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Business Associations
University of Illinois School of Law
Winship, Verity

BUSINESS ASSOCIATIONS

WINSHIP

SPRING 2014

1. BUSINESS ENTITIES (NON-CORPORATE)

1. Basic Agency Principles

a. Who is an agent?

& Restatement (Second) of Agency § 1:

Agency is a relationship that results from:

(1) manifestation of consent by Principal to Agent that A shall act:

(a) on P’s behalf; and

(b) subject to P’s control; and

(2) A’s consent to act

Z Gorton v. Doty: Doty made the coach’s driving the car a condition precedent to its use, therefore it’s implied that the coach is Doty’s agent.

b. Liability of Principal to Third Parties in Contract

Issue: whether the principal is bound by the agent’s actions

& Restatement (Second) of Agency § 144:

A principal is subject to liability upon contracts made by an agent acting within his authority if made in proper form and with understanding that the principal is a party.

& Restatement (Third) of Agency § 2.02(1):

An 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 decides how to act.

& Restatement (Third) of Agency § 3.01

Actual authority “is created by a principal’s manifestation to an agent that, as reasonably understood by the agent, expresses the principal’s assent that the agent take action on the principal’s behalf.”

& Restatement (Third) of Agency § 2.03

Apparent authority is the power held by an agent or other actor to affect a principal’s legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal and that the belief is traceable to the principals’ manifestations.

& Restatement (Third) of Agency § 4.01(1):

Ratification is the affirmance of a prior act done by another, whereby the act is given effect as if done by an agent acting with actual authority. à After A acts without authority of any kind, P can still be bound if she ratifies the K.

F An agent has the ability to bind a principal to an agreement, providing that agent has some form of authority:

ü Actual authority (both express and implied)

ü Apparent authority

ü Ratification

ü Estoppel

F Ratification requires:

ü Acceptance of the results of the act with an intent to ratify, and with full knowledge of all the material circumstances

ü The affirmative can be express or implied

ü But P must know or have reason to know all material facts.

F Estoppel:

ü P creates, through intentional or negligent words, acts, or omissions, an appearance of authority in the purported agent

ü The 3d party reasonably and in good faith acts in reliance on such appearance of authority; and

ü The 3d party changes her position in reliance upon the appearance of authority.

F Agency’s liability:

ü Depends on whether P is disclosed

ü If P is disclosed and the 3d party knows they are interacting with the P, then no agency liability on the contract, except that

o Clear intent of all parties that agent be bound

o Agent was without authority to enter into the contract and A was a party to the contract

ü If P is partially disclosed or undisclosed and the 3d party thinks agent is P, then

o Agent is treated as a party to the contract

o If A wants to avoid liability, A must reveal that

§ He is acting on behalf of P and

§ The identity of P.

o 3d party has no obligation to ask.

Z Castillo v. Case Farms of Ohio: 1) A P may be held liable for the acts of its purported agent based on an actual agency relationship created by the principal’s express or implied delegation of authority to the agent. 2) Evidence of authority: ATC was expressly authorized to recruit workers.

Z Bethany Pharmarcal v. QVC: 1) what the principal has expressed to the third party through the agency; 2) no reasonable person would have thought that Janis had the authority to enter into the contract.

c. Liability of Principal to Third Parties in Tort

& Restatement (3d) of Agency §7.07

An employer is subject to vicarious liability for a tort committed by its employee acting within the scope of employment.

& Restatement (3d) of Agency § 7.07(2)

An employee’s acts within the scope of employment when performing work assigned by the employer or engaging in a course of conduct subject to employer’s control

An employee’s act is not within the scope of employment when it occurs within an independent course of conduct not intended by the employee to serve any purpose of the employer.

Comment c: the determinative question is whether the course of conduct in which the tort occurred is within the scope of employment; intentional torts and other intentional wrongdoing may be within the scope of employment.

& Restatement (3d) of Agency §3(a)

An employee is an agent whose principal controls or has the right to control the manner and means of the agent’s performance of work…

Employee

Independent Contractor

AKA servant

A person who agrees to carry out some task but is not subject to the P’s control in doing so

An agent performing services in the master’s affairs whose physical conduct is controlled or is subject to the right of control by the master

P sets forth the desired result but not have the right to tell the A how to achieve that result.

*Control over the means and the manner

*Just care about the result

Non-agent IC: operates independently and simply enters into arm’s length transactions with others;

Agent IC: agreed to act on behalf of the P, but not subject to P’s control over physical conduct.

Z Humble Oil: Franchisor is liable because he has the power to control the details of the station work. Fact specific

Z Sun Oil: Franchisor is not liable. Fact specific.

Z Holiday Inns: No M/S relationship. D has on control over the details of operation.

: Drafting a franchise agreement

o Avoid specific control over specific matters.

o Contractual Disclaimer: this agreement does not create the relationship of principal and agent btw the Franchisee and Franchisor. Franchisee is an independent contractor.

§ The disclaimer does not control, see Holiday Inns.

§ If a franchise contract so regulates the activities of the franchisee as to vest the franchiser with control within the definition agency, the agency relationship arises even though the parties expressly denied it.

o No holding out: except as expressly permitted under this Agreement for certain rights of Franchisor, neither the Franchisee nor Franchisor will under any circumstances, act or hold itself out as an agent or representative of the other, nor incur any liability or create any obligation whatsoever in the name of the

Prepayment of indebtedness

Amendments to Material agreements

Changes in fiscal periods

Changes in line of business

Negative pledge clauses

Payments by subsidiaries

Becoming a general partner

Speculative transactions

Changes to holding company status

c. The Fiduciary Obligations of Partners

& Restatement (3d) of Agency §8.01 General Fiduciary Principal

An agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship.

& Restatement (3d) of Agency §8.02

An agent has a duty not to acquire a material benefit from a third party … through the agent’s use of the agent’s position

& Restatement (3d) of Agency § 8.04

An agent has a duty to refrain from competing with the principal … or assisting the principal’s competitors.

& RUPA §404(b)(1):

A partner’s duty of loyalty to the partnership and the other partners is limited to the following:

To account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity.

F What relationships trigger fiduciary duties?

à Agents to principals

à Partners to other partners and the partnership

à UPA(1997) §404

F What is the content of these duties?

o Duty of loyalty: the obligation of each partner

§ To account to the partnership for profits, property or benefits from the conduct of partnership business or the use of partnership property

§ To refrain from acting as or on behalf of a party with an adverse interest to the partnership

§ To refrain from competing with the partnership in the subject matter of the partnership business

§ To perform all duties to the partnership and the other partners, consistent with the obligation of good faith and fair dealing.

o Partnership opportunities: duty to not take opportunities which belong to the partnership, for their personal benefit.

§ What’s the nature of the opportunity?

· Information about the potential to profit in an enterprise outside of the scope of the partnership business à disclosure is sufficient

· if falls within the scope of the partnership business, then disclosure is probably NOT enough.

o FIRST, disclose the business opportunity to the other partners

o SECOND, decide whether or not to act on behalf of the partnership and take the opportunity.

o Duty of care: the standard by which a partner must evaluate and make partnership decisions.