Select Page

Business Associations
University of Iowa School of Law
Shill, Gregory H.

Business Associations Spring Outline 2018; Gregory Shill

Business Associations, 9th edition by Klein, Ramseyer, and Bainbridge


Introduction to Agency; Agency Defined; Liability of Principal to Third Parties in Contract (casebook pp. 1-12) Restatement (Third) of Agency §§ 1.01-1.03

“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 other principal’s control and the agent manifests assent or otherwise consents so to act.” §1.01
Three parts: (1) manifestation of consent by the principal that the agent act on the principal’s behalf; (2) subject to the principal’s control; (3) the agent manifests control.
Gorton v. Doty – plaintiff sues defendant as a principal of her agent, the driver, who drove her car and crashed, injuring plaintiff. Is there a principal-agent relationship between defendant and driver? Yes, “where one undertakes to transact some business or manage some affair for another by authority and on account of the latter, the relationship of principal and agent arises.”

Application: (1) defendant designated the driver to drive on her behalf; (2) defendant told driver that only he must drive; (3) driver consented by driving.
It is not necessary that there be a contract or compensation.
Defendant could have avoided liability by driving
Dissent: Request, instruction or command is necessary, not just passive permission. Defendant’s “instruction” to drive was just a precaution.

A. Gay Jenson Farms Co. v. Cargill, Inc. – defendant Cargill has a creditor-debtor relationship with defendant Warren, and Warren fails to satisfy its debt to plaintiffs.

Though creditor-debtor relationship is not automatically a principal-agent relationship, the creditor becomes a principal when it controls the debtor.
Cargill could perhaps have avoided incriminating evidence if it did not (1) assure farmers payment, (2) coerce Warren, (3) have power to veto.

Principal-Agent Problem: The principal is concerned that agent will not do what she herself would have done; the agent has preferences of her own.
“Phonebook” contract = no good (too expensive, time consuming)
Agency costs: expenditure costs (P) + bonding expenditures (A) + Residual Loss (shirking not prevented).

Types of Authority (casebook pp. 12-22)

Restatement (Third) of Agency §2.01-2.03; 2.06; 3.01-3.05; 6.01-6.03

Agent’s Authority

Mill Street Church of Christ v. Hogan – Plaintiff hired an agent to paint a building. Agent hired his brother for some help. His brother gets injured and files a claim for workers compensation from the church. Did the agent possess implied authority to hire his brother? Yes, in past situations, the agent hired his brother; necessity of an assistant; brother believed that the agent had implied authority.

Implied Authority – actual authority circumstantially proven which the principal actually intended to possess and includes such powers as are practically necessary to carry out the duties actually delegated.
Apparent Authority – occurs a third party reasonably believes the principal has authorized the agent to act on principal’s behalf.

POLICY REASONING ALERT! The reason why we have apparent authority and implied authority is so that the principal is aware of his responsibility to communicate to the agent. The principal is the least cost avoider.
Inherent Agency Power – indicate the power of an agent that is derived not from authority, apparent authority or estoppel, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent. (catchall)
Three-Seventy Leasing Corporations v. Ampex Corporation – an agent confirmed delivery of equipment on behalf of his principal though the principal never executed the relevant document. Did the agent have apparent authority? Yes, it was reasonable for someone to presume that one employed as a salesman has the authority to behind his employer to sell. Principal agreed to channel all communications through agent. Thus, third party reasonably believed.
Watteau v. Fenwick – Humble sold business to defendants who kept Humble as a manager, took out license in his name, and kept his name on the business. The defendant told Humble that he could not buy certain materials, but Humble did anyway and the plaintiff who sold the certain materials asks the defendants to pay. Is Watteau liable as an undisclosed principal when Humble acted outside of his actual authority, and Watteau later became disclosed?

Only when the act by the agent is within the scope of agency can someone sue the undisclosed principal, not when there has been excess of authority.

Ratification; Agency by Estoppel; Liability of Principals to Third Parties in Tort (casebook pp. 23-25; 25-26; 26-28; 31-38) §2.05

Botticello v. Stefanovicz – defendant sold house without realizing that his wife had part ownership, and defendant did not show that he represented to the plaintiff, his plaintiff’s attorney, or to his own attorney, that he was acting for his wife, as her agent. Was the defendant an agent of his wife just because they were married? No, marital status cannot in and of itself prove the agency relationship; neither does the fact the defendants owned the land jointly make them each other’s agent. Did the defendant’s wife ratify the agreement by accepting payments from the plaintiff?

There is evidence that the defendant never signed for his wife prior to this case, and thus weakens the plaintiff’s argument.
Ratification is defined as “the affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account.” Ratification requires “acceptance of the results of the act with an intent to ratify, and with full knowledge of all the material circumstances.
Before the receipt of benefits may constitute ratification, the other requisites for ratification must first be present.

Hoddeson v. Koos Bros. – Plaintiff went to buy furniture; the salesman pocketed her cash and told her that he would deliver the furniture on a later date. The furniture was never delivered. Is there an agency when the principal fails to do something that causes the third party to believe that there was authority in the agent? Yes, by estoppel.
Master-servant relationship – where the servant has agreed (a) to work on behalf of the master and (b) to be subject of the master’s control or right to control the “physical conduct” of the servant.
Independent contractors

(a) agent-type: the contractor works on behalf of the principal, but the principal cannot control the way the contractor performs.
(b) non-agent: one who operates independently and simply enters into arm’s length transactions with others.

Humble Oil & Refining Co. v. Martini – Love left her car at Humble’s gas station, but Love’s car ended up moving by the will of GOD and hit the plaintiffs. Plaintiffs sue, but Humble argues that Schneider, the independent contractor, was at fault and therefore Schneider should be at fault.

Just because the employees of an independent contractor do not regard the principal as the actual boss does not mean there is not a master-servant relationship.
As long as there is evidence that there is evidence indicating a master-servant relationship, a formal recognition is not needed.

Hoover v. Sun Oil Company – plaintiff received injury from employee of an independent contractor of Sun Oil Company. Like Humble Oil, but because there Sun Oil Company did not manage the day-to-day operation or influence the independent contractor, Sun had no liability.

Liability of Principal to Third Parties in Tort (cont.); Duties During and After Termination of Agency (casebook pp. 43-52; 69-72)

Miller v. McDonald’s Corp – The plaintiff goes to McDonald’s and bit into a sandwich with a diamond in it. McDonald argues that the real operator was the independent contractor and should be blamed despite McDonald giving a detailed instruction in many aspects of how the restaurant should be run. Is there an agency relationship even when a franchisor explicitly states that the franchisee is responsible for all obligations and liabilities, and when the franchisor has control over the franchisee’s daily operations? If the franchise agreement goes beyond the stage of setting standards, and allocates to the franchisor the

National Biscuit Company v. Stroud – Two partners, one partner said to plaintiff that it would not be responsible for any bread plaintiff gives them, but the other partner bought them and sold the bread.

In a general partnership, what either partner does with a third person is binding on the partnership.
Activities within the scope of the business should not be limited, save by the expressed will of the majority deciding a disputed question.

Summers v. Dooley – Two partners enter a trash business but one partner is unable to work, and hires an employee to work for him, but the other partner does not consent and will not give the employee funds from the partnership. The court states that under the circumstances, where benefit is incurred individually and not for the benefit of the partnership, it would be unfair to permit recovery.

In this case, one of the partners continually voiced objections to the hiring of the third man. He did not sit idly by and acquiesce.

(8) Management (cont.); Dissolution/Dissociation (casebook pg. 121-134)

Day v. Sidley & Austin – Plaintiff does not like the merger that made him no longer the sole chairman and made him relocate his office. He claims that these things were in violation of the merger. Plaintiff claims fraud! Plaintiff claims breach of fiduciary duty!

There can be no fraud because plaintiff was not deprived of any legal right as a result of his reliance on this statement. The Agreement had no detail on the status or office relocation. Agreement gave executive committee authority.
No breach of fiduciary duty because breach of fiduciary duty depends on partners who advantage themselves on expense of the firm. Basic fiduciary duties:

(1) a partner must account for any profit acquired in a manner injurious to interest of the partnership.
(2) a partner cannot without the consent of the other partners acquire for himself a partnership asset, nor may he divert to his own use a partnership opportunity.
(3) he must not compete with the partnership within the scope of the business

There is no duty to reveal information regarding changes in the internal structure of the firm. Especially when the concealment of which does not produce any profit for the offending partners nor any financial loss for the partnership as a whole.

Under UPA (1997), if a partner retires pursuant to an appropriate provision in the partnership agreement (and in various other situations), there is a “dissociation” §601 rather than a “dissolution” §602.
Owen v. Cohen – Plaintiff and defendant entered into a bowling business without a fixed period of time. Plaintiff advanced money, which was to be repaid out of the prospective profits. However, the defendant had lots of quarrels and did lots of questionable things.

Can court order dissolution where there are quarrels and disagreements of such a nature and to such extent that all confidence and cooperation between the parties has been destroyed or where one of the parties by his misbehavior materially hinders a proper conduct of the partnership business? Yes.
Courts of equity may order the dissolution of a partnership where there are quarrels and disagreements that the confidence and cooperation between the parties has been destroyed or where one of the parties by his misbehavior materially hinders a proper conduct of the partnership business.