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Business Organizations
University of Kansas School of Law
Harper Ho, Virginia

 
Business Organizations Outline
Harper Ho Fall 2013
Text: Smith Williams 3rd Ed.
 
Agency
 
Roadmap For Analyzing an Agency Issue
·         Is there an Agency Relationship?
o   Employee? If so, no further analysis
o   If not, analyze Elements of Agency (see below)
·         What type of authority does the agent have?
o   Gold = Express Actual Authority
o   Silver = Implied Actual Authority
o   Bronze = Apparent Authority
·         Was the agent’s action within the scope of that authority?
 
Elements of Agency relationship (R1.01)
 
(1) Control
o   Standards for acceptable service (such as inspections or training requirements) do not alone create a right of control (Nears)
(2) Benefit (on behalf of)
(3) Mutual Assent
·         Objective standard: looks at outward manifestation of assent (like Ks). I.e., no need to have intent to form agency relationship.
·         No formal K required (can be gratuitous promise and form agency relationship) R1.02
·         businesses and gov’ts can form agency relationships. Need not be actual people. R1.04(5)
·         Subagents (R3.15): Subagent = Agent to the Agent. Subagent is in agency relationship w/ both principal and agent. Agent can appoint subagent only if he has authority (actual or apparent) to do so.
 
Fiduciary Duties in Agency Relationship R8.01–R8.13, 8.15
 
(1) An Agent has the following fiduciary duties: performance of obligations (K duties), care, competence, diligence, obedience, disclosure and loyalty.
 
MOST IMPORTANT: LOYALTY (act for the principal’s benefit)
·         Not to use confidential info for agent or third party’s benefit
·         Duty not to compete with principal in things within scope of agency relationship.
o   Non-compete agreements enforceable so long as reasonable (typically 3 years or less and sensible geographic boundaries).
o   To enforce, need injunction which requires showing of “threat of harm.”
o   Duty not to act as adverse party in things within scope of agency relationship
o   Respecting principal’s property (no comingling of property with agent or third party’s property)
o   Intentionally promoting one employer’s interest to the detriment of the other breaches an employee’s duty of loyalty (Food Lion)
(2) Remedies
·         Non-monetary relief/injunction
·         Principle may avoid or rescind contract
·         Monetary relief under whatever governing law is.
·         Any loss breach causes principal (compensatory damages)
·         Punitive damages when justified
o   Law of restitution and unjust enrichment create agent liability even if principal can’t establish that breach caused loss IF
o   Agent has duty to account to principal for the benefit, its value, or proceeds
o   Agent subject to liability to deliver benefit, its proceeds, or its value to principal
o   Agent must also account for value of agent’s use of property of the principal.
 
(3) Consent R8.06
·         What normally would be is not a breach of fiduciary if done with consent so long as:
o   Within scope of agency relationship
o   Party acts in good faith
o   Discloses all material facts known
o   Otherwise deals fairly w/ principal
o   In the case of two or more principals, the fact that you are representing more than one principal is a material fact that must be disclosed.
 
(4) Principal’s Duty to Agent R8.13, 8.14, 8.15
·         (1) Contractual Duties
·         (2) Indemnity for payments made with
o   Actual authority OR;
o   that benefit the principal OR;
o   when the loss should fairly be born by the principal in light of the relationship.
·         (3) Good Faith and Fair Dealing (inform agent of knowm risks of physical harm or pecuniary loss)
 
 
 
Principles of Attribution
 
Actual Authority
 
DEFINED: An agent acts w/ actual authority when he reasonably believes, based on principal’s manifestations, that the principal wishes for him to act that way. R2.01
 
ELEMENTS OF ACTUAL AUTHORITY
·         (1) Agent believes he has authority
·         (2) Belief is reasonable
·         (3) Belief is tied to what principle manifested
o   Manifestation must be directly from principal to agent.
o   Scope of authority is dependent on agent’s reasonable belief of what principal was manifesting
 
EXPRESS ACTUAL AUTHORITY (R2.02)
·         Explicitly given only orally or in writing
 
IMPLIED ACTUAL AUTHORITY (R2.02)
·         Agent has authority to do necessary or incidental things that are implied to carry out principal’s objective.
·         EXAMPLES: express authority to complete delivery à implied authority to buy gas to complete delivery; express authority to hire employees to work at distant factory à implied authority to arrange housing for workers (Castillo).
o   Agent subject to reasonable person standard when determining what the principal’s objective is.
 
Apparent Authority
 
Apparent Authority (R2.03): When a third party reasonably believes that a purported agent does have authority to act in specific way because of manifestations by the purported principal, but in actuality has no authority.
o   Apparent Authority can come about by (1) non-agent appearing to be agent and (2) agent acting beyond scope of authority.
 
ELEMENTS OF APPARENT AUTHORITY
(1) Manifestation from principal to third party that person was an agent
o   Silence can be a manifestation if they knowingly allow someone to act for them.
o   Must emanate from principal (doesn’t matter how third party finds out)
(2) Third party’s reasonable belief
o   Scope of apparent authority depends upon third party’s reasonable interpretation of manifestation.
(3) Belief traceable to manifestation of principal
o   Does not require previous agency relationship
o   (1) A non-agent could end up with authority when non-agent appears to be an agent.
§  Inherent by apparent position       
§  If they were an agent, sometimes can retain authority after agency relationship is over.

§  Ratification encompasses the act in its entirety
§  No partial ratification (R4.07).
 
ELEMENTS OF ESTOPPEL TO DENY RATIFICATION (R4.08)
o   Manifestation of Principle that act has been ratified
o   Induces detrimental reliance
o   Detrimental reliance was reasonable
 
Effect of Ratification (R4.02)
o   Retroactively creates the effect of actual authority
o   Ratification is not effective when:
o   It’s in favor of someone who causes it by misrepresentation or other conduct that would make a contract voidable OR
o   In favor of agent rather than principal when principal ratifies to avoid a loss OR
o   Where it diminishes rights of persons not parties to the transaction, that were acquired in the subject matter prior to the ratification
 
Other Principles
o   Different Types of Principals (R1.04(2)
o   Disclosed Principal: third party knows agent is acting for a principal and knows who the principal is.
o   Undisclosed Principal: third party knows agent is acting for principal but doesn’t know identity
o   Unidentified Principal: third party knows but doesn’t know who principal is.
 
Definition of Notice: When person knows fact or has reason to know fact. Notice can be imputed to principal. (1.04(4)
 
Termination of Authority
 
Termination of Actual Authority
·         Agent renounces by manifestation to principal
·         Principle revokes by manifestation to agent
o   Renunciation or revocation is effective upon notice (see 1.04(4) for notice)
Termination of Apparent Authority
·         Termination of actual authority does not necessarily terminate apparent authority.
·         When third party no longer reasonably believes purported agent has authority.
o   Power to terminate authority can be limited by contract or statute.
 
Partnerships & Hybrid Entities
 
5 Distinguishing Characteristics
Formal creation under state law? 
Any separation of ownership and control?
Personal liability for owners?
Transferabilty of ownership rights?
Limited v. potentially infinite duration.
NOTE: variations in tax treatment
Sole Proprietorship
Default business form
5 Questions: No formal creation, no separation of ownership and control, no transferability of ownership rights (transfer= new business), terminates on death, pass-thru tax.
Most common form of business in the U.S.
FULL PERSONAL LIABILITY FOR LIABILITIES