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Business Associations
University of Illinois School of Law
Hurt, A. Christine

Business Associations Outline
–         3 characters in law of agency: 1) principal 2) agent 3) third-party
–         Theory of the Firm – when you separate ownership from control it leads to agency losses (ex. lemonade stand hires a worker)
–         Rule, restatement definition of Agency relationship:
o       1) Manifestation of consent by P1(principal)
§        Test for manifestation of consent: what would a reasonable person think when looking at the actions of the principal?
·        Note: does not matter what principal thought, just what she said or did.
o       2) That P2(agent), act on behalf of P1
o       3) Under P1’s control
§        Rule: principal need not control every detail, just needs to control the overall goals of the relationship.
o       4) and P2 accepts the manifestation of consent.
–         4 consequences of agency relationship
o       1) Agent can bind principal in contract
o       2) in some cases torts of agent imputed to principal
o       3) information/knowledge of agent is imputed to principal
o       4) parties owe fiduciary duties to one another
–         Fiduciary Duties owed in agency relationship
o       Duty of loyalty\
o       Duty of care
o       Duty of good conduct
o       Performance of contract obligations
o       Basile v. H&R Block:
§        Facts: H&R had a Rapid Refunds program whereby its customers could get early tax refund. The ‘early refund’ was actually a loan from Mellon Bank. H&R did not tell customers that it received payment from Mellon for the program or that it shared profits w/ Mellon. Was H&R the customer’s agent and thus does it owe fiduciary duty by failing to reveal true nature of the Rapid Rewards program?
§        Holding: No, there was no agency relationship b/c the customers did not cede control to H&R. H&R did not have ability to bind customers to Rapid Refunds agreements.
§        Dissent: there was an agency relationship b/c H & R sold itself as an agency that customers could trust.
–         Employer/Employee
o       Rule: there is always an agency relationship b/w employers and employees
o       Food Lion v. ABC (duty owed by employee): ABC reporters posed under cover as Food Lion employees to get information about unsafe meat handling practices. Reporters took undercover video while working there. Did reporters breach duty of loyalty?
§        Holding: Yes, ABC breached duty of loyalty b/c they had intention to act against the interest of Food Lion for the interest of their primary employer, ABC. i.e. breached duty of loyalty b/c they had interest adverse to the interest of their employer
§        Rule, Duty of Loyalty: 3 ways to breach duty of loyalty 1) Compete (w/ your employer) 2) Stealing – misappropriate funds or business opportunity 3) Breach in Confidences – making public or sharing private information you learned as an agent.
o       Note: Fiduciary duties are common law duties owed to employer. All of these duties cease to exist once employment is over. This is why people often sign confidentiality or non-compete agreements when leaving a job.
–         Agency Loss: the loss that a principle sustains when an agent acts for it, or for mistakes made by the agent.
–         AUTHORITY
o       Actual Authority: includes a manifestation by principal to give authority, followed by a reasonable interpretation of this manifestation by the agent.
§        Note: consent can be express or implied
o       Apparent Authority
§        2 situations
·         Agent has some actual authority, but exceeds that authority
·        Agent never had actual authority
§        Rule: there must be some sort of objective manifestation by the principal.
§        Rule: 2 key factors in finding apparent authority
·        1) manifestation must emanate from the principal and must be received by the 3rd person
·        2) scope of the agents apparent authority depends on the 3d person’s reasonable interpretation of that manifestation.
·        Note: in minority jurisdictions the 3d party has to have relied on or changed position in reliance on the apparent authority for P to be held liable.
§        Policy: 1) principals benefit through the agency. It behooves the GAP, FedEx etc. for us to believe people wearing nametags or uniforms work for them – otherwise we would second guess all agents and it would “slow down the wheels of commercePurpose of Apparent Authority: For the benefit of the 3d party. Principal should have chosen a better agent, don’t want the burden to fall on an innocent 3d party. 2) Principals have responsibility of hiring and training agents well. We expect principals to monitor agents.
§        Bethany Pharmical v. QVC: Bethany entered contest to have its product featured on QVC for its 50 products from 50 states series. Janis, employee of IL dept. of Commerce, was helping QVC. She sent letters to all those winners who had been selected and those who were selected as alternates. P was selected as backup, but claims it never received the post-it Janis attached to the letter saying it was backup. Thus P says it relied on being on QVC.
·        Holding: No, Janis was not an agent of QVC, Bethany could not have reasonably believed that Janis was QVC’s agent.
·        Rule: IL law of agency: 1)principal consents to or knowingly acquiesces in the agents conduct 2)3d party has reasonable belief that the agent possesses authority to act on principal’s behalf  3) 3d party relied to his detriment on the agents apparent authority.
·        Note: in this case QVC specifically said Janis could only contact people after they were selected, QVC consistently told participants the only binding contract was through a purchase order i.e. QVC made particular safeguards against apparent authority and court must honor that.
o       Implied Authority: Within actual authority there is the implied authority to do what is necessary to bring the actual authority forward.
o       Castillo v. Case Farms: D contracted with an agency, ATC, to help it find temporary workers on its farm. ATC found and hired migrant workers for the job. The workers claim that the transportation and living conditions provided by ATC were not as promised. Can D be held liable for the actions of ATC?
§        Holding: Yes, D is liable b/c it gave express authority to ATC to find and hire workers and w/in there was implied authority to do all that was necessary to exercise that authority. Though D 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.
o       Note: principals should try to protect themselves from agents exceeding their authority.
o       Note: if agents do exceed their authority, 3d party may sue P, but P may then have recourse against agent.
–         Tort Liability
o       Respondeat Superior: Principle by which employers are responsible for the torts committed by their employees w/in the scope of employment. i.e. employers have vicarious liability where an innocent party is responsible for the actions of others.
§        Note: respondeat sup

here need not be any official filing to start a partnership i.e. it can start by default. May also start a partnership w/ an official filing.
§        Note: if default partnership (no partnership agreement) state laws will govern the partnership.
§        Rule: under UPA and RUPA it is a default rule that if two or more people have agreed to share profits a partnership has been created.
§        (default partnership) Holmes v. Lerner: Two friends decided to go into nail polish business. D said “we’re gonna work on this, its gonna be our baby.” Both discussed building it and then selling it for a profit. Eventually, things went sour, P was offered very small ownership interest and D tried to drive her out.
·        Holding: Yes a partnership was formed at kitchen table when they discussed starting the business. 
·        Rule: An express agreement to divide profits is not necessary for the existence of a partnership, there was an implicit understanding that they would share in profits and losses.
o       Statutory governance of Partnerships: each state has statute governing partnerships, partners can choose the state’s statute they want their partnership to be governed under, modeled after one of 2 models:
§        UPA: some sections support idea that partnerships are separate legal entity, others that they are just an aggregation of partners.
§        RUPA: adopted the entity theory of partnerships
·        Note: did away w/ rule that departure of a partner causes dissolution
·        Note: provides for merger or conversion of partnership into an LP.
o       Ownership Interest – amount each partner puts into the partnership
o       Unlimited Personal Liability: where does money come from when someone sues partnership?
§        1) First assets of entity are exhausted
§        2) Next partners will be held liable
·        RUPA (pro-partner) rule: each partner is liable for her share
·        UPA – may be able to go after one partner, and that partner can then recover from the other partners.
o       Dissolution of partnerships
§        3 types
·        1) Partnership at will: ends when someone looses there ‘will’ i.e. dies or wants to leave.
·        2) Partnership for a term: partnership agreement spells out end date for the partnership.
·        3) Partnership for a particular undertaking (joint venture): partnership ends when the undertaking is over.
o       Management: all partners have equal rights of management unless otherwise stated.
§        Rules
·        If there is a disagreement, majority rules
·        Need unanimous agreement for amendments to the partnership agreement or any extraordinary transactions
·        If it is a 2 person partnership and 1 partner makes a contract w/ a 3d party in opposition to the other partner that contract is not valid.
First American Title v. Lawson: D’s were partners in a