Enterprise Organization
Professor Pritchard
Fall 2000
Enterprise Organization
Basic Business Organization
Pros
Cons
– greater costs (leases, employee salaries, etc.); liability; management difficulties; decreased incentives for employees
Nature of Business Relationship
Indicia of Relationship
Contract
Control
Independent Distributors
Pros
Cons
– lack of control (advertising, price, customer service, etc.); security concerns if distributor’s inventory financed – less risk; narrower business scope; less investment in building distributorship network; better incentives
Nature of Business Relationship
Indicia of Relationship
Contract
Allocation of Risk to Distributor – responsibility for insurance
– Fully independent and arms-length
Independent Distributors
Pros
– some control (governed by contract); excellent security on inventory; limited costs in building distributorship network; no tort liability
Cons
Nature of Business Relationship
Indicia of Relationship
Fowler v. Pennsylvania Tire Co.
D — tire manufacturer
Incident
Issue
– whether supply arrangement between manufacturer and distributor was consignment or sale
Result – consignment arrangement
Rationale
– per agreement manufacturer retained title to the tires until sold; court disregarded use of “sold to” language on inventory invoices
– distributor went bankrupt; manufacturer tried to reclaim inventory to prevent trustee (and creditors) from using to pay distributors debts
P – bankruptcy trustee(p. 1)
Contract
Allocation of Risk to Manufacturer
Right of Return
Control – inventory separation; advertising; etc.
– Agent, but not master-servant – supervision required
Agency
Basic Definition of Agency — Restatement Agency § 1
Consent by principal to agent and by agent to principal that:
o
o
agent shall act subject to principal’s controlagent shall act on principal’s behalf
Three Basic Types of Agency
(employees) – Restatement Agency § 2
Master-Servant relationship
Principal controls or has right to control the physical conduct of agent in performance of service (manner/methods of operation)
all servants are agents
all masters are liable for torts of servants
Indicia of Control
Contractual language
Principal as residual claimant
Requirements of relationship – reporting; inspections; hours of operation; hiring/firing; principal ownership of materials/equipment/premises; principal retention of title in products; allocation of risk; responsibility for insurance
Policy Implications
of Finding Master-Servant Relationship::
Adverse
·
·
·
Eliminate dealer autonomy and incentives for entrepreneurshipRaise prices Shut off market to some participants
Positive
·
– Prevent judgment proofing – by hiring dumbass employees
Improved levels of quality and care
Forced internalization by manufacturers
Principal – Agent Relationship
Agent has authority to affect legal relations between principal and third persons, i.e. to bind the principal in contracts with third persons
o
o
General Agent
Special Agent
(Restatement § 3) – authorized to conduct a single transaction or series of transactions not involving a continuity of service (Restatement § 3) – authorized to conduct a series of transactions involving a continuity of serviceExample à Partners are agents for the partnershipa non-servant agent possesses a degree of discretion in carrying out its purpose that a servant does not have
Independent Contractor relationship
– Restatement § 2
Principals not liable for torts of independent contractors
Some independent contractors are not agents
Agent Independent Contractors
·
·
Subject to control of principal with respect to results/objectives of operation, though not with respect to methods of operationAgreement to act on behalf of another
Non-Agent Independent Contractors
µ
The character of the relationship is a factual determination to be made in light of all circumstances, including the policy implications of imposing or not imposing liability on the principals.
Servants v. Independent Contractors
·
·
Absolutely no controlArms-length contracting relationship; fully independent
Three Basic Ways to Create Agency Relationship
Agreement
Ratification
Estoppel
– reliance by 3rd party on acts of principal suggesting agency relationship – principal accepts the benefits or affirms conduct of one purporting to act as agent – mutual consent required; governed by traditional contract principles
Humble Oil v. Martin
Incident
Issue
Result
Rationale
o
·
Retention of title of gasoline & TBA
o
o
o
Limited business discretion for station ownerPayment of 75% of utility bills by companyReporting requirements; general submission by dealer to mandate of companyOwnership of station, equipment, products by company
Non-persuasive factors
Other Issues
Hoover v. Sun Oil
Incident
Issue – oil company liability for torts of service station employee
Result
Rationale
o
o
o
o
o
o
Non-persuasive Factors
·
·
·
·
sales incentives in rental formulause of trademark and tradename of company by dealer; national advertisinglimitation on sales of competitive productsownership of stat
damages (possibly), enforcement (inspection/reporting), right of entryRisks: possible liability, damage to goodwill, unsuccessful franchiseesBenefits: licensing fees, ongoing use fees
Murphy v. Holiday Inns, Inc.
Incident
Issue
§
Court makes mistake in equating master/servant with principal/agent – it clearly makes a difference for respondeat superior
Result
Rationale
Non-persuasive factors
§
§
conditions of license agreement — training by licensor, non-competition provisions, licensor’s approval for sale of business, mandatory observation of rules of operation, periodic reports and inspectionsdisclaimer in contract – but absence of disclaimer may make a difference
– franchisee held entire right to profit and risk of loss; various regulatory provisions in contract insufficient to confer requisite right to control day-to-day operations
– licensee, not servant; therefore no vicarious liability
– whether franchisee is a servant or licensee– basic slip and fall at motel (p. 19)
Parker v. Domino’s Pizza
Note
Example:
– Domino’s à ¶ 23 of agreement – 5.5% royalty fee
: the courts in these cases trivialize the issue of the agent acting on behalf of the principal. The issue is related to the residual claimant question, both of which suggest a joint venture of sorts – which suggests, in turn, that the principal has an interest in retaining some control
Incident
Issue
Result
Rationale
– disclaimer clause alone doesn’t cut it, but various contractual provisions and the very detailed operations manual raise genuine issue on control – material question as to right of control in franchisor – Nature of agency relationship, for purposes of review of summary judgment grant in D’s favor – MVA caused by Domino’s franchise driver – unoccupied vehicle at service station rolled away, injuring three people (p. 12)
(Organization Within the Firm) (Consignment) (Sales) – Master-servant – greater profit potential; control over operations; integration of management
Factory Outlets – distributorships owned by manufacturer (Organization Across Markets)
