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Business Associations/Corporations
University of Kansas School of Law
Hecker Jr., Edwin W.

I. AGENCY

GENERALLYR3d §1.01

a. Principle/agent. (1) Fiduciary relationship between two people; (2) that requires mutual assent or consent (either party can terminate at anytime despite contrary contract); (3) in which one person (agent) acts on behalf of another person (principal); and (4) is subject to the principal’s right of control.

PRINCIPAL’S RELATIONS WITH THIRD PARTIES

In Tort.

i. Tortfeasor’s liability. Tortfeasor always is liable for tortious conduct.
ii. Vicarious liability / respondeat superior. Employer is liable for employee’s tortious conduct if: R2d § 219, R3d § 2.04
1. Employment relationship. Employment relationship must be “Principal/Agent.”
a. Principal/Agent. A Principal is a principal who has the right to control the physical conduct of the other. R3d § 1.01 An Agent is an agent whose physical conduct is controlled or subject to the right to control by the Principal. R3d § 1.01.
b. Independent contractor. A person who contracts to do something for another but is not subject to the other’s right to control of his physical conduct. May or may not be an agent. R2d § 2(3); R3d § 1.02.
i. Factors. Crucial factor is whether principal has right to control physical activity. Other considerations to determine P/A or IC include: extent of control Principal may exercise over details of work, length of time for which person is employed, method of payment (by time or job), etc. R2d § 220.
ii. Non-liability. A principal or contractee is not liable for physical harm caused by an IC unless the principal/contractee was under a duty of due care. R2d § 250.
2. Scope of employment. Tortious conduct occurred within the scope of employment. Factors to consider: R2d § 228, R3d §7.07
a. Is the conduct of the kind the Agent is employed to perform? R2d § 229
b. Did it occur substantially within the authorized time and space limits?
i. Commuting is not within scope; considered personal time.
c. Is it motivated, at least in part, by a purpose to serve the Principal?
i. Mixed motive is enough to justify liability (“at least in part”).
ii. Independent frolic vs. slight detour. Employer is still liable for conduct on slight detours (vs. conduct obviously outside the scope).
d. For intentional torts, is the use of force expectable given the scope of employment?
iii. Direct liability. Situations in which there is direct liability for the Principal even when the Agent is outside the scope of employment.
1. Principal intends conduct. R2d § 219(2)(a)
a. Authorization. Employer authorizes commission of a tort (usually comes up in the context of contracts—e.g., pie contract). R2d § 212 (pcopy. 12)
b. Ratification. Retroactive conferral of authority for a tort previously unauthorized. R2d § 218 (pcopy. 15)
2. Principal’s conduct is negligent or reckless. E.g., hiring improper persons or giving improper orders. R2d §§ 219(2)(b), 213 (pcopy. 13)
3. Conduct violated Principal’s non-delegable duty. If Principal delegates duty of care to Agent, Principal is liable for harm (e.g., highly dangerous situations). R2d §§ 219(2)(c), 214 (pcopy. 14)
4. Reliance on apparent authority. Agent purported to act or speak on behalf of the principal and/or was aided in accomplishing the tort by the existence of the agency relation. R2d § 219(2)(d)

In Contract.

i. Generally. Question is the ability of an agent to bind a principal to a third party. Contract liability includes all agents (Agents and nonAgents).
ii. Classification of principals. Distinction depends on what the third party has notice of at the time he interacts with the agent.
1. Disclosed. Third party has notice of a principal and knows the principal’s identity. Most common form of principal. R3d § 1.04(2)(a)
2. Partially disclosed (unidentified). Third party has notice of a principal but does not know the principal’s identity (e.g., stock broker, where the brokers are not the ultimate parties but the parties’ identities are not known). R3d § 1.04(2)(c)
3. Undisclosed. 3rd party doesn’t know who principal is but knows agent. R3d § 1.04(2)(b)
iii. Statute of Frauds.
1. Two writings required (written contract and A must have separate written authority to sign for P) for:
a. Leases or estates exceeding one year in duration K.S.A. § 33-105; or
b. Contracts greater than one year, sale of land, marriage, etc. K.S.A. § 33-106
2. At least one writing (but not a separate, written grant of authority) is required for:
a. Sale of goods for more than $500 K.S.A. § 84-2-201; or
b. Lease of goods for more than $1,000. K.S.A. § 84-2a-201
iv. Power to bind principal to third party.
1. Actual authority. P’s manifestation of consent to A to act on P’s behalf (seen from A’s perspective). R3d § 2.01
a. Creating actual authority. P’s manifestations can be made by: R3d § 3.01
i. Words (express actual authority).
1. Written R3d §3.02
2. Oral
ii. Conduct (implied actual authority). Based on:
1. History (acquiescence). Past conduct without objection from P. R2d § 35
2. Position (usual/customary). A reasonably believes he has authority because of the position he holds.
3. If A is told he cannot do something, there can be no implied actual authority.
2. Apparent authority. Principal’s manifestations to third party causing third party to reasonably believe that P had authorized A to act and A is acting for P (seen from third party’s point of view). R2d § 8 Not inferior to actual authority; can be just as binding.
a. Creating apparent authority. P’s manifestations can be made by: R3d § 3.03
i. Words
1. Written
2. Oral
ii. Conduct. Based on:
1. Past individual history (acquiescence). If the third party has dealt with this particular A in the past, his continued presence is a manifestation by P that he still has power to represent P.
2. Position (usual/customary). Created by appointing a person to a position that carries with it generally recognized duties in the trade or profession. T must know it is usual or customary before he can rely on it.
b. Undisclosed. Apparent authority is impossible if principal is undisclosed. (There can be no manifestation from an unknown P upon which third party can rely.)
3. Imposter/Agency by estoppel. A principal who is not otherwise liable as a party to a transaction purported to be done on his account, is subject to liability to persons who have changed their positions because of their belief that the transaction was entered into by or for him, if: R2d § 8B (Imposter example: Imposter valet at hotel would result in liability of hotel by estoppel because of reliance. Contrast this with apparent authority where there would be no liability for the hotel because it cannot be traced back to something the hotel did as the P.)
a. He intentionally or carelessly caused such belief; or
b. Knowing of such belief and that others might change their positions because of it, he did not take reasonable steps to notify them of the facts.
4. Estoppel of undisclosed principal. An undisclosed P is bound by what is usual and customary in the type of the transaction the A is undertaking on P’s behalf. Secret limitations to restrict A’s authority are ineffective. R3d § 2.06
5. Ratification. After-the-fact, retroactive actual authority. Election by a principal who was not previously bound to treat the act by the purported agent as binding. R3d § 4.01
a. Elements. Four elements required:
i. Affirmance (spoken or written or conduct) by P (cannot be undisclosed)
ii. P must have knowledge of all material facts at the time of affirmation
iii. Actor was purporting to be an A for the P
iv. Conduct was not binding at the time
b. Provided. Additional requirements:
i. Principal had capacity at both times. R3d § 4.04
ii. Act was legal at both times.
iii. Third party didn’t withdraw in the interim. R3d § 4.05(a)
iv. Circumstances didn’t change adversely to third party in interim. R3d § 4.05(2)
c. Affirmance. What qualifies?
i. Words. Spoken or written; SOF may apply.
ii. Acquiescence. Knowledge of the act and failure to repudiate within a reasonable time. R2d § 93
iii. Receipt/retention of benefits. Retention by a purported principal of something which he is not entitled to obtain. Even if P repudiates the act, his retention constitutes an affirmance (to the market value) at the election of the other party to the transaction. R2d §§ 98, 99
v. Termination of agency.
1. Employment at will. Default/general rule. Either party may terminate the employment at any time without cause provided the notice requirements are met. R2d § 442 (power and right)
a. Exceptions. Three case-law exceptions to employment at will:
i. Express/implied contract provisions. Parties can contract out of employment at will.
1. Express. Express provision in contract that employment is for term or an express provision that employment will not be terminated without cause.
2. Implied. Implied-in-fact contract theory obligating employer to terminate only for good cause. (E.g., course of dealing, conversation or employee manual; employee manual not common today b/c manuals have been rewritten to avoid.)
ii. Implied duty of good faith/fair dealing. Covenant of good faith and fair dealing forbids termination without good cause. R2d Contracts § 205 Not recognized in Kansas. Morriss v. Coleman, pcopy 43
iii. Retaliatory discharge. Discharge is tortious and employee has cause of action if employer fires employee in retaliation for conduct that is protected by public policy (e.g., work comp claim, whistleblower). Murphy v. City of Topeka, (not in material)
2. Term employment/specific undertaking. If the principal has contracted to employ the a

ent may not take advantage of a still subsisting confidential relation created during the prior agency relation. R2d § 396(d)
3. “Unless otherwise agreed.” Duties may be contracted away by principal.

Torts; duty of care and skill.

i. Paid agent. Unless otherwise agreed, agent has a duty to act with care and skill standard in the location for the type of work performed; must also exercise any special skill. R2d § 379(1)

ii. Gratuitous agent. Unless otherwise agreed, agent must act with care and skill required of persons not agents performing similar gratuitous undertakings for others. R2d § 379(2)

Contract; duty of obedience. Agent may not act except in accordance with principal’s manifestation of consent; agent is liable to principal for any resulting damage. R2d § 383

AGENT’S LIABILITY TO THIRD PARTIES

Fully disclosed principal. R3d § 6.01Unless otherwise agreed…

i. Actual authority. Principal and third party are bound to the contract. Agent is not liable to anyone on any basis.
ii. Apparent authority. Principal and third party are bound to the contract. Agent is liable to principal for acting beyond actual authority.
1. Indemnity. If 3rd party sues P, P can get indemnity from A. R2d § 440
iii. No authority. There is not a valid contract and A is not a party to any contract.
1. Warranty of authority. A breached the implied warranty of authority and is liable to 3rd party unless P ratifies. R3d § 6.10
2. Ratification. If P ratifies A’s actions:
a. A’s breach of the warranty of authority is cured.
b. A is not a party to the contract.
c. P is bound to the contract.
iv. Principal is non-existent or incompetent.
1. Third party has no knowledge of P’s non-existence/incompetence. A is liable for breach of implied warranty of authority because A had no power to bind a P. R2d § 329
2. Third party knows of P’s non-existence/incompetence. A becomes party to the contract with the 3rd party. R3d § 6.04
a. Promoters. When promoters enter a contract for a corporation not yet formed, the parties can agree to a contract by which the promoter is bound until the corporation is formed and manifests a willingness to enter the deal.
b. Ratification. There can be no ratification by a newly formed corporation (because it was not in existence at the time of the contract) and the corporation would have to “adopt” or “novate” the contract.
c. Durable power of attorney. If POA is durable, there will be a contract. (POA acts even with P’s incompetence.)

Partially disclosed principal. Unless otherwise agreed, the agent is party to the contract along with the principal and third party. R3d § 6.02

i. Actual authority. 3rd party can recover from A or P. If 3rd party recovers from P it is over. If 3rd party recovers from A, A can get indemnity from P because he was acting on his behalf.
ii. Apparent authority. 3rd party can recover from A or P. If 3rd party recovers from P, P can get indemnity from A for acting outside the scope of his actual authority. If 3rd party recovers from A it is over.
iii. No authority. P and 3rd party are not bound to contract. A is liable to 3rd party on contract (unless P ratifies).

Undisclosed principal. The agent is party to the contract. Agent is liable to third party for non-performance R3d § 6.03

i. Actual authority. P, A, and 3rd party are parties to the contract. If 3rd party recovers from P it is over. If 3rd party recovers from A, A can get indemnity from P.
ii. Estoppel but no actual authority. P, A, and 3rd party are parties to the contract. If 3rd party recovers from P, P can get indemnity from A for acting beyond actual authority. If 3rd party recovers from A, it is over.
iii. No authority. P and 3rd party are not bound to contract. A is liable to 3rd party on contract.