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Business Associations/Corporations
University of Pennsylvania School of Law
Bratton, William Wilson

William Bratton

Corporations – Fall 2011


Agency Relationships – Authority

· Agents- Special /General

o 2 definitions:

§ Restatement: a person who by mutual assent acts subject to another’s control

· Concerned with tort liability à focus on principal’s retained control

§ Economic (Jensen & Meckling): delegation of decisionmaking authority

· Presumption of rational actors à focus on authority of the agent

o Special agent – specific task

o General agent – continuity of service

· Principals – Disclosed / partially disclosed / undisclosed

o Disclosed – 3rd party knows that agent is acting for principal and knows principal’s identity

o Partially disclosed – 3rd party knows that agent is acting for principal but doesn’t know principal’s identity

o Undisclosed – 3rd party doesn’t know that agent is acting for any principal

§ NOTE: can’t have apparent or incidental authority if principal is undisclosed!

o Who is bound by contract between agent and 3rd party?

§ Disclosed àprincipal bound, agent not bound

§ Partially disclosed àagent and principal bound

§ Undisclosed à agent and principal bound

· NOTE: only if actual authority (apparent and incidental don’t work for an undisclosed agent)

o NOTE: disclosure rules allocate information risks regarding creditworthiness

· Authority- actual (+incidental) / apparent (estoppel) / inherent

o Actual authority – words/conduct of principal lead reasonable person in agent’s position to think that he has authority

§ Express actual authority – “go buy gasoline”

§ Implied actual authority – “take care of the yard” (what would reasonably be necessary to accomplish the task that agent is expressly authorized to do)

· Incidental authority – subset of implied

· “reasonable” defined by customary practice or what other agents in similar business are doing

· (implied actual authority may also result from acquiescence – see below)

o Apparent authority – words conduct of principal lead reasonable person in 3rd party’s position to think that the agent has authority

§ Deals with unfairness and inefficiency in requiring 3rd parties to verify an agent’s authority for every transaction (ex/ if board created appearance that officer is authorized, board will be held liable to 3rd party)

§ 4 elements of apparent authority:

· Principal

· Agent

· Third party

· Words/conduct on part of principal

§ Apparent authority by power of position – general agent with broad customary power (Ex/ “secretary” or “treasurer”)

§ Estoppel –third party detrimentally relies on impression based on conduct of principal that agent has authority (principal estopped from denying agent’s authority)

§ NOTE: difference between implied actual authority and apparent authority

· Implied actual – 3rd party knowledge is irrelevant à based solely on relationship between principal and agent

· Apparent – 3rd party knowledge/reliance is determinative

o Inherent authority – agent performs foreseeable/incidental actions that usually accompany a transaction even though principal has prohibited this conduct and 3rd party relies on impression of authority

§ If agent’s actions relate to transactions he is generally authorized to conduct and 3rd party reasonably believes he is authorized and has no notice to the contrary, principal is bound à imposes burden on principal to monitor agent

§ NOTE: restatement (third) of agency rejects this (and Bratton agrees!)

· Grounds: same results will follow from (a) apparent authority by power of position combined with (b) liberal interpretation of the terms of agency

· Ratification / acquiescence

o Ratification – principal ratifies agent’s unauthorized conduct by treating it as authorized (ex post)

§ can be express or implied

o Acquiescence – a series of ratifications creates prospective authority (ex ante)

§ Creates implied actual authority

· Termination

o Termination is at will

o Distinguish the agency from the contract!

§ Principal can terminate at any time for any reason, but agent may still be able to get damages for breach of contract

§ Even if agent sues for breach of contract, he cannot bind the principal once the agency is terminated

· Liability of 3rd party to principal

o If principal is liable to third party, then third party is liable to principal

o Exception: if principal is undisclosed and both principal and agent know that third party would not have contracted with agent if knew principal’s identity

§ What about partially disclosed principal? Unclear, Bratton doesn’t know the answer

· Restatement doesn’t address this specifically – intended to make sure undisclosed principal is bound

· Bratton’s instinct is that if the principal’s identity is undisclosed for the purpose of ensnaring the third party, there should be a way to remedy and give third party an exit (notion of contractual consent)


FACTS: Dawn (principal) hires Rainbow (agent) à contradictory contract terms specify that Rainbow is not an agent but an independent contractor, but authorizes Rainbow to incur debts in the ordinary course of business à Rainbow contracts with 3rd party (Morris) and Morris gets stiffed à is Dawn liable to 3rd party?

HOLDING: YES – secret instructions or limitations on the agent’s authority by the principal must be known to the party dealing w/ the agent, or the principal is bound as if the limitations had not been made

(Example of separating the contract from the agency)

Agency Relationships – Fiduciary Duty

· Restatement (Second)

o § 387 – agent has duty to act solely for benefit of the principal

o § 388 – agent must turn over profit made in connection with the agency

§ NOTE: customary exception / ordinary practice of not turning over profits (ex/ a delivery man taking tips)

o § 389 – agent may not act as an adverse party (i.e. may not go into competition with the principal)

§ Comment C: even if the principal is not hurt thereby

o § 390 – agent who wants to act on his own account must put principal back in an independent position so that he can self protect

§ Agent must disclose everything to the principal and be fair

§ Disclosure includes “all facts affecting the desirability of sale”

o NOTE: these are all default rules “unless otherwise agreed” – agent and principal can contract around them

· Compare Jensen and Meckling to restatements:

o View principal and agent as rational utility maximizers

o Agency costs – costs incurred by Principal to monitor the Agent to prevent self dealing (Principal assumes agent is a utility maximizer and that he will self deal)

o Bonding costs – costs incurred by Agent to ensure the Principal that he won’t self de

HOLDING: “the conduct of the parties and the circumstances surrounding their relationship and transactions control the factual question of whether a partnership existed when no written agreement exists… not intent” à subjective intent is NOT determinative


FACTS: Ds lent money to P to help his struggling business (loan agreement specified that this is not the formation of a partnership); P’s business went down anyway, creditors want to hold Ds liable as partners

HOLDING: all features of the agreement are consistent with loan agreement, not a partnership à no liability; court applies substantive review à statement in loan agreement that this is not a partnership is not dispositive; partnership defined as association with intent to carry on as co-owners of a business for profit

a. financial stake in the enterprise including profit sharing, and

b. participation in management/control

NOTE: 4 element test – a partnership will likely be found if 4 elements are met:

– Agreement to share profits

– Agreement to share losses

– Mutual right of control/management of business

– Community of interest in the venture

o Limited Partnership

§ Draft a Limited Partnership Agreement (but don’t have to file it)

§ File a certificate with the state – 201(a)

§ Pay annual franchise fee

o Limited Liability Corporation

§ Draft an Operating Agreement (similar to LP Agreement) – don’t have to file it

§ File Articles of Organization

§ Pay annual franchise fee

o Corporation

§ Draft By Laws (not filed)

§ File certificate of incorporation

§ Pay annual franchise fee

· Management and Control

o Partnership

§ UPA 18(e),(h)- “equal rights in management” – majority rules; unanimity for act in contravention of partnership agreement

· Contractual alternative – can draft around default voting rule and put one person in charge as managing partner

· UPA 18(h) – voting rules

o 100% to amend Partnership Agreement

o 100% to admit new partners

o “Ordinary matters” are majority rule (“extraordinary” matters require 100%)

§ UPA 19 – partnership books shall be kept at the principal place of business of the partnership and every partner shall at all times have access to and may inspect and copy of any of them

§ UPA 20 – partners render on demand true and full information of all things affecting the partnership to any partner or the legal representative of any deceased partner or partner under legal disability

§ UPA 21 – partners are in fiduciary relationship to each other