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

FALL 2013
I.            Creation of the Agency Relationship
·         Agency Law Generally
o   Agency law governs the interactions among Ps, As, and the 3d parties As deal with on behalf of Ps
o   Agency is the foundation/core of partnership, corporate, and other areas of law
o   Restatement is NOT binding on courts, but cited in many decisions invoking agency law
·         R(3d) §1.01.  An agency relationship is created when:
o    The P “manifests assent” to have the A act on the P’s behalf and under the P’s control AND
o   The A “manifests assent or otherwise consents” to act
§  (1) Control- key to determining whether an agency relationship has been formed for purposes of imposing liability. He who acts through another, acts himself.
§  (2) Benefit- broad, but still must be present. Those who gain from the actions of another should sometimes be held to answer for costs inflicted by those actions.
§  (3) Mutual assent- verbal (oral K), written (K or other), action. §1.03. Central to determining whether an agency relationship exists and thus whether it is fair to impose liability on the P for actions of the A.
·         What you do is more important that what you say; intent to create an “agency relationship” is NOT required. §1.02.
·         “Manifestation of assent”
o   Unexpressed reservations or limitations do NOT restrict the party’s expression of consent. §1.01, n. d.
o   Although the parties MUST agree to enter into the relationship, NO K is required (many agents act or promise to act gratuitously. §1.01, n. d.
o   Parties do NOT need to have intent to enter “agency relationship”. §1.02. Whether a relationship is characterized as agency in an agreement between parties or in the context of industry or popular usage is NOT controlling.
§  Look at parties’ objective actions rather than Ks bc subjective intent may be hard to establish.
·         External- 3d parties need clear standard for determining who is responsible for breach of K, torts. Agency relationships are regulated because of their impact on 3d parties.
·         Internal- Disparity in relationship between principals and agents.
·         Tripartite relationship- Principal, agent, and 3d parties
·         Legal consequences of agency: §1.01, n. c.
o   Inward-looking consequences- Principal-agent- Largely governed by Ks between the parties AND the law of fiduciary duties.
o   Outward-looking consequences- Principal/Agent-3d party- governed by the various “principles of attribution” (K and TORT)
·         Nears v. Holiday Hospitality Franchising, Inc.- Outward-looking consequences. Claim by P 3d party that a principal is liable for the tortious conduct of the agent. P former employee is suing defendants, Marshall, ETEX and HHFI. Marshall is an employee-agent of ETEX. To hold HHFI vicariously liable, P must show that HHFI is either directly responsible for the torts OR show Marshall is an employee-agent of HHFI by demonstrating benefit, control, and mutual assent. Court focuses on control (less emphasis on assent and benefit).
o   P evidences control because HHFI performed inspections, previously dismissed manager, created standards manual for the franchise requiring manager training, conferences, etc. D countered that HHFI did not have authority to hire/fire employees.
o   COURT- No evidence of right to control or actual control. Setting quality control standards does NOT itself create a right of control or agency relationship .§1.01, cmt. f.
·         Problem 1-1- Is there an agency relationship? Look at control, benefit, mutual assent.
o   NOTE: monitoring and training programs present a catch-22 for the principal. On the one hand, more control means the court is more likely to find liability. On the other hand, less control may mean more problems. However, a principal may be able to recover from an agent who acts outside his scope of authority.
II.            Duties of Principal and Agent
·         R(3) Chapter 8- principals and agents owe duties to each other within an agency relationship
o   PROBLEM- Agent may willfully or accidentally not follow instructions from P
§  Small business- leaders jockeying for control
§  Large business- shareholders who are not really in charge of day-to-day operations
o   Tools to solve the problem:
§  Common law- fiduciary duties (gapfiller for statutory law)
§  Statutory law- e.g., corporate law, securities regulation
§  K- statutory defaults can be extended by K (e.g., non-compete agreements)
·         Agent Action
o   Principal-agent- Fiduciary relationship (trust, good faith, special confidence, etc.)
o   Principal-3d party- Obligation or liability
o   Agent-3d party- K or tort.
§  NOTE: If P has no direct involvement, must have P-A relationship to hold P liable in A-3d party context.
·         Principal Duties. R(3d) §§8.13-8.15.
o   Performance of K obligations
o   Good faith and fair dealing
o   Indemnification
·         Agent’s Duties.
o   FIDUCIARY DUTY!!! §8.01.
o   8.02- material benefit- NO misappropriations
o   8.03- acting as/for adverse party
o   8.04- competing with principal (non-compete until relationship ends)
o   8.05- not to (1) use property OR (2) disclose confidential info (indefinite)
o   8.08- duty of care (special skills then duty of care is higher)
o   8.07- K duties between agent and principal
·         Fiduciary duty- an agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship. R(3d) § 8.01.
o   Comment b- the general fiduciary principle requires that the agent subordinate the agent’s interests to those of the principal and place the principal’s interests first as to matters connected with the agency relationship
o   Inward-looking consequences between the principal and agent
·         Agent’s fiduciary duty to P includes “restrictive covenants”-
o   Noncompetition obligation- (default rule)- can’t compete with P DURING scope of agency relationship. R(3d)§8.04.
§  (Ks not to compete are generally upheld as long as they are limited in time (approx. 3 years), scope, and geography)
§  A has a duty not to act as an adverse party to the P in a transaction connected with the agency relationship. R(3d)§8.03
o   Non-disclosure obligation- (default rule)- can’t disclose P’s confidential information DURING scope of agency relationship AND BEYOND. R(3d) §8.05.
o   NOTE: can modify default rules between P and A, BUT agency rules are generally MANDATORY (for the benefit of 3d parties)
·         PROBLEM 1-2- Rockham was offered stock options in exchange for signing a K not to compete with Cloudberry for three years after leaving the company. Rockham was offered the job of president of Red Mango, Inc., a frozen yogurt franchisor that competed directly with Cloudberry. Soon after joining Red Mango, Cloudberry brought an injunctive action against Rockham to enforce covenant not to compete, claiming that his knowledge of how Cloudbe

§  Confidentiality. §8.05.
III.            Principles of Attribution
·         Sources of Agent’s Power to Affect Legal Relations of Principal
o   Actual authority. R(3d)§2.01. (P to A)
§  Express- “action designated”
§  Implied
·         Necessary or incidental OR
·         Implied (custom, practice, etc.)
o   Apparent authority. R(3d)§2.03. (P to 3d)
§  Non-agent
·         Inherent/apparent by position
·         After termination of agency
§  Agent overreach
o   Estoppel. R(3d)§2.05.
o   Ratification. R(3d)§7.04.
o   Respondeat superior. §7.07.
·         Problem 1-3- What is the scope of authority of franchisee employee? Of the franchisee?
A.    Actual Authority
·         When A acts with authority, can bind P
·         Actual authority- (1) A believes they have authority AND (2) that belief is reasonable AND (3) that belief is tied to P’s manifestations. §2.01.
o   Created by a manifestation from the principal to the agent that the principal consents to the agent taking actions on the principal’s behalf. §3.01.
§  Look at communications between the principal and agent to evaluate whether agent had actual authority. Did the agent reasonably believe they could do X?
§  Actual authority may exist even though there is no written K between the principal and agent BUT certain kinds of authority must be in writing based on individual state law requirements (e.g., statute of frauds)
·         Actual authority can be express or implied- cmt. 2.01(b)
o   Express- oral or in writing
o   Implied- the power to do those things reasonable and necessary to fulfill the agency
o   E.g., used car business. Express actual authority to run business. Implies actual authority to buy used cars (presumably on credit), advertise the cars, hire additional employees as necessary, and enter binding Ks with customers)
o   NOTE: principals who wish to limit their potential liability should be explicit with their instructions to their agents. Also monitoring.
·         Castillo v. Case Farms of Ohio, Inc.- Ps alleged violations of various laws due to misrepresentations and mistreatment of the plaintiffs in the recruitment process and the working and living conditions afforded them. D chicken processing plant hired ATC for recruitment and alleged it could not be legally responsible for plaintiffs’ alleged mistreatment.  No written K, only oral K (“Go recruit and hire workers”). Can processing plant be liable for ATC’s actions?
o   (1) Must look at control, benefit, and mutual assent objectively when determining if there was an agency relationship
§  Remember that K may be considered but is NOT dispositive!!!
§  Control- YES. Case Farms retained control over ATC
§  Benefit- YES. Case Farms received benefit from ATC’s recruitment
§  Mutual assent- YES. There was an oral K between the parties