for agreement). A salesperson binds his employer to a sale if he agrees to the sale in a manner that would lead buyer to believe sale was consummated. Reasonable for T to presume salesman has authority to bind employer to sale. Memo said dealings with buyer would go through salesman. P never communicated to T that A didn’t have authority to accept sale. It’s easier to make P say only certain officers have authority than to make T check to see who has authority (easier for P to protect itself than make T check).

Inherent Authority

Watteau v. Fenwick (Queen’s Bench 1892) – Humble owned beerhouse, sells to defendants, but remains manager – and all signs at pub have Humble’s name. Humble had no authority to buy goods except beer and water. Humble buys cigars and Bovril from Watteau on credit. Watteau wants to recover price of goods from Fenwick. 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 this particular type of transaction. No actual express authority or implied authority here (forbidden from buying anything but beer/Bovril). Inherent authority – no reason for T to think A didn’t have authority. More efficient to make P state any relationship out of the ordinary than make T investigate every P/A relationship. Undisclosed P is liable for acts of A, done on P’s account, if usual or necessary for such transactions, although forbidden by P.

Ratification – Affirmance by a person of a prior act which did not bind him, but which was done or professedly done on his account. After A acts without authority of any kind, P or T can still be bound if he ratifies K.

Botticello v. Stefanovicz (Conn. 1979) – Married couple own land. Botticello and husband agree to lease with purchase option. Botticello wants to exercise option, couple refuse because wife never agreed to original contract (but had been cashing rent checks which Botticello says was ratification. Marital status does not, by itself, prove an agency relationship. Ratification requires acceptance of the results of the acts with the intent to ratify, and with full knowledge of all the material circumstances.” Affirmation can be express or implied, but P must know or have reason to know all material facts.

Estoppel

Hoddeson v. Koos Bros. (NJ. App. Div. 1957) – Hoddeson goes to furniture store. Random buy dressed as salesman makes sale. Hoddeson pays cash, doesn’t get receipt and is told furniture isn’t in stock and will be delivered. To establish agency by estoppel, appearance of authority must be shown to have been created by the manifestation of the alleged principal and not solely by the supposed agent. No apparent authority here (store never held imposter out as agent).

Requirements to show estoppel:

Acts/omissions by P (intentional or negligent), which create an appearance of authority in purported A

T reasonably and in good faith, acts in reliance of such apparent authority

T changed her position in reliance upon appearance of authority.

Agent’s Liability on the Contract (Duty to Disclose Principal) – to avoid personal responsibility, A must disclose fact that he is acting as representative of P, and disclose identity of P. Duty on A to disclose, no obligation for T to ask.

Atlantic Salmon A/S v. Curran (Mass App Ct 1992) – Curran holds himself out to be owner of company to Atlantic even though his company is now owned by Marketing. Currant never tells Atlantic of Marketing. CT says: it’s not sufficient that plaintiffs had means to determine identity of principal, actual knowledge is required.

Liability of Principal to Third Parties in Tort

Servant vs. Independent Contractor

Reaspondeat Superior: a “master” (employer) is liable for the tots of its servants (employees) if acts were within scope of employment.

Master-servant relationship exists where the servant has agreed:

a) To work on behalf of the master; and

b) To be subject to the master’s control to right to control the physical conduct of the servant (the manner in which the job is performed, as opposed to the result alone.

P liable for actions of A if acts were within scope of employment.

Agent-Type Independent Contractors: has agreed to act on behalf of the principal, but not subject to the principal’s control over how the result is accomplished (over the physical conduct of the task).

P not liable except in special cases.

Non-Agent Independent Contractors: operates independently and simply enters into arm’s-length transactions with others. Does not operate on P’s behalf in transactions with other parties, but rather enters into arms-length bargains with them. No power to act on P’s behalf.

P not

rom normal methods; and

Whether the master would reasonably expect such act would be performed

Majestic Realty Associates, Inc. v. Toti Contracting Co. (NJ 1959) – City contracted with Toti to demolish buildings so it could build parking area. During demo, Toti caused damage to nearby building owned by Majestic. Although a person who engages a contractor (who conducts an independent business using its own employees) is not ordinarily liable for negligence of the contractor in performance of the contract, such person is liable when the contractor performs inherently dangerous work. City could be liable because Toti doing inherently dangerous work (nuisance per se).

Generally: where a person engages a contactor, who conducts an independent business by means of his own employees, to do work not in itself a nuisance, he is not liable for the negligent acts of the contractor in the performance of the K.

Exceptions to General Rule that Principal is not Liable for Actions of Contractor:

Where the landowner retains control of the manner and means of doing the work which is the subject of the contract;

Where he engages an incompetent contactor; or

Where, as noted in the statement of the general rule, the activity contracted for constitutes a nuisance per se

Fiduciary Obligation of Agents

Reading v. Regem (KB 1948) – Reading was soldier in Royal Army in Cairo. Took bribes to sit in car as it transported contraband across Cairo. Car wouldn’t be stopped because Reading was sitting in car in full uniform. An agent who takes advantage of the agency to make a profit dishonestly is accountable to the principal for the wrongly obtained profits. Burden of disclosure – agent must disclose to principal (who might have reason to object). Secret Profits Rule: If a servant takes advantage of his service and violates his duty of honesty and good faith to make a profit for himself, in the sense that the assets of which he has control, the facilities which he enjoys, or the position which he occupies, are the real cause of his obtaining the money as distinct from merely affording the opportunity for getting it, that is to say, if they play the predominant part in his obtaining the money, then he is accountable for it to his master.

Restatement (2) 387: A has a duty to act solely for the benefit of the P in all matters connected with his agency.

388: Unless otherwise agreed, an A who makes a profit in connection with the transactions conducted by him on behalf of the P is under a duty to give such profit to the P.

404: an agent who, in violation of his duty to his P, uses for his own purposes assets of the P’s business is subject to liability to the P for the value of its use.

General Automotive Manufacturing Co. v. Singer (Wis 1963) – Singer’s (GM of General – machine shop) job to solicit work for General. Employment contract said he would work exclusively for General. Some work he found, General couldn’t fulfill for lack of suitable equipment or couldn’t offer competitive price. Instead of turning down jobs, Singer referred jobs to another shop at lower price and kept difference. An agent who draws business away from his principal for his own enrichment is liable to the principal for his profits. Singer breached his fiduciary duty of loyalty – part of which is not to do anything to principal’s economic detriment. Agent who engages in activities which draws profits from principal does this. If General had known about other orders, they could have decided to expand business. Duty to exercise good faith by disclosing to P all facts regarding the matter.

Rash v. JV Intermediate (10th Cir 2007) – JVIC hired Rash to manage Tulsa division. Rash’s contract required him to devote full time and attention to JVIC. K expired, but Rash continued to work without new K for 3 years. JVIC claimed that starting in 2001, Rash owned/operated 4 other businesses, one of which bid on projects from JVIC and Rash often selected another of his companies (TIPS) as subcontractor. Unless otherwise agreed, an A is subject to a duty not to deal with his P as an adverse party in a transaction connected with his agency without P’s knowledge. Rash violated fiduciary duty by not disclosing his interests in TIPS to JVIC. Rash had duty to deal fairly with Principal on all transactions between them, and to fully disclose to P information about matters affecting the company’s business. Burden on A to make sure every action doesn’t provide competition/conflict with P. Here, JVIC’s President told Rash he didn’t have problem with Rash forming businesses which might contract with JVIC – court says that’s not enough.

Town & Country House & Home Services, Inc. v. Newberry (NY 1958) – Town operates cleaning service catering to affluent households. Newberry and other employees resigned and formed competing company. They used customer lists obtained during their employment and began soliciting them for their own business. Town sued for unfair competition. Former employees may not use confidential consumer lists belonging to the former employer to solicit new customers. Customer list is trade secret if it contains info not publicly available. Employer put time and effort into putting list together, if list had come from public directory – it would be ok. You can’t use a trade secret obtained through employment with the one possessing the secret.

Restatement 396b – you can compete, but can’t violate fiduciary duty.

Restatement 379(a): a paid agent is subject to a duty to act with standard care and with the skill which is standard in the locality for the kind of work which he is employed to perform, and, in addition, to exercise any special skill he has.