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Business Associations/Corporations
University of Pennsylvania School of Law
Choi, Albert H.

CHOI – FALL 2017
Business Organization, Allen and Kraakman, (5th ed. 2016)
Introduction to Agency
i. Objectives of Corporate Law
Maximize Efficiency
Pareto: everyone has to be better off than the status quo (the pie gets bigger and everyone’s slice gets bigger too)
Kaldor-Hicks: on whole it has to be better off than status quo (the pie gets bigger but it doesn’t matter what happens to the slices)
Shareholder Primacy
When we think of increasing welfare we are thinking of increasing the welfare of the shareholders
Reduce Agency Costs
ii. Agency relationship = building block for every hierarchical business structure
3 Problems in Agency Relationships
i. Formation and Termination
ii. Principal’s relationship to third parties
torts (vicarious liability)
iii. Duties/obligations agent has to principal [[most important for us]] duty of care
duty of loyalty
business judgment rule
Agency Formation and Termination
i. Statutes
01 Agency Defined
Agency is the fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an “agent”) that the agent shall act on the principal's behalf and subject to the principal's control, and the agent manifests assent or otherwise consents so to act.
1.02 Parties Labeling Not Controlling
An agency relationship arises only when the elements stated in § 1.01 are present. Whether a relationship is characterized as agency in an agreement between parties or in the context of industry or popular usage is not controlling.
1.04(2) Types of Principals
(2) Disclosed, undisclosed, and unidentified principals.
i. (a) Disclosed principal. A principal is disclosed if, when an agent and a third party interact, the third party has notice that the agent is acting for a principal and has notice of the principal's identity
ii. (b) Undisclosed principal. A principal is undisclosed if, when an agent and a third party interact, the third party has no notice that the agent is acting for a principal.
iii. (c) Unidentified principal. A principal is unidentified if, when an agent and a third party interact, the third party has notice that the agent is acting for a         principal but does not have notice of the principal's identity.
3.10(1) Manifestation Terminating Actual Authority
Notwithstanding any agreement between principal and agent, an agent's actual authority terminates if the agent renounces it by a manifestation to the principal or if the principal revokes the agent's actual authority by a manifestation to the agent. A revocation or a renunciation is effective when the other party has notice of it
ii. Formation Overview
Restatement requirements
Two components to create an agency relationship
i. manifestation of mutual assent, (meeting of the minds) P and A on the same page
may be implicit, does NOT need to be express, circumstances can create an implied in fact manifestation 
ii. control < more important of the two >
distinguishes agency relationship from merely a contractual relationship
Principal is in CHARGE
Agent shall act on behalf and subject to principal’s control
How much control does P have over A
Employee/Servant: P controls in great deal how A performs his task
Independent Contractor: [messy] P’s control limited, IC has a lot of discretion 
Types of Agents
Special agent:
i. single act or transaction
e.g. attorney doing a case for a client
General agent:
i. series of acts or transactions
ii. e.g. officer of a corporation that can do general tasks
Types of Principals
i. third parties understand that the an agent acts on behalf of a particular principal 
ii. parties in a lawsuit are known
Partially disclosed:
i. third parties deal with an agency without knowing the identity of their principal
ii. grocery store employee – you know you’re dealing with an agent but you don’t know who the principal is
i. third parties believe the agent to be the principal
ii. Disney sets up shell corps to buy land so no one knows that they are dealing with Disney and can get better deals
iii. Jenson Farms Co. v. Cargill
Facts: Warren needed cash and Cargill provided some financing and had a hand in the operations of the business. They got grain from Warren, made suggestions, reviewed finances, etc. When Warren finally collapsed, plaintiffs sued Cargill under theory that Cargill was the principal and Warren was agent.
need to show? Manifestation of mutual assent… Nowhere in the lending/security agreement is this assent made explicit/express. Court looks to the circumstances. 
R3dA § 1.02 Parties' Labeling and Popular Usage Not Controlling
An agency relationship arises only when the elements stated in § 1.01 are present. Whether a relationship is characterized as agency in an agreement between parties or in the context of industry or popular usage is not controlling.
Cargill is liable as principal because all three agency requirements were met. There was assent both ways and Warren was subject (at least to some extent) to Cargill’s control. This was more than just a lending relationship because Cargill was buying 90% of Warren’s grains so this is more buyer-supplier than lender-borrower.
COUNTER: Warren never did anything that Cargill suggested
Rule: Agency relations may be implied even when the parties have not explicitly agreed to an agency relationship
Policy: Is this the right/desirable outcome… why should we look at circumstances?
they said they weren’t creating an agency relationship, why not honor that?
i. third parties are impacted by and rely on agents. 
ii. want to ensure that parties can’t evade responsibility for actions taken by their agents
iv. Termination Overview
Either principal or agent can terminate at any time, they are just liable for breach of contract damages
This instability is inherent in agency relationships
All agency relationships can ALWAYS be terminated at any time, by either party
i. agent = renunciation, A renouncing the obligation
ii. principal = revocation, P revoking authority granted to A
Two types of agencies
i. Terminating has no consequences and both parties have a right to terminate
Agency for specific task/duration
i. Termination does have consequences. Both parties have the power to terminate, but do not have the right.
ii. only monetary damages available for breach of contract/wrongful termination (no specific performance)
Choi: Origination = contract law principles (expectation/sometimes reliance damages) 
EXCEPT, land sales may get specific performance (See, White v. Thomas below)
iii. Duration
If specified, automatically expires
Unspecified, terminates at end of “reasonable term”
Principal’s Liability in Contract Overview
i. Statutes
2.01 Actual Authority
An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal's manifestations to the agent, that the principal wishes the agent so to act.
03 Apparent Authority
Apparent authority is the power held by an agent or other actor to affect a principal's legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal's manifestations.
4.01(1) Ratification Defined
(1) Ratification is the affirmance of a prior act done by another, whereby the act is given effect as if done by an agent acting with actual authority.
 R2dA 8A Inherent Agency Power
Inherent agency power is a term used to indicate the power of an agent which is derived not from authority, apparent authority or estoppel, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent.
161 Unauthorized Acts of a General Agent
A general agent for a disclosed or partially disclosed principal subjects his principal to liability for acts done on his account which usually accompany or are incidental to transactions which the agent is authorized to conduct if, although they are forbidden by the principal, the other party reasonably believes that the agent is authorized to do them and has no notice that he is not so authorized.
ii. Scope of Authority
Scope of actual authority conferred on the agent is that which a reasonable person in the position of A would infer from the conduct of P
Scope of apparent authority is the authority that a reasonable third party would infer from the actions or statements of P
iii. White v. Thomas
Facts: White employed Simpson as a personal assistant of sorts. He asked her to go bid on a piece of property but not to exceed 250k. She exceeded it, and tried to cover mistake by turning around and reselling the property. She told Thomases that she had authority to do so. She told White about overpaying, yet he agreed to pay anyway, but he did not want to sell to Thomases. Thomases are suing for specific performance of the sale under agency theory.
Two Actions:
Simpson purchased the land (bid substantially higher than $250k), White ratified the purchase [R3dA § 4.01(1) Ratification Defined] i. Actual authority: No, he said up to $250k, expressly authorized up to a certain about via verbal instructions
ii. Apparent authority: yes, she had a blank check. It may have appeared to Thomases that Simpson had the authority to bid up $347k
Simpson promised to sell 45 acres, White repudiated the contract she had entered into
i. Actual Authority: White didn’t say anything, Simpson would be UNREASONABLE to think that she had authority to make a sale. Three manifestations: verbal instruction, check, and ltd. POA

acting ultra vires
Principal’s Liability in Tort
i. Statutes
 R3dA §2.04 Respondeat Superior
An employer is subject to liability for torts committed by employees while acting within the scope of their employment.
Generally, agents/employees will not be authorized to commit tortious acts.
spectrum from Employee  – – – – – – – – – – Independent Contractors 
R3dA §7.07 Employee Acting Within Scope of Employment
(1) An employer is subject to vicarious liability for a tort committed by its employee acting within the scope of employment.
(2) An employee acts within the scope of employment when performing work assigned by the employer or engaging in a course of conduct subject to the employer's control. An employee's act is not within the scope of employment when it occurs within an independent course of conduct not intended by the employee to serve any purpose of the employer.
(3) For purposes of this section,
i. (a) an employee is an agent whose principal controls or has the right to control            the manner and means of the agent's performance of work, and
ii. (b) the fact that work is performed gratuitously does not relieve a principal of liability.
Oftentimes the tortious conduct by the agent is done unilaterally and the principal does not play a part in it
So actual, apparent, and inherent authority play no part because the principal is never going to give the agent the authority to commit a tort
ii. Policy – Alternatives
alternatives to considering the facts/circumstances to consider control
strict liability 
if within employment then the P/employer should monitor and keep their employees/agents in check incentivizes monitoring behavior and good training 
BUT people won’t go into business with dangerous stuff [activity Q] AND wouldn’t enter into agency relationships
BUT Socially wasteful to have to spend a lot of time monitoring. 
BUT If P doesn’t have control not fair
no liability 
well employee is a human with his or her own 
BUT if we never hold P liable, then P isn’t disincentivized to keep his employees in check
iii. Vicarious liability
triggers joint and several liability 
can go after one and get both SO doesn’t matter who pays
iv. Humble Oil v. Martin
Facts: An empty car was left at a gas station for inspection and rolled into the Martins. The Martins want to sue Humble because they have the deep pockets, even though the gas station was operated by an independent contractor.
Court finds liability because this was a so called “master servant relationship.” Humble owned the station and the products sold there. The main point of the operation was to market Humble products and it was done under the supervision of Humble. The contractor had very little autonomy outside of hiring/firing employees to work at the station, so he is considered an employee for the purposes of principal’s liability.
Court looks at the day-to-day operations, in which Humble had a lot of control. There are recommendations from Humble that must be followed.
The title of the products sold never transfers, Humble owns it the entire time. The contractor is just marketing it for them.
Most of the contractor’s costs are being reimbursed and he shares in revenue, not profit.
v. Hoover v. Sun Oil
Facts: Fire started at rear of plaintiff’s car while filling with gasoline allegedly due to negligence of employee of Barone. Barone is independent contractor who runs the gas station that is owned by Sun.
Court finds no liability for Sun because there is not an agency relationship. There is nothing to establish anything more than a landlord-tenant and independent contractor relationship.
Sun does not have a heavy hand in the day-to-day operations. Sun makes suggestions by Barone does not have to follow them.
Barone shares in the profits, so there is an incentive on his part to sell a lot of Sun products. This is typical of an independent contractor relationship.