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Business Associations
University of Illinois School of Law
Williams, Cynthia

Williams – BAI – Fall2009
 
CHAPTER one. Law of Agency
A.    CREATION OF THE AGENCY RELATIONSHIP
–          An agent is any person who is authorized to act on behalf of another (known as the principal).
–          Restatement says:
o   An agency relationship is created when 1) the principal “manifests assent” to have the agent act on the principal’s behalf and under the principal’s control, and 2) the agent “manifests assent or otherwise consents” so to act. 
§ The use of the word “assent” is intended to emphasize that unexpressed reservations or limitations do not restrict the party’s expression of consent.
–          Creation of an agency has two types of consequences:
1)      Internal (Fiduciary Duties)
o   Fiduciary duties to principal (duties of care, loyalty, full disclosure)
o   These relate to the relationship between the principal and agent and are largely governed by the contracts between the parties and by the law of fiduciary duties.
2)      External (Authority)
o   Agents can change relationship of principal (enter into contracts) to the outside world through the existence of actual/apparent authority.
o   Agents can cause liability by engaging in tortious behavior. 
–          How can you restrict an agency relationship?
1)      Provide the agent with notice that certain actions are not authorized. RST 258
2)      Follow up to correct an agent who takes unauthorized actions.
3)      Try and suggest the third party had notice the agent was acting outside the scope of their agency.
4)      Try and suggest a third party’s reliance on the agents statements was unreasonable.
5)      Argue an agent’s action was not foreseeable.
·          
US v. Cyberheat, Inc (2007)
·         Facts – Cyberheat claiming that there was no agency relationship with an affiliate that violated a statute regarding e-mails offering explicit materials; Or otherwise are not such close agents that Cyberheat would bear liability for the actions of the affiliate
·         Rule –Factual Analysis; Whether or not agency relationship exists (as a material issue of fact)
o   Control – Principal’s right to control the alleged agent
o   Benefit – Alleged agent’s duty to act primarily for the benefit of the principal
o   Power – Alleged agent’s power to alter the legal relations of the principal
–          Control
o   Cyberheat distributed materials to each affiliates
§ HOWEVER, Cyberheat says they did not allow their affiliates to violate the act.
o   They had a policy to control advertising per their policy.
o   Notice, this can cut both ways. There was a pattern of neglect in enforcement of Cyberheat’s own policies.
–          Duty to Act for Benefit of Cyberheat
o   There was a pattern of neglect in enforcement of Cyberheat’s own policies.
–          Benefit to the Principal
o   Cyberheat obtains substantial benefits from the relationship.
 
 
B. Agent’s Fiduciary Duties to the Principal
–          3 distinct duties:
o   Duty of care (work with diligence, care, and skill required for the type of work)
o   Duty of loyalty (act in the principal’s benefit)
o   Duty of full disclosure (required to disclose economically significant information, without being asked; affirmative duty)
–          All duties must be done in good faith
o   Subjective: Agent must believe that they are acting in the best interest of the principal
o   Objective: Reasonable person believes agent is acting in good faith
–          Principal’s Remedy for Breach of Duty of Loyalty
o   Damages and disgorgement of profits
–          Principal’s duties to agents:
1)      Performance of contractual obligations
2)      Good faith and fair dealing
3)      Indemnification under certain circumstances
 
·         Food Lion v. Capital Cities/ABC (1999)
–          Facts – Plaintiff brought a tort action after defendant television broadcasting company aired videotape of unwholesome food handling practices, which videotape was obtained by defendant reporters who gained employment in plaintiff’s supermarkets by misrepresentation
–          Rule – An employee owes a duty of loyalty to the employer; 3 ways to breach duty of loyalty
1. Compete (w/ your employer)
2. Stealing – Misappropriate funds or business opportunity
3. Breach of Confidence – Making public or sharing private information you learned as an agent.
–          Holding –Defendant reporters breached their duty of loyalty to plaintiff
–          Reasoning – Reporters intended to act against the interests of plaintiff in favor of their primary employer and were therefore liable in tort for employee disloyalty
–          Note – Fiduciary duties are common law duties owed to employer, which cease to exist once employment is over. This is why people often sign confidentiality or non-compete agreements when leaving a job
o   Most non-competition agreements are enforced as long as they are reasonable in time and geographic scope. 
 
 
C.     Principles of Attribution (Relationship between Principal and 3rd Party)
1.     Actual Authority
–          Vicarious liability
o   Employees, Respondeat Superior (§ 703 (2)(a))
o   Agents, Vicarious Liability (§ 703 (2)(b))
–          Actual authority usually includes both express and implied aspects: 
1)      Express/Explicit
o   Orally or in writing
o   Express actual authority exists “where the principal authority has made it clear to the agent that he/she wants the act under scrutiny to be done.”   (Castillo)
2)      Implied/Implicit
o   Power to do those things proper, usual, and necessary to fulfill the agency.  So express authority to “run my car business” has implied authority to buy cars, advertise, hire, etc. (what the job is, wages, etc.)
·         Castillo v. Case Farms of Ohio (1999) (Actual authority?)
–          Facts – Plaintiffs, a group of migrant farm workers, filed suit against defendant, a chicken processing plant that contracted with ATC to help it find temporary workers for defendant’s farms. Plaintiffs allege violations of various federal and state laws for defendant’s alleged misrepresentations and mistreatment of the plaintiffs in the recruitment process and the working and living condition. Question of whether defendant can be held legally responsible for plaintiffs’ alleged mistreatment
–          Rule – Agency relationship created by principal’s express or implied delegation of authority to agent:
o   Express authority – Where principal has made it clear to agent that he wants act to be done
o   Implied authority – To do all things proper, usual, and necessary to exercise express authority
–          Holding – Yes, D is liable b/c it gave express actual authority to ATC to find and hire workers and w/in there was implied actual authority to do all that was necessary to exercise that authority
–          Reasoning – Though defendant did not directly control the transportation and living this was an– implied authority given to ATC since it was necessary to provide these things in order to fulfill the express authority of hiring workers.
–          Note – Principals should try to protect themselves from agents exceeding their authority; if agents do exceed their authority, 3rd party may sue plaintiff, but plaintiff may then have recourse against agent
 
2.     Apparent Authority and Estoppel
–          Apparent authority can be the basis for liability in two situations:
1)      Where person appear to be agents, even though they do not qualify under the definition discussed above (“apparent agency”)
2)      Where agents act beyond the scope of their actual authority.
–          Apparent authority: Objective “manifestation” by principal + subjective belief of 3rd party that agent had authority to act on behalf of principal.
o   Two key points of finding “apparent authority”: 
1)      Manifestation must emanate from the principal and must be indirectly/directly received by the 3rd person.
2)      Scope of agent’s apparent authority depends on the 3rd party’s reasonable interpretation of that manifestation.
a.       Has subjective and objective components
                                                                                                   i.      Objective – What is the job description of the person I’m dealing with?
                                                                                                 ii.      Subjective – Did this person actually believe th

superior.
–          Other important points from other parts of the opinion
o   Co-Employee liability
§ A co-employee can be vicariously liable for the torts of his co-employee if he is at fault in appointing, supervising, or cooperating with that employee.
§ BUT usually, an independent agent à NOT an employee of another agent
o   Loaned Servant Doctrine
§ When one person puts his servant at the disposal of another for the performance of a particular service for the latter, the servant, in respect of his acts in that service, is to be dealt with as the servant of the latter and not of the former.
·         Dissent
–          Goes with the loaned-servant doctrine and says that it still applies regardless of the fact that they are co-employees.
o   Relationship as co-employees and as supervising anesthesiologist and supervised CRNA are separate and independent. 
o   Majority says Dr. Ware’s right of control comes only from their co-employee status, but dissent argues that it comes from the supervising/supervised relationship.
Theory of the Firm: Ronald Coase Theorem
 
Firm
Market
Economics
Hierarchy
(Management control)
Price
(Competition lowers costs)
Law of Agency
(Benefits)
Fiduciary duties create a standard form contract
No need to negotiate loyalty, disclosure or case
Lower transaction costs
No respondeat superior
Not as much vicarious liability
Apparent Authority?
Law of Agency
(Costs)
Possibility of liability (respondeat superior)
Apparent Authority
Apparent authority?
No Fiduciary duties
 
CHAPTER TWO: Partnerships
INTRODUCTION
·         Law of Partnerships
·         Uniform Partnership Act (UPA) §557 – An undertaking of two or more, to act as co-owners of a business, for profit
·         Revised Uniform Partnership Act (RUPA) §575 – An association of two or more owners to carry on for a profit, whether or not it was the persons intent to form a partnership
–          Why study?
o   Inadvertent partnership
o   Law still used to construe the law of the replacement form (LLP)
o   Joint ventures
§ If gaps in the agreements general partnership law applies
–          Generally
o   Partnership= association of two or more persons to carry on as co-owners a business for profit (RUPA 202(a)); UPA § 6.01
o   Not taxed as separate business entities
o   Pros simplicity, favorable tax treatment, simple to form, flexible in organization
o   ConsàOne partner can be bound to third parties by the act of another partner, Partners are personally liable for the obligations of the partnership
o   UPA (1917)
§ Some provisions suggest partnerships have separate legal existence, where others suggest that a partnership is merely an aggregation of the partners
o   RUPA (1997) – adopted by 70% of states
§ Important Changes from UPA
·         S. 201 partnership is an entity distinct from its partners
·         S. 203 partnership property is the property of the entity, not the individual partners
·         Does away with UPA rule that departure of a partner ends the partnership
·         Provides for the merger or conversion of partnerships into limited partnerships
o   The most common disputes over partnerships arise when one party is trying to reduce liability by saying they are partners with someone else who denies the partnership exists.