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Business Associations
University of Illinois School of Law
Winship, Verity

Winship Business Associations I Spring 2014

I. Introduction:

1. If something isn’t specified by contract, will get the default rule

i) Some terms are mandatory, but many can be changed by contract

ii) Always think about what’s the default rule and which terms can be changed by agreement

2. Different business organizations can be thought of as different sets of default rules

i) Note that sole proprietorships are by far most common type of business form but it’s corporations that drive much of the economy

3. Sources of default rules:

i) State law

a) Statutes

o Partnership act

o LLC act

o Corporate code

b) Common law:

o Much of agency law

o Fiduciary duties

ii) Federal law:

a) Criminal law

b) Securities regulation

4. Where to organize:

i) US businesses can organize in any state without having physical presence in a state

ii) Internal business relationships are then generally governed by the of place of organization

5. Corporate law relationships:

i) Corporate law only about relationship between corp/board of directors/shareholders

a) Consider what loyalties, duties they have

II. Agency:

1. Agency defined:

i) relationship that results from the manifestation of consent by principal to agent that A shall act on P’s behalf AND A’s consent to so act—Restatement 2nd of Agency Sec. 1


i) Agency case because have to decide if car owner who let football couch drive her car (and then student was injured) would be liable as the principal to the kid’s parents

a) If no agency relationship, then can’t recover from driver (and therefore the school)

ii) Principal/Agent/Third Party Triangle:

a) Agency relationship between P & A

b) A deals with third party (T)

c) Creates legal liability of P to T (and vice versa)

iii) Court found there was agency relationship so owner could be sued for driver’s actions

iv) Court considers:

a) Owner told agent he could drive the car

b) Coach specifically driving was condition precedent to using the car (implied from fact he drove the car)

c) Owner controlled the purpose of borrowing car to something specific

v) Possible ways in which driver wouldn’t be found to be agent next time:

a) Have less conditions on driving the car because court focused on the conditions

b) Contract that specifies not an agency relationship wouldn’t be dispositiveàRestatement of Agency says conduct, not agreements are controlling in deciding if there’s agency

c) Specify it’s only a loan of the car

3. Consider legal consequences of agency relationship:

i) When should entity be responsible for another’s action?

ii) Differences between contracts and torts


i) Involves migrant workers who were hired by temp agency, then treated poorly at plant in Ohio

a) For there to be liability under federal statute, would have to be agency relationship between plant owner and temp agency (including manager)

ii) One of underlying claims was breach of contract claim: workers were promised one standard of living when hired then in reality got something else when arrived

a) Part of the difficulty was this was only an oral, not a written K

iii) Result: temp agency and one who hired them were both agents of Case Farms so Case was liable

iv) Important point on authority: agent must have “authority” to enter K

a) Restatement 2nd Agency, Sec. 144: “principal subject to liability upon contracts made by an agent acting within his authority if made in proper form and with the understanding that the principal is a party”

v) Actual authority can be either express or implied:

a) Restatement 3rd of agency, 2.02(1): agent has actual authority to take action incidental to achieving principal’s objective, as agent reasonably understands principal’s manifestations and objectives when the agent determines how to act

b) Restatement 3rd of agency, 3.01: actual authority is created by principal’s manifestations to an agent that that as reasonably understood by the agent, expresses the principal’s assent that the agent take action on the principal’s behalf

vi) Here, because it’s an assumed thing that workers from another state are going to need housing, making housing decisions is implied authority


i) Question is if state agency woman who makes mistake about including Bethany Pharmacal on QVC program is QVC’s agentàif QVC’s agent, QVC will be liable for breach of contract

a) End result: court finds NO agency relationship

ii) Deals with apparent authority, Restatement 3rd of Agency, Sec. 2.03: apparent authority is power held by agent to affect a principal’s legal relations with 3rd parties when a 3rd party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations

a) Here though, no reasonable person could think that “Janis” could enter into K on QVC’s behalf because QVC’s actions were directly opposed to thatàconsider that principal has expressed to third party (though could be through the agent)

o QVC had disclaimer that said verbal statements/discussions were not commitments on their behalf

iii) If QVC had allowed Bethany to participate anyway, “agent” still would not have had authority to enter K, BUT that QVC’s action would be ratification of the contract so would be bound to Bethany

6. Ratification: affirmance of prior act done by another, whereby act is given effect as if done by an agent acting with actual authority, Restatement 3rd Agency, Sec. 401(1)

i) After A acts without authority of any kind, P can still be bound if P ratified the K

ii) Often will be an argument that there was agency, but if not, in the argue ratification in the alternative

iii) Requires showing acceptance of the results of the act with intent to ratify with ful


b) Parent company basically just made recommendations which franchise wasn’t bound to follow

iii) Because not enough day to day control by parent, franchise was an independent contractor, not EE which is what is needed for agency liability

a) If parent company only has control over the end product, not the means of achieving it, that’s classic IC relationship

iv) Note that a franchise is basically its own business model

a) Franchises have an independent operator but are closely tied to the business model of the parent company

15. Additional formulation of actual authority:

i) Agent has actual authority to take action designated or implied in the principal’s manifestations to the agent and acts necessary or incidental to achieving the principal’s objectives, as the agent reasonably understands the principal’s manifestations and objectives when the agent determines how to act—Restatement 3rd Agency 2.02(1)

16. Contractual disclaimers in agency:

i) If parties make an express denial that there’s principal/agent or master/servant relationship, will that be controlling?

a) NO: if franchise contract so regulates the activities of the franchisee as to vest the franchiser with control within the definition of agency, agency relationship arises even though the parties expressly deny itàsee disclaimer in Holiday Inn (not controlling)

17. Considerations in franchise agreements:

i) Consider if particular inclusion is necessary to protect and preserve the business

ii) Consider if inclusion affects control over franchise’s day to day operations

a) See if list of obligations entitles parent company to tell franchise HOW to conduct daily businessàif so, likely to be agency relationship

b) Consider if provision is really necessary to protect business’s goodwill or if are more concerned with tort liability

18. Scope of employment for agency purposes:

i) Restatement 3rd Agency 7.07 (1): EE is agent whose principal controls or has right to control manner and means of agent’s performance of work

a) Determinative question is whether course of conduct in which tort occurred is within the scope of e’ment—comment (c) to 7.07

b) Intentional torts and other intentional wrongdoing may be within the scope of e’ment

ii) 7.07(2): within scope of e’ment when performing work assigned by the ER OR engaging in course of conduct subject to ER’s control