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Business Associations/Corporations
University of Pennsylvania School of Law
Wachter, Michael L.


Restatement of Agency §1 (supp. p. 6):

“Agency is the fiduciary relationship which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.”
an agent is a person who by mutual assent acts on behalf of another and is subject to the other’s control – a fiduciary with respect to matters within the relationship

Types of Authority
The liability of the principal to the third party depends on the types of authority the agent was given in striking a deal

Actual Authority:

Restatement of Agency §2.01 (p. 45): an agent acts with actual authority when, at the time of taking the 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; that is, if the principal’s words or conduct would lead a reasonable person in the agent’s position to believe that the principal had authorized the agent to so act Þ the issue is the agent’s belief
this may be express or implied from the words used, from customs, and from the parties’ relationship
incidental authority is that to do acts that are reasonably necessary to accomplish an actually authorized transaction

Apparent Authority

§27 (p. 10); where the words or conduct of the principal would lead a reasonable person in the third party’s position to believe that the principal had authorized the agent to so act Þ the issue is the third party’s belief
power of position; apparent authority can be created by appointing a person to a position which carries with it generally recognized duties; to those who know of the appointment there is authority to do the things generally entrusted to one in that position

Agency by Estoppel

a person who is not otherwise liable as a party to a transaction purported to be done on his account is nevertheless subject to liability to persons who have changed their positions because they believed the principal entered into the transaction, and (a) he intentionally or carelessly caused such belief, or (b) knowing of such belief and that others might change their positions because of it, he did not take reasonable steps to notify them of the facts
this is subsumed into apparent authority

Inherent Authority

§161 (p. 20); a disclosed principal is liable for an act done on his behalf by an agent, even if forbidden to act, if (1) the act usually accompanies or is incidental to the transactions the agent is authorized to conduct, and (2) the third party reasonably believes the agent is authorized to so act
§194 (p. 21); an undisclosed principal is subjected to liability for acts done on his account if the acts are necessary or usual in such transactions. although forbidden by the principal
this derives from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent; for it would be unfair for an enterprise to benefit from the work of its agents without making it responsible for their excesses
the Third Restatement classifies this as matter of torts – it is listed under respondeat superior


the principal will be bound to third party, even if the agent had no authority, if the agent purported to act on the principal’s behalf and the principal, with knowledge of the material facts, affirmed the agent’s conduct by (1) manifesting an intent to treat the act as authorized – express ratification, or (2) engaging in conduct justifiable only if the principal intends to treat the act as authorized – implied ratification

Morris Oil Co. v. Rainbow Oilfield Trucking (p. 2)
The principal, Dawn, allowed its agent, Rainbow, to use its trucking license

Dawn reserved full control of the oil-related operations; the agreement between them specifically stated that Rainbow was not empowered to incur any debt or liability other than in the ordinary course of business
Rainbow eventually declares bankruptcy, and Morris, a creditor and Π, seeks Dawn’s cash when it finds out about its existence as the backer of Rainbow

the charges were in the name of Rainbow, not Dawn; Dawn had set up a fund to settle claims created by Rainbow’s operations
the trial court found that Dawn was aware that Π was relying on Dawn’s representations that payment would be made from the fund and that ∆ was at all times the agent of Dawn; Dawn on appeal argued there was no agency relationship

this is a case of inherent authority with undisclosed agency; the undisclosed principal is subject to liability to third parties with who the agent contracted where such transactions are usual in the course of business conducted by the agent, even if the contract is contrary to the express directions of the principal
furthermore, Dawn ratified Rainbow’s actions here

The Agent’s Duty of Loyalty
Tarnowski v. Resop (p. 18)

Π had sought to buy a jukebox business, hiring ∆ as his agent; ∆ proceeded to take a bribe and buy Π a shite business
Π can recover the commission that his agent secretly received from the sellers and further a damage award for costs that were a consequence of the transaction;
Rest. 2d. of Agency §388 (p. 30); an agent has a duty of loyalty to his principal and the principal can absolutely recover any unauthorized profits made by the agent on the transaction

the principal gets whatever he put into the transaction back plus any damages

Further relevant provisions:

§ 388: an agent who makes a profit in connection with transactions conducted by him on behalf of the principal is under a duty to give such profit to the principal

General points about partnerships;

partnerships are defined by the Uniform Partnership Act, (UPA) §6 (p. 100);

“a partnership is an association of 2 or more persons to carry on as co-owners a business for profit”

whereas, the Revised UPA §202(a) (p. 134): the “association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.”
these associations of two or more people can be formed easily or inadvertently; there is no requirement of filing papers or a certificate
as with corporations, the statutes are largely either enabling or default – not mandatory
equality among partners exists
ease of dissolution exists
partners have unlimited liability, and are either jointly and severally, or severally and jointly liable Þ as per UPA §13

Other Statutory points;

UPA §15 (p. 104); “All partners are liable (a) jointly and severally for everything chargeable to the partnership under §13 (wrongful acts of partners) and §14 (breach of trust by partners), and (b) jointly for all other debts and obligations of the partnership
UPA §7 (p. 100) lists the rules for determining the existence of a partnership

by the following rules:

(e) all partners have equal rights in the management an conduct of the partnership Þ this is identical to RUPA §401
(h) any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners; but no act in contravention of any agreement between the partners may be done without the consent of all the partners

RUPA §401 (p. 149): Partner’s Rights and Duties

(j) Ordinary decisions; “A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners.

Extraordinary decisions; acts outside the ordinary scope of business may require the consent of all parties

this tracks UPA fairly closely, except that under RUPA, a partnership agreement consists of the fragmentary implicit and explicit agreements made as the partnership agreement evolves; therefore, unanimity is required not only to depart from the formal agreement, but also the fragmentary ones

(i) becoming a partner; “a person may become a partner only with the consent of all the partners”
(f) partners have equal right in the management of the partnership

RUPA §403 (p. 153) and UPA §19 (p. 106) indicate that all partners have access to the books at all times
NB: these are default rules that the partners can change if they do so desire

A Partner’s Expenses are not Reimbursable Unless Approved by the Majority
Summers v. Dooley (p. 41)
Π sued his partner when ∆ refused to sanction the hiring of an employee, and Π hired him anyways, paying out a salary

UPA §18(h) indicates that when an equal partnership exists, differences in business matters must be decided by a majority of partners; in a two person partnership, one partner cannot take action that will bind the partnership over the objection of the other partner

Under the default rules of a partnership, all individuals count equally; just b/c you contribute 90% of the capital and get back 90% of the profit, it does not mean you have complete control over the business – your vote is still equal to those who contribute 10%:

but recall that these default rules can always be changed

Types of Rules:

(1) they can be default
(2) they can be mandatory rules which can NOT be changed by agreement
(3) enabling rules; rules which specifically direct the parties to write in language

Sanchez v. Saylor (supp. p. 1): a third party was willing to lend the partnership money, but only with the condition that he obtain the financial statements of ∆, one of the partners