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Business Organizations
University of Dayton School of Law
Chaffee, Eric C.

I.       AGENCY
A.      Who is an Agent:
                                       i.      Defined: Agency relationship is 1) a fiduciary relation 2) which results from the manifestations of consent 3) by one person 4) to another 5) that the agent shall act on the principal’s behalf 6) and subject to the principal’s control 7) and consent by the agent to so act.
1.       Capacity: Agent has the authority to act on behalf of the principal
2.       Consent Test: Capacity to consent required (otherwise voidable). Writing sometimes required. 
a.       There must be an agreement which doesn’t necessarily have to come about through a contract
b.       Agreement may result in the creation of an agency relationship even if parties did not all believe it to be an agency and did not intend the legal consequences of the relationship.
c.        Gordon v. Doty – Football coach drove another teacher’s car in order to transport students to game. [Relationship of Principal/Agent existed].
3.       Control Test: In looking to whether control exists, one looks to many factors in the full circumstances of the transaction.
a.       A. Gay Jenson Farms v. Cargill – Farmers brought action against Cargill bc Warren defaulted on his contracts with farmer. Warren purchased the grain he sold to the farmers from Cargill. Warren ended up being an agent of Cargill bc Cargill provided advice, inspected records, financed grain purchases and had the power to cease funding. [Cargill was principal to Warren and liable for nonpayment].
                                     ii.      Intention to form Agency / Compensation Not Needed: An agency relationship can be formed unintentionally without compensation or a contract. 
B.      Liability of Principal to 3rd Parties: Focus on Consent.
                                       i.      EXAM: You can have more than one type of authority, so argue all.
                                     ii.      Authority: Liability is based on authority – if principal has any type of authority over agent, the principal is liable.
1.       Actual:
a.       Express: Principal states you are my agent
b.       Implied: Principal actually intended agent to possess authority. Includes such powers as are practically necessary to carry out duties actually delegated. 
                                                                                                               i.     
Factors for Implied Authority:
1. Agents understanding of authority
2. Nature of Task/Job
3. Existence of Prior Similar Practices
4. Burden of proof exists on person alleging agency
 
 
Test: Determined whether agent reasonably believes he has authority because of present or past conduct of the principal. (Based on the agent’s reasonable interpretation of the principal’s manifestation in light of the principal’s objectives and other facts known to the agent)
                                                                                                             ii.      Mills Street Church – Hogan was hired to paint for church. He had done so previously and had been able to hire a helper. [Due to the custom of being able to hire whom he pleased, there was implied authority].
2.       Apparent: Principal makes certain representations to a third party that the agent is authorized to act on his behalf.
a.       Authority that a third party reasonably believes an agent has, based on the third party’s dealings with the principal, even though the principal did not confer or intend to confer the authority.
                                                                                                               i.      Authority must be shown to have been created by the manifestations of the alleged principal. (A matter of appearances on which third parties come to rely).
b.       Mills Street Church v. Hogan, (pg. 15)
c.        Attorney of Record Presumed to be Agent:   In some jurisdictions, an attorney of record is by default an agent of his client. (Dweck v. Nasser 16).
3.       Inherent: Principal makes certain representations by putting an agent in a situation that he otherwise would not have been in, and the agent acts on that situation. Thus, liability accrues solely based on the existence of an agency relation (i.e., regardless of any apparent or actual authority) in order to protect the third party harmed by or dealing with the agent. (29) 
a.       Restatment 2d Agency § 194: an undisclosed principal is liable for acts of an agent “done on his account, if usual or necessary in such transactions, although forbidden by the principal”.
b.       Restatement 2d Agency § 195: 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 business and on the principal’s account, although contrary to the directions of the principal.
c.        Eg: A was responsible for ordering items for the bar. A ordered cigars but P argued that A did not have the authority to do so. A knows that he is not allowed to order cigars. A does not have actual authority, but A did have inherent authority. There are certain instances where the agent can bind the principal where the principal is undisclosed to a third party. In this example, cigars were usually supplied to and dealt in such an establishment. (Watteau v. Fenwick pg. 26)
                                   iii.      Ratification: Sometimes, a party can be bound by another party’s conduct even without any agency relationship or authority. 
1.       Defined: Ratification is a means by which a principal can say “my agent didn’t have the right to enter into this contract, but I’m glad she did so.” Thus, ratification allows a principal to agree to be bound by a contract entered into by his agent, even when said agent lackedauthority. (Botticello v. Stefanovicz pg. 31)
2.       Restatement 2d Agency § 82: The affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account.
3.       Ratification requires acceptance of the results of the act with intent to ratify and with full knowledge of the material circumstances.
4.       Elements: (1) Principal’s intent to ratify, and (2) full knowledge of all material circumstances/effects.   
                                   iv.      Estoppel: A substitute for an agent’s authority. (No authority is needed)
1.       Defined: Even where there is no form of authority whatsoever, there are circumstances where an entity can still be held liable for somebody who is viewed as their agent (by estoppel). 
2.       Prevents a person from denying something his conduct led another to believe. It’s a principal’s job to give safety and security to customers.
3.       Principal Breaches Duty: Principal owes some duty to a 3rd party, and for whatever reason principal is negligent in undertaking that duty. 
a.       Eg: Imposters: An imposter furniture salesman in a furniture store sells furniture to a third party customer and takes their cash and promises future delivery. The furniture store is liable to the third party because the law aims to protect the customer and not provide an escape of liability for the negligent proprietor. If a proprietor is negligent in the handling of their premises, there will be negative consequences. (Hoddeson v. Koos Bros. pg. 35)
C.      Agent’s Liability on the Contract:
                                       i.      RULE: Agent is liable if principal is undisclosed or partially disclosed (In order for agent to protect himself, he must reveal principal).
1.       Elements: Agent must disclose (1) that he is acting in a representative capacity; and (2) the identity of his principal
2.       Disclosed Principal: Transaction entered into on behalf of a disclosed principal, the principal becomes a party to the contract.
a.       Agent is NOT liable if:
                                                                                                               i.      He had authority to act; and
                                                                                                             ii.      The principal is disclosed
3.       Partially Disclosed Principal: Principal’s identity is unknown, but third party is on notice that agent is acting for principal.
a.       Agent IS liable if third party knows there is a principal, but does not know the identity of the principal.
                                                                                                               i.      Eg: Company owner operates under a false entity to buy salmon from salmon vendors. In fact, however, he was involved in a wholly separate corporation. Thus, there was no disclosure as to the real principal for whom he worked. (Atlantic Salmon A/S v. Curran pg. 38).
4.       Undisclosed Principal: If the third party believes the agent is acting on his own, the agent is bound to the third party.
5.       Liability for Breach of Contract: Where agent acts against the wishes of the Principal, principal can recover damages from the agent. 
D.      Tort Liability of Principal to 3rd Parties: Focus on Control. 
                                       i.      Doctrine of Respondeat Superior – an employer is liable for torts of its employees
1.       Elements: A relationship exists where the servant has agreed to (1) work on behalf of the master; and (2) be subject to the master’s control to the physical conduct of the servant.
                                     ii.      Servant (Agency) versus Independent Contractor:   
1.       Master-Servant Relationship: Servant agrees (1) to work on behalf of the master, and (2) to be subject to the master’s control or right to control the “physical conduct” of the servant.
a.       Control Test: Control everyday aspects of business
                                                                                                               i.      Day-to-day Control of Operations
                                                                                                             ii.  

the manner and means of the doing of the work which is the subject of his contract (IC is an agent);
b.       Where he engages an incompetent contractor; or
c.        Where the activity contracted for constitutes nuisance per se
2.       Nuisance Per Se –
a.       Inherently Dangerous Act: an activity which can be carried on safely only by the exercise of skill and care
                                                                                                               i.      Peculiar risk of harm to others unless special precautions are taken and if the contractor is negligent in failing to take those precautions.
b.       Ultra-Hazardous Act: absolutely no level of care can be exercised to be a safe act, and is not a matter of common usage.
                                                                                                               i.      STRICT LIABILITY: Principal is held liable
c.        Majestic Reality v. Toti Contracting pg7 – Toti demolished property adjacent to plaintiff’s building. Parking authority had no control over contractor’s day-to-day activities. [Exception to the general rule that an employer of IC can’t be held liable].
E.      Fiduciary Obligation of Agents:
                                       i.      Duties During Agency: 
1.       Agent owes fiduciary duties to his principal, and cannot use his position to benefit himself. 
a.       DUTY OF LOYALTY: One cannot compete with employer
b.       GOOD FAITH: Acting honorably and not adversely to the interest of who they are dealing/ in a fiduciary relationship with
c.        DISCLOSURE: Must disclose business to who you work for.
2.       Agent cannot use a particular position to benefit themselves
3.       Do NOT need to prove harm to principal
                                     ii.      Breach of Duty: Master is entitled to all unauthorized gains of his servant or agent. 
1.       Eg: If a servant takes advantage of his service and violates his duty of honesty and good faith to make a profit for himself…then he is accountable for it to his master. (Reading v. Regem pg. 76).
a.       RULE: Monies received while employed belong to the owner – duty of good faith, loyalty, and disclosure
2.       Eg: General Automotive v. Singer – Automotive hired Singer to work for company – under his own employ he had a competitive side business. [Found Singer liable for breach of the duty of disclosure, loyalty and good faith].
                                   iii.      Duties During and After Termination of Agency (“Grabbing and Leaving”): In certain instances, duties extend after termination of the relationship. 
1.       Special Knowledge: Where agent has gained access to certain information or abilities due to fiduciary relationship (eg: client list, etc.), this may extend agent’s duties. 
a.       Trade Secrets: Courts will usually deem special knowledge as a “trade secret” to protect the owner. (N/A to things such as working skills, etc.). 
2.       Can’t use knowledge they gained specifically from employment besides general skills.
3.       Eg: (Town & Country v. Newbury pg. 83) – Plaintiffs owned a cleaning service – employees quit and solicited business to plaintiff’s customers [Defendant is liable because the used lists of customers (trade secrets)].
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
II.    SOLE PROPRIETORSHIP
Is the most common form of business, but does not make up much of the countries profit business. The downsides is that the person who owns the building has unlimited liability. No separation between business assets and personal assets. The upside is, there exist total control, tax benefits, and no need for an attorney.
 
III.PARTNERSHIPS
A.      What is Partnership: An association of two or more persons to carry on as co-owners of a business for profit
                                       i.      Partners Compared with Employees: No express agreement is necessary to create a partnership; rather, they are determined by the totality of the circumstances.