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


Professor Bratton

Fall 2016

Agency Relationships

Governs the relationship between agents and principals; between agents and those and those the agent deals with on the principal’s behalf; and between principals and those the agent deals or purports to deal with.
Restatement (Third):

Agency is a relationship arising when one person (principal) manifests to another (agent) that the and subject to the principal’s control

Jensen & Meckling:

Agency is a contract under which one or more persons engage another to perform some service on their behalf which involves delegating some decisionmaking authority to the agent

a person who by mutual assent acts on behalf of another and subject to the other’s control

Ex: Lawyer is an agent when interacting with third persons; where lawyer acts in advisory capacity, no agency relationship exists

: person for whom an agent acts. Three categories:

(1) Disclosed: third person with whom the agent deals is aware of the existence of a principal andthe principal’s identity

Only the principal is bound

(2) Partially Disclosed or Unidentified: third person is on notice that the agent is acting on behalf of a principal but is not aware of the identity

Both agent and principal are bound

(3) Undisclosed: third person has no notice that the agent is acting on another’s behalf

Both the agent and the principal are bound
However, if the third person, after learning of the principal’s identity, obtains judgment against the principal, the agent is discharged from liability

Whether an agency relationship exists is a legal conclusion that is not based on the intent of the parties. Rather such fiduciary relationships arise where:

“One person manifests assent to another person that the agent shall act on the principal’s behalf and the subject to principal’s control, and the agent manifests assent to act. R3d § 1.01

In all probability there is a contract between the agent and the principal; however, where the agency relationship is gratuitous there is no consideration and thus no contract
Speed v. Muhanna (GA 2005): slip and fall v. Sports Authority; held: “… in the absence of express restrictions [in the contract] the authority may be considered plenary by the court and opposing parties. The authority may be considered plenary unless it is limited by the client and that limitation is communicated to opposing parties.”

Authorization to investigate andpursue “any and all claims which client may have against Sports Authority, and any other Defendants later named or identified as a result of” the incident at Sports Authority
Does attorney have actual authority to release Doc from later med mal liability in exchange for Doc’s co-operation in preparation of suit against SA?

Could be read broadly or narrowly; narrowly would protect the client and find the agent not authorized

Does attorney have apparent authority to release the Doc?

Doctor was justified in assuming the lawyer was authorized

Burden on client to rein in the lawyer. Client has a malpractice action against attorney

Agent’s Authority 1-24

(1) Actual Authority: where the principal’s words or conduct would lead a reasonable person in the agent’s position to believe that the principal wishes the agent to so act.

The principal is bound to the third person where the agent acts within actual authority – even where the third person did not know that the agent had actual authority and even if the principal was undisclosed

Actual authority is contractual — its scope is determined through contractual interpretation principles. Interpretation of an agency contract is ambulatory

: focuses on the reasonability of the agent’s interpretation of his authority at the time he acts. R2d § 33 Comment a

Power to act is dependent on what the principal told the agent but also changes in the situation after the instructions were given

R3d 2.02 Comment c: interpretations have a temporal focus that moves through time as the agent decides how to act

(1)(a) Express Authority: agent is given detailed explanation of what he is authorized to do.
(1)(b) Implied Authority: there are powers implied or inferred from the instructions used, from the customs, or from the relation of the parties
(1)(c) Incidental Authority: implied actual authority to do incidental acts that are reasonably necessary to accomplish an actually authorized transaction or that usually accompany a transaction of that type.

(2) Apparent Authority: where manifestations of the principal to the third person (or manifestations by the agent to the third person that the principal authorized) would lead a reasonable person in the third person’s position to believe that the principal had authorized the agent to act.

Principal is bound where the agent has apparent authority and acts within it
(2)(a) Power of position: a type of apparent authority where the apparent authority is created by appointing a person to a position which carries with it generally recognized duties.

R2d § 27, Comment a. Where agent is a general agent with broad customary power
The “position” amounts to a communication from the principal to third party
Most apparent authority falls into power of position
P writes to A directing him to act as his agent for sale of land. P sends copy of letter to T, prospective purchaser. A has actual authority and to T, A has apparent authority

(3) Inherent Authority: binds the principal even where no actual or apparent authority exists

If the principal is disclosed or partially disclosed, the principal is bound if (1) the act usually accompanies or is incidental to the transactions that the agent is authorized to conduct, and (2) the third person reasonably believes the agent is authorized to act. R2d § 161
If the principal is undisclosed, there is inherent authority where the conduct is usual or necessary in such transactions, even though forbidden by the principal to do them. R2d § 194

It is or should be foreseeable to a principal that an agent acting in good faith is likely to deviate occasionally from instructions
It would be unfair for principals to have the benefit of agents but not the responsibility to some extent for their excesses and failures – principal should bear the cost, not third parties.
If third parties bore the costs, they would not conduct transactions with agents without explicit actual authority – increase transaction costs generally

Restatement (Third) rejects the concept

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

(4) Agency by estoppel: A person who has not made a manifestation that an actor has authority as an agent is liable to third party who is induced to make a detrimental change in position b/c the transcription is believed to be on the person’s account if:

The person intentionally or carelessly caused such a belief, or
Having notice of such belief the person did not take reasonable steps to notify them of the facts
Note: usually subsumed by apparent authority

(5) Ratification (Ex Post)

Principal’s manifestation of intent to treat an unauthorized contract as authorized by either:

(1) manifesting an intention to treat the agent’s conduct as authorized (express ratification), or
(2) engaging in conduct that is justifiable only if he has such an intention (implied ratification)

Must be objectively manifested by principal
EX: implied ratification where acceptance of a benefit-like payment

(6) Authority by Acquiescence (Ex Ante): a series of ratifications creates prospective authority

If agent performs a series of acts of a similar nature, failure of principal to object to them is an indication that he consents to performance of similar acts in the future under similar conditions
Gives rise to implied actual authority and apparent authority

Termination of Agent’s Authority

Agent’s authority is at will
Generally, a principal has the power to terminate an agent’s authority at any time, even if doing so violates a contract and even if it had been agreed that the agent’s authority was irrevocable

Exception: Agency coupled with an interest (chapter 8)

Morris Oil Co v. Rainbow Oilfield Trucking (NM 1987): Dawn enters multiple contracts with Rainbow permitting Rainbow to use Dawn’s certificate of public convenience. Dawn reserves right to control Rainbow’s operations; collects charges; deducts monthly clerical fee. Rainbow responsible for operating expenses; all bills in Dawn’s name. Agreement states Rainbow is not an agent of Dawn and was not empowered to incur liability. Was Rainbow an agent where it incurred debt to Morris? Is Dawn responsible for repayment?

: Agent for undisclosed principal subjects principal to liability for acts done on his account if they are usual or necessary in such transactions even if the contract is contrary to the express direction of the principal
(1) Contract language relied upon by Dawn is rejected:

Contract states that Rainbow may create liabilities of Dawn in ordinary course of business (as this was)
Contractual documents between two parties do not bind third parties ignorant of those instructions

(2) Even if Dawn was not originally liable, it ratified the open account when Morris contacted Dawn

ership agreement
UPA § 13 interpreted to block a partner from suing partnership for damages. So a partner can only sue for an accounting or dissolution (RUPA § 305 permits money damages suits)

Enea v. Superior Court

Selection of the Form of Business Enterprise–Corporations and Alternative Forms of Business Organization 73, 159-160, 191-193

Business Forms:

General Partnership
Limited Partnership
Limited Liability Partnership

Characteristics of a Corporation

Limited Liability
Free Transferablility of Ownership Interests
Continuity of Existence
Centralized Management
Entity Status

Financial Statements 33-43.

Fundamental equation: assets = liabilities + owners’ equity

Assets = Liabilities + Equity
Assets – Liabilities = Equity

Double-Entry Bookkeeping: two entries for every transaction to be accounted for

: left-side entry

The entity itself — intangibles and tangibles

Credit: right-side entry

Liabilities and Shareholder’s Equity
Legal rights and obligations to the entity

Left and right side must balance
Record assets at historical cost

Balance Sheet : AKA Statement of Financial Position AKA Statement of Financial Condition

States, at one particular point in time, what assets the business owns and where the money came from to acquire those assets.
So Balance Sheet shows the present status of the assets and their sources resulting from ALL the transactions since the business was formed
Note Payable: long-term obligation in respect of borrowed money
Accounts payable: purchased goods or services on open account (did not borrow money)

Short-term debt: due in less than a year
Long-term debt: more than a year

Shareholder Equity

Common Stock

Original contribution

Retained Earnings

Whatever is left over after you do the subtractions

Statement of Earnings Retained

Earnings minus dividends paid (profit distributions) — balance appears as retained earnings on the Balance Sheet

Income Statement

Shows the extent to which business activities have caused an accounting entity’s equity, or net worth, to increase and decrease over some period of time
Covers a period of time — a quarter, a year

Cash Basis of Accounting: Revenues and expenses are recorded when cash comes in or out
Accrual Basis of Accounting: Revenues are reported in the fiscal period in which they are earned and expenses are reported in the fiscal period when they are incurred.

Cash in/out is irrelevant.
Revenue recognized by the realization principle

Prevents recognition of revenue until either the goods are shipped to their buyer or the services rendered

Expenses determined according to the matching principle

Cost of an item expensed when item contributed to general operations or to specific revenues à so assets are really just costs waiting to be assigned to a future period; ex: prepaid advertising

Cost Convention: items are recorded at their historical cost (as opposed to their replacement cost or fair market value)

(cost – estimated salvage value) / estimated life in year
Approaches to assigning cost to the materials and goods held in inventory which are ultimately sold or used in the production of goods that are sold.

Average Cost Method: assigns the cost as the average cost
FIFO Method (first in/first out): assumes the widgets sold in the order they were acquired
LIFO Method (last in/first out): assumes the last widgets acquired sold first

Statement of Retained Earnings connects Income Statement to Balance Sheet