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Business Organizations
University of Connecticut School of Law
McClane, Jeremy R.

 
McClane – Business Organizations – Fall 2014
 
What is a Business Organization?
·         Defined: Way in which groups of people work together to achieve a purpose, usually to make money
 
·         Basic Problems of Corporate Law:
Transaction Cost Economics (costs of negotiations & doing business)
1. Facilitating relations among the owners of a corporation
2.  Facilitating relationships between owners (e.g. shareholders) and outside parties
Agency Cost Economics (cost of monitoring your agents)
3. Facilitating relationships between owners and managers
 
[PART ONE: AGENCY & PARTNERSHIP LAW]  
AGENCY
 
·         Core of the agency relationship: Agent (A) can bind principal (P) to a third party (T).
 
Agency Relationship (Fiduciary Relationship):
·         Manifestation of consent by the principal to the agent that the agent shall act on the principal’s behalf and subject to the principal’s control, with a manifestation of consent by the agent to be subject to principal’s control.
                See Restatement (Third) of Agency §§1.01-03
·         Formation Requires:
Assent: Offer and Acceptance (explicit or implicit)
For A to act on P’s behalf
Subject to P’s control
·         Agency Relationship does not require contract, promise, or compensation
·         Can be formed based on level on control and interaction (See Jensen Farm)
·         Can be proved by circumstantial evidence (See Jensen Farm)
·         Why do you want an agent?
o    Assistance (one person can only do so much themselves)
o    Agent has expertise you don’t have
 
Types of Agency:
·         Scope
o    Special agent (one act or transaction)
o    General agent (series of acts or transactions, ex. employee)
·         Disclosure
o    Disclosed (T Knows A acts for P)
o    Partially Disclosed (T Knows A is an agent, but does not know identity of P–common in real estate transactions)
o    Undisclosed (T does not know A is an agent–secret agent, no clue)  
·         Control
o    Employee or “Servant” (P controls details)
o    Independent Contractor (P has less control)
 
Termination of Agency Relationship:
·         Law strongly favors the assent aspect in an agency relationship
o    Won’t force someone to be in a relationship they don’t want to be in
·         Either principal or agent can terminate relationship
o    Never will be forced to stay in relationship but
o    Might instigate lawsuit and potential for payment of damages for breach of contract
 
 
CASES
 
·         Jenson Farms Co. v. Cargill, Inc. (p.9) (Creditor/Debtor Can = Agency Relationship)
Facts: Grain Company (Warren) entered into security/loan agreement with Cargill (the financier, defendant). Cargill exerted extensive control over W (couldn’t make specific decisions without Cargill (D), couldn’t make capital improvements for over 5k+ without permission, audited company & gave direction on how to run business p. 12). Cargill kept extending credit line. W defaulted on its Ks with creditors. Creditors sue Cargill and W.  
Issue: Whether Cargill, in the course of dealings with W, became liable as a principal on contracts made by warren with plaintiffs/creditors?
Rule: Agency created when one party (1st party) ’s has manifested consent that another party (2nd party) be its agent; the 2nd party acts on behalf of the 1st party; and the first party exercises control over the first party.
Holding: Yes, Cargill was liable. Court found master/servant (principal/agent) relationship because all three elements of agency were present. Directing W to implement recommendations, C manifested consent that W would be agent. W acted on C’s behalf by procuring grain, which was financed by C. C exercised more than nominal control, and was an active participant in W’s operations. Weren’t just being regular lenders. Just because they didn’t have a contractual relationship does not mean principal agent relationship cannot exist between them.
 
 
RESPONSIBILTIY FOR AGENT’S ACTIONS
Contract law binds principal? *
Principal is vicariously liable in tort law? **
Employee/Servant-Agents:
(P has control over the physical conduct of the task)
Yes
Yes
Agent Independent Contractor:
(P has some control over the conduct of the task)
Yes
No
Non Agent Independent Contractor:
(P specifies the outcome alone and has no control over A’ conduct)
No
No
 
·         For liability in contract, what matters are
o    Whether there is an agency relationship and
o    Whether the principal is liable b/c the agent had authority or under some other theory.
·         For liability in tort, the first thing that matters is the nature of the agency relationship.
o    The basic rule is that masters (employers) are liable for torts committed by their servants (employees).
 
Liability in Contract – Forms of Authority:
·         Whether a principal is liable for a contract entered into by an agent.
·         Theories under which a principal may be liable:
o    Actual Authority: That which a reasonable person in A’s position would infer from P’s conduct
§  Explicit (express): if communication was explicit  (ex. written or stated)
§  Implicit: if A’s actions were reasonably calculated to discharge P’s explicit instructions.
·         Incidental: the authority to do those implementary steps that are ordinarily done in connection with facilitating the authorized act
o    Apparent Authority: authority that a reasonable third party would infer from the actions and statements of P. (See White v. Thomas)
§  Equitable remedy designed to prevent fraud or unfairness to 3rd parties who reasonable rely on the principal’s actions or statement in dealing with the agent.
·         Customary actions for agent to do for principal
§  Inherent Authority:
·         The principal is liable for unauthorized acts by the agent if the principal is aware of those acts and doesn’t notify third parties; or
·         The principal is liable for acts that the agent would customarily have authority to do, even if the principal told the agent not to do those acts.
·         Policy: a lot of people find problems with this doctrine because its just an excuse for judges to do justice
 
Ratification: agent exceeds authority but principal adopts the action of agent and is now liable for actions
·         Requires:
o    Assent by B to the transaction
o    Intent by B to ratify the transaction
o    Full knowledge by B of all the material facts of the transaction
 
General Rules:
·         The agent is not liable to the third party for actions taken with actual or apparent authority. (Under the provisions above, the principal is liable to the third party.
·         However, if the agent enters into a contract under apparent but not actual authority, she may be liable to the principal.
·         If the principal is undisclosed (the third party does not know that there is a principal) or partially disclosed/unidentified (the third party knows there is a principal, but does not know who it is), and the agent has actual or apparent authority, then both the principal and the agent are liable (unless otherwise specified). See R3A §§ 6.01–03.
 
CASES
 
·         White v. Thomas: (pg. 14):  No Apparent Authority
Facts: W (principal) sent Simpson (agent) on his behalf to purchase land, authorizing the expenditure of 250k (actual authority). Thomas (plaintiff) ends up getting 3-acre site but not adjoining land because Simpson (agent) won. By accident, she paid 327k for this land. To fix problem, she enters into agreement with Thomas to sell him back land and claims power of attorney. When White returns, decides to keep all of the land in essence cancelling contract (ratification of purchase for excess $, not for sale to Thomas).
Issue: Whether Simpson had apparent authority to sell land to Thomas (Plaintiff)?
Rule: for appa

er vicarious liability
Issue: whether party can be liable for independent contractors torts.
Rule: franchisee is considered an independent contractor if franchisee retains control of inventory and operations. Test → whether franchisor retains rights to control day-to-day operations of franchise.
Holding: Sun not liable because Barone clearly is an independent contractor who exerted control of decisions, inventory, and day-to-day operations.  
 
 
Agents Fiduciary Duties to Principal
·         Agent is a fiduciary of her principal.
o    Purpose of fiduciary relationship in agency is to advance the purposes of the principal.  
·         Fiduciaries duties fall into three categories:
o    Duty of Obedience: Restatement (Third) Agency §8.09
§  Duty to obey principals commands
o    Duty of Loyalty
§  Obligation always to exercise legal power over the subjects of the relationship in a manner that the holder of power believes in good faith is best to advance the interest or purposes of the principal and not to exercise such power for personal benefit.
§  Ends when agency relationship ends
§  Prohibits Non-exclusively
·         Receiving secret profits in connections with transactions on principal’s behalf
·         Competing with the principal or making profits from transactions of the principal
·         Using status of agents to make profits in side business
§  Using the principal's property or confidential information for the agents benefits
See Restatement 3rd of Agency §§ 8.01-8.02, 8.04-8.05
§  Can do those acts as long as the principal is aware of the facts or if agent disclose and if principal consents then agent is acting in good faith and fair dealing
                                                                See Restatement 3rd of Agency § 8.06
o    Duty of Care
§  Duty to act in good faith, as one believes a reasonable person would act, in being informed.
 
CASES
 
·         Tarnowski v. Resop (p. 27): Agent’s Duty of Loyalty to Principal
Facts: Tarnowski (P) hired Resop (D) as an agent to negotiate purchase of a business for him. Relying on R’s advice, T purchased a business from 3rd party. D represented he did a thorough investigation but he relied on the 3rd parties word and also took a secret commission from them.  
Issue: Whether R breached his duty of loyalty to T. Whether R has to give T the profits made from transaction.
Rule: An Agent is liable to the principal for damages caused by breach of duty of loyalty (See Restatement 3rd of Agency § 407(1)). An Agent is liable to principal on profit made during course of agency.
Holding: R was liable to P for damages because if an agent has received a benefit as a result of violating his duty of loyalty and the principal didn’t know, the agent owes the principal the value or proceeds of what he received and the amount of damages caused. This is true regardless of the fact that a principal might have recovered the property. R also owes T profits made during course of agency even if no material or actual injury to principal resulted or principal made a profit on the transaction. Principal also receives attorneys fees because directly result from breach.