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

 
I. AGENCY
The Different Types of Authority
 
A. INTRODUCTION
 
·        Important: what matters is that the agent does what the principal tells him to do.
·        Types of business organizations: sole proprietorships, corporations, general and limited partnerships, LLCs.
·        Sole proprietorships: owned by single individual. Still a business organization. 
o       Psychologically, has an identity separate from the individual (separate name). Financially, only a portion of the individual’s wealth is invested in business (separate finances).
§         Legally speaking, however, no separate identity – need to be incorporated or all wealth can be committed to the enterprise – unlimited personal liability for obligations incurred in the course of business.
o       Typically will not conduct business by herself, but will hire others to act.
§         Agent: person who by mutual assent acts on behalf of another and is subject to the other’s control.
§         Principal: person for whom the agent acts.
·        The Law of Agency: Covers
o       The relationship between agents and principals.
o       The relationship between agents and third persons with whom an agent deals, or purports to deal, on a principal’s behalf.
o       The relationship between principals and third persons when an agent deals, or purports to deal, with a third person on the principal’s behalf.
 
RESTATEMENT (THIRD) OF AGENCY § 1.01: 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.
·        Translation: Agency has to do with an agent acting on behalf of and subject to the control of the principal.
 
RESTATEMENT (THIRD) OF AGENCY § 1.02 (Comment a): Whether a relationship is one of agency is a legal conclusion made after an assessment of the facts of the relationship and the application of the law of agency to those facts. Although agency is a consensual relationship, how the parties to any given relationship label it is not dispositive.
o       Translation: It doesn’t matter what the parties think the relationship is. It is a legal determination made by a court.
 
B. AUTHORITY
·        If principal is bound by actual, apparent, or any other kind of authority, and principal is disclosed, then principal is liable and agent is not.
·        Where principal is undisclosed, then the principal and agent are liable if there is legal authority. If agent does not have proper authority, then agent is liable, principal not.
 
1.      Actual Authority
 
Actual Authority: Principal is bound, even if third person did not know agent had actual authority, or even if third person thought agent was principal. Undisclosed principals are therefore liable.
·        R.3d § 2.01: 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.
 
Types of Actual Authority
·        Express: to the extent that principal specifies conduct of agent.
·        Implied: (e.g. sell my automobile) powers are implied or inferred from words used, from customs and from the relations of the parties. (R.3d § 2.01 comment b: implied authority means what is necessary, usual, and proper to accomplish express responsibilities or the manner in which an agent believes the principal wishes the agent to act.)
o       Incidental authority: incidental acts that are reasonably necessary to complete an actual authorized transaction.
o       R.3d § 2.02(1): An agent has actual authority to take action designated or implied in the principal’s manifestations to the agent and acts necessary or incidental to achieving the principal’s objectives, as the agent reasonably understands the principal’s manifestations and objectives when the agent determines how to act.
·        The bulk of actual authority comes from implied authority.
 
2.      Apparent Authority
 
Apparent Authority: Manifestations of principal to third party would lead a reasonable person in third party’s position to believe that principal had authorized agent so to act. If agent has app. auth. and acts within scope of that auth., principal is bound.
·        Cashier hypo: an agent will reasonably believe he has power that cashiers normally have, and third persons will reasonably believe the same thing (power of position).
·        R.3d § 2.03: 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.
 
3.      Agency by Estoppel
 
Agency by Estoppel: (R.3d § 2.05) Person who has not made a manifestation that an actor has authority as an agent and who is not otherwise liable will be liable if third party is induced to make a detrimental change in position if:
·        P intentionally/carelessly caused belief.
·        P had notice of such belief and that it might induce others to change positions, and did not take reasonable steps to notify them.
 
4.      Inherent Authority
 
Inherent authority: (R.2d § 161) Disclosed/partially disclosed P is liable even if principal had forbidden agent to act, if act usually accompanies or is incidental to transactions that agent is authorized to conduct and third person reasonably believes agent is authorized. For undisclosed agents, don’t need reasonable belief requirement.
·        Justification? Is or should be foreseeable that an A acting in good faith for benefit or P is likely to deviate occasionally from instructions. (Circumstances may change, P might have different opinion, it might be impracticable to communicate with P for clarification before action needs to be taken.)
·        R.2d § 8A: Inherent agency power is a term used to indicate power derived nor from actual, apparent or estoppel, but solely from agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent.
·        Not in Third Restatement: (see § 2.01, comment b): other doctrines include it, including importance of interpretation by the agent in the agent’s relationship with the principal, as well as the doctrines of apparent authority (broader definition), estoppel, and restitution.
·        See R.3d § 2.02, p. 14.
 
5.      Ratification
 
Ratification: even if no actual/apparent/inherent authority, P is bound if principal, with knowledge of material facts, either affirms agent’s conduct by manifesting an intention (express ratification) to treat agent’s conduct as authorized, or engages in conduct (implied ratification, e.g. retaining a benefit) that is justifiable only if he has such an intention.
·        Rationales: functionality – won’t have to establish apparent authority, eliminates claims against agent; Posner: P would not have ratified unless he saw commercial advantage in doing so.
·        R. 3d § 4.01: Affirmance of a prior act done by another, whereby act is given effect as if done by an agent acting with actual authority.
·        R.3d § 4.02: Can ratify by manifesting assent, doing conduct that would justify a reasonable assumption of consent.
·        R.3d § 4.03: Act must be ratifiable, person needs capacity, must be timely, and must encompass act in its entirety.
 
6.      Other
·        Acquiescence: failure of principal to object is an indication of consent (R.2d § 43).
·        Termination of agent’s authority: P can terminate at any time, even if it violates a contract. 
 
7.      Hypo (Diana/Annold – See Outline 1)
·        Actual Authority? Implied?
o       Arg. for yes: Annold could say he never took steroids. Plus, just because he uses steroids, doesn’t mean he pushes them.
o       Arg. for no: Diana was specifically told not to sell to steroid pusher.
 
·        Apparent Authority?
o       No – needs to be based on manifestations of principal to third party.
o       If principal isn’t know, can’t have apparent authority. Plus, third party would need to observe in some form the action of the principal that gave rise to the assumption that the agent had authority.
 
·        Agency by Estoppel? 
o       No – Pump Prince took immediate steps to make sure Annold didn’t think the deal was OK.
 
MORRIS OIL CO. v. RAINBOW OILFIELD TRUCKING, INC. (N.M. Ct. App. 1987): D (Dawn, principal) entered into contracts with Rainbow (agent) for oilfield trucking business. Dawn held a certificate of public necessity, which it let Rainbow use. Dawn retained control over Rainbow’s operations, collected clerical fees and percentage of gross receipts. Rainbow would be responsible for operating expenses, but all operations utilizing fuel were to be under direct control and supervision of Dawn. All billing would be made under Dawn’s name, all monies to be collected by Dawn. Agreement stated that Rainbow was not to become the agent of Dawn and was not empowered to incur or create any debt or liability “other than in the ordinary course of business;” also that Rainbow was not an employee. Rainbow established a relationship with Morris (third party), whereby Morris installed a bulk dispenser and periodically delivered diesel. Rainbow declared bankruptcy, owing Morris $25k. Dawn held $73k in receipts from the Hobbs operation, and established an escrow account to settle claims against Rainbow’s Hobbs operation. Dawn told Morris to wait on collection. Dawn said that agreement was cancelled by Dawn when it learned that Rainbow was incurring debts in Dawn’s name. Here, though, charges were incurred in Rainbow’s name.
Holding: Rainbow is an agent of Dawn, despite the agreement they made. 
·        What kind of authority? 
o       “Other than in the ordinary course of business” – implied actual?
o       Retained benefit of Rainbow’s word – ratification?
 
Trial court findings:
1.      Dawn made representations concerning existence of the fund.
2.      Dawn was aware that Morris relied on representations.
3.      Rainbow was an agent of Dawn.
 
Argument by Dawn: Dawn states that the agreement frees it from liability – said Rainbow was not an agent or employee. Not good for two reasons:
·        Agreement states that Rainbow may create liabilities from the ordinary course of business.
·        Recitation of parties in their contracts do not bind third parties who do not know about those instructions when dealing in business with one of the parties.
 
Undisclosed Agency: An agent for an undisclosed principal subjects the principal to liability for acts done on his account if they are usual or necessary in such transactions, even if the principal has previously forbidden the agent to incur such debts (2d, § 194).  Where it is usual in the course of business conducted by agent, liable even if K is contrary to express directions (2d, § 195).
·        Limitations: If limitations are known by third party, then OK. 
·        Ratification: If principal ratifies transaction after acquiring knowledge of material facts, liable. (Dawn never disputed legitimacy of the account).
o       Benefits: If principal retains benefits of business relations from agent, then it is deemed to have ratified.
 
Disposition: Affirm judgment below – Dawn loses.
 
NOTES ON AUTHORITY AND LIABILITY
General vs. Special Agent:
·        General: authorized to conduct transactions with continuity of service.
·        Special: authorized for one transaction.
 
Principals and Disclosure:
·        Disclosed: third party has notice that agent is acting for principal, knows identity.
·        Partially disclosed/unidentified: knows of principal but not identity.
·        Undisclosed: no notice of a principal.
 
Tort Liability:
·        Rest. 2d: principal controls/has right to control physical conduct.
·        Rest. 3d: principal/employee – vicarious liability (respondeat superior) for agents torts – not based on physical conduct, but the manner and means of the agent’s performance of work.
o       Vicariously liable if acting within the scope of employment, meaning in a course of conduct subject to employer’s control, rather than an independent course of conduct not intended to serve any purpose of the employer.
o       Policy reasons:
§         Ability of enterprise to spread risk from losses.
§         Proper allocation of resources is promoted, as enterprise will include costs of accidents in prices.
§         Greater safety.
§         More equitable – greater assurance that victim will be paid.
 
Principals and Third Persons: If P is liable to T, then T is laibel to P, except that T is not liable to undisclosed P if A or P knew that T would not have dealt with P if he had known identity. 
 
Agents and Third Persons: Whether A is liable depends on whether P is liable.
·        If P is bound:
o       Disclosed P: agent is generally not bound – T wouldn’t expect A to be bo

ies, especially where the rights of third parties are concerned.
 
UPA AND RUPA ON DEFINING PARTNERSHIPS
UPA § 6: Partnership Defined.
(1)   A partnership is an association of two or more persons to carry on as co-owners a business for profit.
(2)   But any association formed under any other statute of this state, or any statute adopted by authority, other than the authority of this state, is not a partnership under this act, unless such association would have been a partnership in this state prior to the adoption of this act; but this act shall apply to limited partnerships except in so far as the statutes relating to such partnerships are inconsistent herewith.
 
UPA § 7: Rules for Determining the Existence of a Partnership. (See Statutes, p. 114-15.)
(3)   The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived.
(4)   The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment:
(a)    As a debt by installments or otherwise,
(b)   As wages of an employee or rent to a landlord,
(c)    As an annuity to a widow…
(d)   As interest on a loan…
(e)    As consideration for the sale of a business or other property…
 
RUPA § 101(6): Definitions. “Partnership” means an association of two or more persons to carry on as co-owners a business for profit formed under Section 202, predecessor law, or comparable law of another jurisdiction.
 
RUPA § 202: Formation of Partnership. (See Statutes, p. 148-49.)
(c)    In determining whether a partnership is formed, the following rules apply:
(1)   Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not by itself establish a partnership, even if the co-owners share profits made by the use of the property.
(2)   The sharing of gross returns does not by itself establish a partnership, even if the persons sharing them have a joint or common right or interest in property from which the returns are derived.
(3)   A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment:
i.        of a debt by installments or otherwise;
ii.      for services as an independent contractor or of wages or other compensation to an employee;
iii.    of rent;
iv.    of an annuity or other retirement or health benefit to a beneficiary, representative, or designee of a deceased or retired partner;
v.      of interest or other charge on a loan, even if the amount of payment varies with the profits of the business, including a direct or indirect present or future ownership of the collateral, or rights to income, proceeds, or increase in value derived from the collateral; or
vi.    for the sale of the goodwill of a business or other property by installments or otherwise.
 
LIABILITY OF PARTNERS IN PARTNERSHIPS
UPA § 15: Nature of Partner’s Liability. All partners are liable
(a)    Jointly and severally for everything chargeable to the partnership under § 13 and 14 (§ 13 wrongful acts of partners, § 14 breach of trust by partners),
(b)   Jointly for all other debts and obligations of the partnership.
 
RUPA: extends joint and several liability.
 
MARTIN v. PEYTON (N.Y. Ct. App. 1927): Peyton made a loan to KN&K firm. Ds say that no partnership exist. Lower court enters judgment in favor of Ds.
Partnerships Based on Conduct of Parties, Circumstances Surrounding Interactions: Partnership results from K, express or implied. If denied it may be proved by the production of some written instrument; by testimony as to some conversation; by circumstantial evidence. If nothing else appears the receipt by the defendant of a share of the profits of the business is enough.
·        It is for the court to say whether a partnership exists. 
·        Mere words will not blind to realities. Statements that no partnership is intended are not conclusive.
 
Relevant question: whether in fact parties agreed to so associate themselves to carry on as co-owners a business for profit. Look at details of the relationship.
·        Relevant facts (p. 34-35): Looks like there is an element of control.
o       Obtained a loan of 2.5m worth of liquid securities. In compensation for the loan respondents would receive 40% of profits until the return was made.
o       Trustees were to be kept informed of all transactions affecting them.
o       They would be paid all dividends and income accruing therefrom. 
 
Holding: Not a partnership – the steps taken by Ds were “but proper precautions to safeguard the loan.” They couldn’t initiate transactions like partners or bind the firm by actions of their own. 
·        This is especially the case because the firm could dissolve at any time – they needed something to properly secure their interest as lenders. 
·        “A point may come where stipulations immaterial separately cover so wide a field that we should hold a partnership exists.”
 
Disposition: Judgment of lower court affirmed.