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Business Associations
University of Iowa School of Law
Yockey, Joseph W.

Business Associations
Professor Yockey
Fall 2010
1.      Introduction
a.       Basic elements of a business association
                                                               i.      Risk of loss – what happens if the firm fails?
                                                             ii.      Return – what do I stand to gain?
                                                           iii.      Control – who is in charge?
                                                           iv.      Duration – how long does the association last?
b.      How the elements get sorted:
                                                               i.      Government regulation
                                                             ii.      Private Contract
c.       Choosing a business association
                                                               i.      Transaction costs – the costs associated with doing a deal; the economic equivalent of friction
                                                             ii.      Agency costs – costs associated with an agent does something in his or her own self interest to the detriment of the principal
1.      Ie: shirking – not doing your best, stealing time
d.      A lawyer’s role in a business association
                                                               i.      Transaction cost engineers
1.      Regulatory arbitrage
2.      Private ordering
                                                             ii.      Role of the state in a business association
                                                           iii.      Provides standard forms of business associations and default rules of internal governance
1.      This is the “implied hypothetical bargain”
2.      When the client doesn’t like this, a lawyer is important
a.       The lawyer, as the “tailor”  
b.      The law gives us a set of rules that we the lawyers want to conform as best as possible to the client’s needs
2.      Agency
a.       What is agency?
                                                               i.      Agency is a relationship that results from:
1.      The manifestation of consent from P to A that A shall act
a.       On P’s behalf
b.      Subject to P’s control
2.      A’s consent to so act
b.      The PAT triangle
                                                               i.      There is an agency relationship between P & A
                                                             ii.      A deals with T, the third party
                                                           iii.      Creates legal liability between P and t.
c.       Restatement §101: The test for agency relationship
                                                               i.      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, and the agent manifests assent or otherwise consents so to act.
d.      Creating an agency relationship
                                                               i.      Doty :
1.      Teacher offered the car
2.      She set a condition precedent, by requesting the coach drive
a.       Eliminating this condition precedent may have eliminated the agency relationship here.
3.      Coach manifested his consent by agreeing to the terms and driving the car.
4.      There is a presumption that a driver is the agent of the owner of a car
a.       Underlying policy objective:  car owners should insure their cars.
                                                             ii.      Can create an agency relationship through a contract
1.      Can disclaim liability too through a contract, however, a court may look beyond the four corners of the document to see what the relationship looks like, parties can’t dictate to a court what the relationship is.
                                                           iii.      Setting a condition precedent and having that condition carried out are hallmarks of an agency relationship.
                                                           iv.      Control is also important.
1.      Cargill: Warren was giving Cargill 90% of their grain, Cargill was interfering in Warren’s operations, Warren’s consent existing b/c it never resisted
2.      Cargill’s consent existed in directing Warren’s operations which were financed by Cargill
3.      Under Cargill’s control:
a.       Looked to restatement §14 0: Creditor becomes a principal at that point at which it assumes de facto control over the conduct of the debtor
b.      Ct looked to several factors in making its determinations:
                                                                                                                                       i.      Cargill’s constant recommendations to Warren by phone
                                                                                                                                     ii.      Cargill’s right of first refusal on grain
                                                                                                                                   iii.      Warner’s inability to enter into mortgages, purchase stock, or pay dividends without Cargill’s approval
                                                                                                                                   iv.      Cargill’s right of entry onto Warren’s premises to carry on checks and audits
                                                                                                                                     v.      Cargill’s correspondence and criticism regarding Warren’s finances, officers salaries and inventory
                                                                                                                                   vi.      Provision of drafts and forms to Warran upon which Cargill’s name was imprinted
                                                                                                                                 vii.      Cargill’s power to discontinue the financing of Warren’s operations
1.      Many of these elements were traditional debtor-creditor relationship elements, but many others indicated much stronger control of Warren by Cargill.
4.      How could Cargill avoid liability?
a.       Act more like a bank and avoid some of the agency behaviors
b.      Use veto power rather than affirmatively telling the other company what to do
                                                                                                                                       i.      Affirmative authority – this is agency, you are able to tell the agent what to do
                                                                                                                                     ii.      Negative authority – associated w/ creditor relationship, veto the debtor’s actions.   
c.       Charge more money to insulate itself
5.      Some places are willing to make this risk. For example, McDonalds which values consistency with the control, and so becomes a principal.
e.      Liability of Principals to Third Parties in Contract
                                                               i.      This focuses on the consequences:  whether P is bound by a K?
1.      In order for this to be true, the A must be acting w/ authority in order to be bound.
                                                             ii.      There are different kinds of authority because the burden of proving the agency relationship rests with the 3rd party in order to hold principal liable. 
1.      Save money; no lengthy contracts.
2.      Fairness to the 3rd party.
                                                           iii.      Actual v. Apparent Authority
1.      The important factor here is who is communicating with whom.  There are not different legal consequences based on the type of authority.
a.       Actual Authority
                                                                                                                                       i.      Express – P says to A “do X”, it is a clear command to do something.  Once A does it, P is bound
                                                                                                                                     ii.      Implied – A does something to comply w/ P’s express authority.  “Includes such powers as are reasonably necessary to carry out the duties actually delegated”
1.      Ex:  A is told to sell a house, hires a notary to do it.
2.      The Church case, where contractor hired his brother.  Implied actual authority was found.
3.      Can be proven through:
a.       Past or present conduct of the principal
b.      Nature of the task at issue
                          

                v.      Whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work;
                                                                                                                                   vi.      The length of time for which the person is employed;
                                                                                                                                 vii.      The method of payment, whether by the time or by the job;
                                                                                                                               viii.      Whether or not the work is a part of the regular business of the employer;
                                                                                                                                   ix.      Whether or not the parties believe they are creating the relation of master and servant; and
                                                                                                                                     x.      Whether the principal is or is not in business.
d.      Under pinning all of the above is risk allocation:  are they exercising the kind of control we expect with this kind of risk?
3.     Scope of the employment
a.      Was the conduct of the same general nature as, or incident to, that which the servant was employed to perform?
                                                                                                                                       i.      Factors to consider under Restatement §229:
1.      whether or not the act is one commonly done by such servants;
2.      the time, place and purpose of the act;
3.      the previous relations between the master and the servant;
4.      the extent to which the business of the master is apportioned between different servants;
5.      whether or not the act is outside the enterprise of the master or, if within the enterprise, has not been entrusted to any servant;
6.      whether or not the master has reason to expect that such an act will be done;
7.      the similarity in quality of the act done to the act authorized;
8.      whether or not the instrumentality by which the harm is done has been furnished by the master to the servant;
9.      the extent of departure from the normal method of accomplishing an authorized result; and
10.   whether or not the act is seriously criminal.
                                                                                                                                     ii.      Whether the conduct was substantially removed from the authorized time and space limits of the employment?
1.       Frolic v. Detour
                                                                                                                                   iii.      Whether the conduct was motivated, at least in part, by a purpose to serve the master.
                                                                                                                                   iv.      Ex:  drunken sailor case.
1.      The damage to the dry dock was foreseeable, but not burning down a bar. 
2.      The court holds gov’t liable:  we know sailors are drinkers and they were living on the boat. 
3.      New rule:  The question is no longer whether they act with purpose of serving the master.
a.       Is some harm foreseeable, even if its not this particular harm?
b.      The conduct must relate to employment, rather than domestic life.