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Business Associations/Corporations
University of Iowa School of Law
Stone, Ethan G.

General Intro
·         Theme of course – mechanisms of private governance
o   Governance – systems for making decisions
o   Comparison to contracts
§ Contract – agreements to decide exactly what to do in the future
§ This course – deciding how the parties will decide what to do when the time comes
o   Three forms of private governance
§ Agency
§ Partnership
§ Corporations
·         Forms of Business Organizations
o   Agency
§ When one person contracts to “work for” or “represent” another person
§ 2 decision making arrangements
·         When the boss is silent, your choice goes
·         When the boss is verbal, his choice goes
§ Termination ends decision-making system
o   Partnership
§ 2 or more working together, rather than one working for the other
o   Corporations
§ Unlike agencies and partnerships, not created by common law
§ Governance scheme created by statute
§ Formally seperates ownership from control
·         Assigns ownership and control to a fictional person (corp itself) created by state
·         So directors and officers can run business w/o having ownership in it
·         Shareholders can enjoy benefits of owning business w/o power to run it
·         Governance Contracts
o   Meaning of a Governance Arrangement
§ Governance
·         agreeing now on a system for deciding what to doin the future
§ Non-Governance Contracts
·         agreeing now on what you’ll do in the future
o   Elements of a Governance Arrangement
§ Who decides? (Authority)
·         Discretion
o   Governance means giving someone else power to make decisions for you without your direction or approval
·         Limits on Discretion
o   Discretion to govern is always limited. What kinds of decisions does the power cover?
·         Obedience
o   Can someone override the decision making power if it has not yet been exercised and direct the decision?
§ How to decide? (Fiduciary Duty)
·         General Idea
o   Assuming governing authority means agreeing to make decisions for another person. The duty to faithfully pursue that person’s interests in exercising governance authority is the fiduciary duty
·         Care
o   People make their own decisions carefully to avoid harm to themselves. Fiduciaries have a duty to exercise care to avoid harming the people they serve
·         Loyalty
o   People naturally consider their own interests when they make their own decisions. Fiduciaries have a duty to consider the interests of the people they serve as if those were the fiduciaries own interests

RST § 1. Agency. Agency is the fiduciary relation which results from the manifestations of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other to so act.
i.      §1 Agency; Principal; Agent – page 4
ii.      §14 Control by principal – page 4
1.      Principle controls agent
iii.      §15 Manifestations of consent / Creation of agency – page 4
1.      Agency relationship only exists if there has been manifestation of consent by principal  to agent that the agent may act on his accoundt
2.      And
3.      Agent must consent too
Termination of Agency: Agency exists only so long as mutual consent continues (RST § 118);
§118 Termination of agency – page 5
i.      Principle or agent manifests to the other dissent
ii.      Principal – power to REVOKE
iii.      Agent – power to RENOUNCE
iv.      Comment b
1.      Statement in contract that authority can’t be terminated by either party is effective only to create liability for wrongful termination
2.      if termination of agency constitutes a breach of K, agency is STILL terminated but terminating party may owe K damages.
General Agency Duties: Two-Tier Governance Structure:
1. Authority:  If the principal doesn’t want to intervene, the agent’s authorized decisions are binding between the principal and agent.
i.      Duty to act only as authorized by the principal (RST § 383)
1.      except when an agent is privileged to protect his own or another’s interest.
2.      An Agent is subject to a duty to principal not to act in principals affairs except in accordance w/ principals manifestation of consent
2. Obedience:  If the principal wants to intervene, the principal’s decisions are binding between the principal and agent.
i.      Duty to obey all reasonable directions of the principle (RST § 385)
1.      Agent has discretionary authority only if the principal leaves the decision to the agent
2.      Reasonability:  Compatible with what the agent signed on to do in general.  Reasonability puts an objective limit on the agent’s duty to obey (courts decide what’s reasonable, not principals or agents).
a.      What is “reasonable” principal order?
i.      Compatible with the agency; as long as it is compatible then the principals decision governs
ii.      Reilly v. Polychrome Corp.
1.      1) An agent has relative authority/discretion to decide ( to come into work or stay home or not) in this type of situation when the principal is Absent or Silent, BUT this is irrelevant b/c the principal spoke..
a.       1. there was an express provision in the contract  that stated he had to come in at certain times
b.      and
c.       2.his superior 3 t imes demanded he come in at these times….and “generally accepted business customs” do not rise above OBEDIENCE DEMANDED IN A CONTRACT
2.      was the demand reasonable? – “compatible w/ the agency”
a.       here it was reasonable b/c it was a year end closing and although possibly not necessary for reily to come in, it was certainly reasonable for it to be asked of him, especially considering the circumstances (asked three times)

AGENCY:           ACTUAL            APPARENT                  INHERENT        AUTHORITY
Authority of Agent to Bind Principal: Authority is the power of the agent to affect the legal relations of the principal by acts done in accordance with the principal’s manifestations of consent to him. (RST § 7)
i.      scope of discretion to act on behalf of the principal without direct supervision
1.       if there is some type of authority, the agent will not be liable to principal for bad results
Actual Authority: Principal manifests consent directly to agent; if actual authority exists principal is bound by agent’s authorized actions even if the party with whom the agent deals is unaware that the agent has actual authority or it would be unusual for agent to have such authority. Can be (1)express or (2)implied.
express (express statements/directions from principal to agent)
implied –  because it is hard to define actions in every situation, agents often have a lot of Implied authority
i.      Makousky, Inc. v. Stern
1.      IMPLIED AUTHORITY – Principals are responsible for acts of their agents that are a standard practice
2.      Hiring a broker in a real estate transaction is fairly standard practice, so you are bound
Objective test – how a reasonable person would interpret the principal’s words and actions….would a reasonable person (agent) think the principal gave them authority?
Apparent Authority: Arises when agent is without actual authority, but principal manifests consent directly to third party who is dealing with the agent that the agent has authority to perform the act. Third party MUST KNOW he is dealing with agent. (RST § 8).
Agent’s actions alone are NEVER relevant, no matter howconvincing – MUST be action of the principal
Makins v. District of Columbia – FACTORS to consider (NOT sure where I got these….)
1.      1) actual authority of the agent
a.       In this case, just the authority to go to the conference and negotiate (not settle)
2.      2) usual or normal conduct of the agent in the performance of his or her duties,
3.      3) previous dealings between the agent and the party asserting apparent authority
4.      4) declarations or representations allegedly made by the agent
5.      5) customary practice of other agent’s similarly situated
ii.      The key is in
1.       1) What the Principal ( Makins) does herself in front of third party
a.       Makins, herself never gave indication to DC that she had given her attorney power to settle
2.       2) what the Third Party (DC) perceives
a.       so DC never perceived anything from Makins that them believe she had given authority
iii.      Makins had only given her attorney “actual authority” to attend the conference and negotiate…NOT settle
1.       . Restatement of law: in absence of contrary agreement, lawyers can generally negotiate, but not end a settlement/dispute
a.       This is reserved to the client
2.       Burden is on third party to realize the agent might not have the power to settle
Inherent Authority (Not apparent authority b/c it this is indirect implication ofauthirtyt): Gap filling device used by courts that is implied from the agency relationship. (RST § 8A).
if the principal puts the agent in a certain position (clerk is at front of store), the principal should expect that third parties will presume a certain amount of authority
i.      Third parties can reasonably rely on actionsby the principal that are only indirectlyaimed at conveying the agent’s authority to them

Liability for Action in Scope
Type of Authority
Manifestation of Principal’s Consent for the agents to act on their behalf
Third Party Knowledge of Agency
Agent to Principal
Principal to Third Party


Express to Agent



Implied to Agent
Express/Implied to Third Party
Possible (if didn’t grant agent specific or implied authority, may be liab

   Even if he honestly wanted the best for both companies, this is a per se breach of fiduciary duty – 390 or 392
ii.      But his principal knew….392….so?
1.       Disclosure (fair dealing)He could say that he disclosed that he was dealing with the “other team”
2.       Fairness (fair dealing / fair price)=He could have the affirmative defense that his principal gave him consent to do what he wanted: Refusing to vote (he sat on the board) does not nullify the influence and predominance he exerted without a vote (he still crafted the contracts to his own benefit and his companies detriment)
3.       Fair Price (harder to get) -could say this is same price a completely neutral person would have gotten as well
All of these must outweigh the “conflict” that the principal has a prima facie case establishing
Competing w/ Principal: a duty not to compete with principal concerning subject matter of agency. (RST § 393).
Acting for One with Competing Interests: cannot act for someone who has competing interests of principal. (RST § 394).

REMEDIES FOR ABOVE BREACHES………Property of the Principal and Profits of the Agency –
Profits:Profits resulting from the agency belong to the principal unless otherwise agreed. (RST § 388).
i.       Unlike 403 below…where the profits result from violation of duty of loyalty
Loss Caused:§401 – liability for loss caused – agent is liable for losses caused
1.       Comment a.Can be if agent just screws up (duty of care) – liability for Chattels OR Breach of Duty
2.       Comment e. Or for violating direct orders ….if it causes a loss a loss, agent is liable for loss if that loss was within the risk of the action he took, even if the risk was less than the risk of following the principals orders
Accounting for profits received: Remedy for breach of duty of loyalty is not only damages suffered but also profits taken (or conferred to others). (RST § 403). §403 – liability for things received in violation of duty of loyalty
i.      If a you breach duty of loyalty and recover profits as agent by virtue of that breach, you better pony up the profits you made by virtue of the breach
ii.      Comment C) if you spend money to effectuate the breach, your expenses are not deducted. You still owe the full amount that you profited
iii.      Burg v. Miniature Precision Components, Inc.– Steps to Proving entitlement to remedy
1.       1. Prove fault of defendant, 2. Prove that P lost something, 3. Prove that the defendant was “fat” – got something b/c of P’s loss Or that the Defendant fattened someone else that should not have gotten fat
2.       So these profits that he made himself, or that he made wrongfully for someone else, should all go to the plaintiff…(less his costs that he can prove)
Forfeiture of Contractual Compensation (salary): Not an automatic remedy for disloyalty. A disloyal agent can still provide compensable services. The principal must show that the disloyalty affected the agent’s right to be compensated at all.Might have to give up your salary if you weren’t actually working for the company you were supposed to be working for
i.      Burg v. Miniature Precision Components, Inc.If your payment of salary to the person ended up just being unjust enrichment – they took the money , didn’t do their job, and run -Then you must pay back your salary
1.       Burg did not have to forfeit his salary b/c there was not unjust enrichment from the salary
a.       Although there was a breach of fiduciary duty….
b.       he still actually did his work/job for them, even though he sought profit for himself in a couple days
i.      They tried to prove that he didn’t show up to key things…but there was enough contrary evidence that he did do a job for them, even if he was duplicitous in a couple of the deals
1.       If it would have been all the deals, we maybe have a different story