Business Organizations
Professor Harry Gerla
Fall 2010 Semester
§1.01 Restatement 3rd of Agency:
A fiduciary relationship between a principal and an agent occurs where the agent acts on behalf of the principal and is subject to the principal’s control and the agent consents to so act.
– Creation of an agency relationship requires 3 main elements:
o Assent by principal to have agent act on their behalf and by agent to act on behalf of principal.
§ Conscious awareness of the relationship is not necessary.
o Agent must actually act on behalf of the principal.
o Principal must hold control over the actions of the agent.
– Agency agreement does not need express manifestations by the parties or any financial compensation.
– Agency by estoppel: if principal or agent leads third party to believe that such a relationship exists and the third party relies to their detriment.
– How can an agent’s authority be expressed?
o Actual Authority: principal has given agent authority through actual manifestations.
§ Express Actual: physical manifestations of authority.
§ Implied Actual: agent reasonably believed they were given authority through principal’s actions.
· If there is a conflict, express authority always trumps implied authority because implied is assumed by the court.
o Apparent Authority: manifestations given to third parties by the principal regarding agent’s authority.
§ Must cause claimant of apparent authority to subjectively believe agent has the authority
§ Subjective belief must be objectively reasonable.
§ How would this come into play? Principal sends info regarding authority of agent to the customer or whoever the third party is (ability to make sales, monetary limit, amount of order limit, etc.)
Duties of An Agent
– Duty of Care of An Agent
o Agent must act with reasonable care, competence, and due diligence of a reasonable person similarly situated.
§ Negligence standard
– Duty of Disclosure
o An agent has a duty to disclose any material information connected to a transaction in which his/her principal is involved.
§ What is “material”? Any information that would affect the principal’s decision to engage in the particular action.
· If a reasonable person would attach importance to the existence of the information.
– Duty of Loyalty
o An agent must put the principal’s interest in a transaction above all others, including their own.
§ When an agent puts their interests before the interest of the principal, then they have breached their fiduciary duty.
§ However, principal may elect to give agent any amount of profits in excess of their normal wages, but the agent may not take them without principal’s permission.
– When is a principal liable for damages or injuries caused by their agent? Vicarious liability of the principal
o Courts look at circumstances surrounding the incident in question.
o Was the agent within their scope of employment?
§ Was the employee’s conduct of the general kind they were employed to perform?
§ Did the conduct occur substantially within the hours and ordinary spatial boundaries of their employment?
§ Was the conduct motivated, at least in part, by the purpose of serving the employer’s interest?
· If the terms of employment are detailed, and the agent goes against the terms in any deviation, then they are generally held to be outside the scope of their employment.
o Motive Test: if the tort is the result of the employee “furthering” the employer’s interest, then the employer is on the hook.
o Abandonment of Employment: agent/employee actively leaves location and duties of employment, with the intent not to return.
o Frolic (employee leaves scope of employment temporarily) vs. Detour (not substantial enough of a departure to relieve principal of liability)
o Some courts may impose liability when actions that caused damage or injury are reasonably foreseeable in the particular industry or line of work.
§ Actions must be reasonably foreseeable and occur in area where agent was authorized to work.
– Independent Contractor vs. Employee §220 Restatement of Agency
o Factors to Consider (None are dispositive)
§ Extent of control, which, by the agreement, the principal may exercise over the details of the work.
§ Whether or not the one employed is engaged in a distinct occupation or business.
– Partnership Property
o Partnership property is codified in §203 of RUPA: Two presumptions
§ Any property bought with partnership funds is partnership property.
§ Property acquired in the name of one or more of the partners without an indication of their status as partners and without use of partnership funds are presumed to be the partner’s separate property.
· Even if used for partnership purposes.
– What kind of authority do partners have?
o Actual Authority
§ A partner needs to have authority extended by the partnership. Absent an agreement dictating otherwise, a majority of the partners must agree on an action.
· Equal rights in the management and conduct of the business.
· If only two partners, then the dissenting partner must be followed.
§ This is the default rule; partners may extend authority by an agreement expressly detailing the extension. The Burger King Approach.
o Apparent Authority
§ RUPA §301 says that apparent authority is a fact-based inquiry.
· Was the partner carrying on in the ordinary or a similar manner in which business is conducted by the partnership?
· If no, did the person with whom the partner is dealing actually know or receive notification that the partner lacked authority?
o Partnership may send a statement to a party with whom they are dealing setting the metes and bounds of the dealing party’s authority.
§ They may also preauthorize any unordinary business through representations.
§ Even if the partner exceeds the amount authorized, the partnership may still be bound if it was a reasonable deviation and was done within the ordinary course of business.
· Unless, of course, other party knew they were prohibited from doing so.
o Bad faith on their part.
