Forms of Business Organizations
· Sole Proprietorships (19.7 million)
· Partnerships (2.3 million)
o General Partnerships
o Limited Partnerships
· Corporations (5.4 million)
Considerations in a Business Relationship
Rules of Business Law
· Default rules (majority) can be contracted around
· Mandatory rules must be followed
· Effects of contracting are default rules
o Encourages socially desirable outcomes
o Avoids difficult situations ex ante
o Form vs. substance
· What are the business or social reasons for the court’s ruling?
o Court aims to create certain behavioral results
What is an Agency Relationship?
· Agency is the fiduciary relationship that arises when one person (a principal) manifests assent to another person (an agent) that the agent shall act on the principal’s behalf and subject to the principal’s control, an the agent manifests assent or otherwise consents so to act. Restatement (Third) § 1.01.
· Parties’ labeling and popular usage do not control. Restatement (Third) § 1.02.
· Types of Principals
o Disclosed principal: A principal is disclosed if, when an agent and a third party interact, the third party has notice that the agent is acting for a principal and has notice of the principal’s identity.
o Undisclosed principal: A principal is undisclosed if, when an agent and a third party interact, the third party has no notice that the agent is acting for a principal.
o Unidentified principal: A principal is unidentified if, when an agent and a third party interact, the third party has notice that the agent is acting for a principal but does not have notice of the principal’s identity.
Gorton v. Doty
· Facts: Doty, teacher, volunteered her car for use in transporting football players to game, but under the condition that Garst, football coach, drive the car. An accident occurred and Gorton was injured. Gorton sues Doty under the theory that Garst was an agent of Doty while and in driving her car. If agency relationship is proven, as principal, Doty would be liable for the actions of her agent, Garst.
· Holding: agency relationship existed between Doty and Garst.
o Relationship of principal and agent does not necessarily involve some matter of business, but arises where one undertakes to transact some business or manage some affair for another by authority and on account of the principal.
o Not essential that there be a contract (oral or written agreement) between principal and agent or that the agent promise to act as such.
o Manifestation of consent: Doty volunteered the use of her car upon the express condition that Garst should drive it.
· A shall act on P’s behalf: Garst should act on Doty’s behalf, in driving her car to and from the football game.
· Subject to P’s control: express condition that Garst should drive Doty’s car.
o A’s consent to so act: Garst’s act in driving the car.
· Avoid imposing any control
· Not helpful: express statement that one is not the agent
Gay Jenson Farms Co. v. Cargill, Inc.
· Facts: Farmers sold their grain crops to Warren, a local firm that operated a grain elevator. Warren bought grain for Cargill, a worldwide dealer in grain, and received loans from Cargill after experiencing financial difficulties. Warren became insolvent without having paid the farmers for their grain and they sued Cargill. Cargill argued that its relationship with Warren was purely contractual. In contrast, the farmers argued that the web of contracts between Cargill and Warren had become so strong that their relationship had evolved into an agency relationship.
· Holding: agency relationship did exist due to Cargill’s influence and control over Warren.
o Manifestation of consent: Cargill financed Warren’s operations and made Warren’s business decisions
with person assigned to job title)
· Actual authority ends when relationship terminated, but apparent authority ends when the 3rd party receives notice of the termination of the relationship
· Undisclosed principal: An undisclosed principal is subject to liability to a third party who is justifiably induced to make a detrimental change in position by an agent acting on the principal’s behalf and without actual authority if the principal, having notice of the agent’s conduct and that it might induce others to change their positions, did not take reasonable steps to notify them of the facts.
o Undisclosed principal: when the third party believes that agent is the last person in the chain; does not apply where the principal’s existence is disclosed but not identified.
o Undisclosed P may not rely on instructions given to A that reduce A’s authority to less than the authority that T would reasonably believe A to have under the same circumstances if P had been disclosed.
o If the principal is disclosed, apparent authority encompasses customary actions.
The scope of the agent’s authority is:
All the acts which are within the authority usually confided to an agent of that character. Watteau
Transactions usual in such business
· Do the legal consequences of an agent’s acts depend on the type of authority the agent possessed?
o NO, authority is authority.
o The ultimate result is the same, but proving authority requires the particular facts to prove the specific type of authority alleged.