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Business Associations
University of Kentucky School of Law
Woods, Andrew Keane

Business Associations


Spring 2015

I. Agency

a. The Agency Relationship

i. Intro

1. Shareholders = owners/principals. Officers/managers = agents. This is a principal-agent relationship.

a. The principals own the company, but the agents decide how the company operates.

2. Financial Institution v. Investor

a. If you get a loan from a financial institution to start a business, the institution does not get equity in the business. Instead, the institution only gets a promise of repayment, but the business might be collateral

b. With an investor à Joint venture agreement

i. The investor does get equity (stock = a piece of equity)

ii. Public v. Privately Held Businesses

1. In this situation, this would be privately held because it is not on the open market.

iii. There are 2 questions:

1. Descriptive Q: What rules are set up so that the investor receives his/her equity?

2. Normative Q: What should the corporation be?

3. Timken

a. Maximizing for one group (agent/principal) sometimes is in conflict with another group’s interest. No one group should be in control, but the debate is over where the middle ground is.

4. The Principal-Agent “Problem”

a. The principal must allow agents to make decisions for her or make decisions on the basis of information provided by the agent.

i. The principal is concerned that the agents will not do what she herself would have done.

1. Agnts have preferences of their own. These are usually private information

ii. How can the principal ensure that the agents act in her (the principal’s) best interest instead of their own (shareholders’)?

ii. Actual Authority


Types of Authority

I. (Express) Actual Authority

a. P tells A to deal with T

II. Implied actual authority

a. P tells A to do X; it is implied that X might lead A to deal with T

III. Apparent authority

a. T reasonably infers that A is acting on behalf of T

IV. Inherent Powers

a. Even though T doesn’t know about P, P is bound because it is inherent in A’s job that A would contract with T and P never objected

Legal Standard: Agency exists where

a. One person (the principal) consents that another (agent) shall act on the principal’s behalf and subject to the principal’s control; and

b. The agent consents to act.

c. Basically a three part test

2. Capacity

a. Capacity to be a principal

i. Test: Does the principal have the capacity to do the act for which the agent was appointed?

ii. Generally, any person having the capacity to contract can appoint an agent

1. E.g. minors and incompetents cannot appoint an agent if they could not themselves do the act in question

a. Corporation is a person for this purpose

b. Capacity to be an agent

i. Anyone can be an agent

3. A “principal need not exercise physical control over the actions of its agent” so long as the principal may direct “the result or ultimate objectives of the agent relationship.” Green v. H&R Block.

a. “When one . . . asks a friend to do a slight service for him, such as to return for credit goods recently purchased from a store,” an agency relationship exists even though no compensation or other consideration was contemplated.” Rest. (Second) § 1(1) comment b.

4. Basically

a. Agency relationship is consensual in nature.

b. Based on concept that parties mutually agree:

i. Agent will act on behalf of principal.

ii. Agent will be subject to principal’s direction and control

c. Agency can be express or implied

iii. Case Law

1. Gorton v. Doty

a. Woman (Doty, ∆) lends car to football coach (Garst) to drive the players to the game. She gives the condition that the coach drive the car.

i. She = owner = principal

ii. He = actor = agent

b. Gorton (π) was injured, and π brings action to sue the woman on principal-agent theory. That is, she, as the principal, was liable for the agent’s actions.

c. Issue: Whether an agency relationship exists between π and ∆.

i. It matters because as principal, Doty would be liable for the actions of her agent, Garst

d. Vicarious liability

i. “For whoever employs another, is answerable for him, and undertakes his care to all that make us of him. The act of a servant is the act of his master, where he acts by authority of the master.” Jones v. Hart

1. “A master is subject to liability for the torts of his servants committed while acting in the scope of their employment.” Restatement (Second) of Agency §219(1)

e. Rule: There is express and implied agency. That is, there does not have to be an explicit statement that there is a principal-agent relationship.

i. Rest. (3d) of Agency § 1.01 (p. 15)

ii. Implied agency:

1. An agency that occurs when a principal and an agent do not expressly create an agency.

a. The agency is implied from the conduct of the parties.

i. The extent of the agent’s authority is determined from the particular facts and circumstances of the particular situation.

f. Gorton tells us that a contract is not essential to establishing agency.

g. Cargill – there must be an agreement, but not necessarily a contract

h. For implied agency, you need:

i. Manifestation of consent from agent;

ii. Relationship can develop unknowingly

i. The evidence of consent in Doty: she gave him a condition and he followed it. She gave the condition, so she had control, and he was subject to that control.

2. Gay Jenson Farms v. Cargill

a. Warren = distributor for Cargill. Warren takes out loans and Cargill finances. Warren defaulted. Farmers (not paid) sue Cargill. Warren is acting on Cargill’s behalf by procuring grain

b. Both the agent and the principal have to have capacity.

i. Capacity to be a principal:

1. Test: Does P have capacity to do the act that A has appointed? Generally, an entity with the ability to contract has capacity.

2. Thus, Cargill is on the hook notwithstanding the fact that Cargill argues the relationship is purely contractual. Cargill did this to shield themselves from liability (substance over form).

c. Holding

i. Cargill argued its relationship with Warren was purely contractual. In contrast, the π farmers argued that the web of contracts b/w Cargill and Warrant had become so strong that their relationship had evolved into an agency relationship comparable to a sole proprietorship

ii. Holding: That an agency relationship did exist between the ∆s

d. Apply the definition

i. A manifestation of consent by Cargill that Warrant acted

1. On Cargill’s behalf

a. By procuring the grain for Cargill as part of its ordinary operations, which operations were financed by Cargill

2. Subject to Cargill’s control

a. By directing Warrant to implement its operations

i. Gorton v. Doty – control established by a condition precedent

ii. Control the end result, even if only by prescribing the agent’s responsibilities

b. And by Interfering in Warren’s operations

ii. Warrant consented to act

iv. Illustrations

1. Renting is not a principal-agent relationship. The lessor is in control, but the lessee is not acting on the lessor’s behalf.

a. However, if A additionally agrees to collect the rent from the mall’s other tenants and remit it to P in exchange for a monthly service fee, A is P’s agent in collecting and remitting the other tenant’s rental payments. A is not P’s agent in operating A’s store in the mall.

v. Avoiding liability

1. Insurance

2. Suppose you are Cargill’s lawyer. The CEO of the company, after hearing about the decision in Warren, asks for your recommendations about how Cargill should change the way it does business to avoid liability in the future.

a. Tell them not to exert this much control without expecting liability

b. Do business with them with no strings attached

c. Do nothing

d. Terminate

e. Decrease Cargill’s control

f. Take on additional control

vi. Termination of an agency relationship

1. Agreement of parties

a. The contract b/w P and A states when it will end.

2. Agency at will

a. At common law, agency relationships presumed to be “at will” and thus terminable at any time by either party after notice

i. Revocation

1. Principal revoked

even know that the principal existed. If you don’t know that there is a principal, how can there be a holding out?

b. In undisclosed principal cases, what is the scope of the agent’s authority?

i. In Watteau: “the principal is liable for all the acts . . . which are within the authority usually confided to an agent of that character.”

ii. § 194: A general agent for an undisclosed principal authorized to conduct transactions subjects his principal to liability for acts done on his account, if usual or necessary in such transactions, although forbidden by the principal to do them.

iii. § 195: An undisclosed principal who entrusts an agent with the management of his business is subject to liability to third persons with whom the agent enters into transactions usual in such businesses and on the principal’s account, although contrary to the directions of the principal.

iv. Restatement (3d): Restatement (3d) of agency abandons inherent agency power, purporting to subsume all of the cases covered by thereby with expanded notion of apparent authority.

1. Problem: the logic of apparent agency does not extend to cases involving so-called “undisclosed principals,” which traditionally were decided under the logic of inherent agency power.

a. “Apparent authority is not present when a third party believes that an interaction is with an actor who is a principal.” Rest. (3d) of Agency § 2.03, cmt. f.

i. Apparent authority cannot exist in cases involving an undisclosed principal.

2. Rest. (3d) plugged the hole by creating a new section with “no precise counterpart” in the Rest. (2d)

3. § 2.06 makes undisclosed principals liable for the actions of their agents – acting without actual authority – if a third party detrimentally relies on the agent and the principal does not take reasonable steps to notify the third party of the misplaced reliance.

a. An undisclosed principal may not rely on instructions given an agent that qualify or reduce the agent’s authority to less than the authority a third party would reasonably believe the agent to have under the same circumstances if the principal had been disclosed.

c. Ratification & Estoppel – Non-Contract Binding of the Principal

i. Ratification

1. A acts without authority (of any kind) and there are no grounds for estoppel.

2. P will only be bound if P ratifies the contract

a. If A was not P’s agent, ratification of the contract also creates an agency relationship by ratification

3. Ratification requires

a. A valid affirmation by the principal

b. To which the law will give effect

4. Affirmation

a. Can be express or implied

i. Rest. (3d) § 4.01(2) “A person ratifies an act by (a) manifesting assent that the act shall affect the person’s legal relations, or (b) conduct that justifies a reasonable assumption that the person so consents.”

b. Principal must know or have reason to know all material facts

c. Affirmation is all or nothing

5. Effect

a. Will be denied legal effect where necessary to protect the rights of innocent third party

i. Rest. (3d) § 4.02(2)

1. “Ratification is not effective:

a. in favor of a person who causes it by misrepresentation or other conduct that would make a contract voidable;

b. in favor of an agent against a principal when the principal ratifies to avoid a loss; or

c. to diminish the rights or other interests of persons, not parties to the transaction, that were acquired in the subject matter prior to the ratification.”