Business Associations – Ganor – Fall 2015
I. Agency Law
a. Formation of principal agent relationship – formation elements (R3d §1.01)
i. Manifestation of consent by P to A that A shall act
1. Both P and A must consent to agency relationship
2. Terminable at will by either P or A
3. Scope – special agent (limited to specific purpose) or general (unlimited)
ii. On behalf of the P
1. Different types of Ps
a. Disclosed P
b. Undisclosed P – 3rd party does not know there is a P
c. Partially disclosed P – 3rd party knows there is a P but not ID
iii. Subject to P’s control
1. Two kinds of agents
a. Employee (more control) – type of A
b. Independent contractor (less control) – may or may not be an A
2. There need not be intent to form an agency relationship, only intent to control and consent to control -> consent may be inferred from control (Cargill – Long-time creditor of a grain distributor took increasing control over distributor’s operations as distributor’s debts increased. Held, this control turned the distributor into an agent of creditor, thus making creditor liable in contract for distributor’s debts to farmers.)
iv. Consent by the agent
b. Principal’s Liability in Contract
i. P is liable for A’s contracts when A has authority – three types of authority:
1. Actual authority – P-A (R3d §2.01)
a. A reasonably concludes from P’s manifestations that he has authority to from P to act
2. Apparent authority – P – 3P
a. What a reasonable 3rd party would conclude from manifestations of P
b. A’s manifestations to 3rd party about his authority are insufficient
3. Inherent authority (A – 3P)
a. Generally – A can sometimes bind P to an unauthorized K – most likely to be found when there is an undisclosed P
b. Two Conditions
i. Ordinary – transaction is the sort that the general A would ordinarily have authority to conduct
ii. Not on notice – 3rd party has no knowledge that A is not authorized to conduct this transaction
c. R3d and Inherent Authority – R3d tried to eliminate inherent authority but courts still use it
i. Undisclosed Ps – R3d §2.06 – makes Ps liable for unauthorized actions of As if P was on notice of A’s conduct and that it might induce 3rd party to change his position
ii. Estoppel & Restitution R3d §2.05, 2.07 – do the same thing as inherent authority in R2d
d. Fairness – protects good faith 3rd parties at the expense of “innocent” Ps
i. Undisclosed P – no P-3rd party relationship to find lack of apparent authority
ii. Monitoring costs – explain the difference in outcome in cases finding a lack of apparent authority and those finding inherent authority. When P is undisclosed -> 3rd party has no ability to monitor A?
c. Principal’s Liability in Tort
i. Respondeat Superior – R3d 2.04 – P is liable for A’s torts if:
1. A is an employee (3d 7.07(3) – An A whose P has the right to control the “manner and means” of A’s performance)
a. Test is functional not intentional – extend to which P controls A’s day to day operations (who bears risk of the operation, who exerts control?)
2. Tort is committed within the scope of employment – performing work assigned by the employer or engaging in a course of conduct subject to the employer’s control
a. NOT “when it occurs within an independent course of conduct not intended by the employee to serve any purpose of the employer.”
d. A’s Duty of Loyalty to P
i. Benefit of Agency Relationship Accruing to A (and not P!) – violation of duty of loyalty
1. A has a duty not to acquire a material benefit from a 3rd party in connections with transactions conducted or other actions taken on behalf of the P or otherwise through the A’s use of A’s position (R3d §8.02)
a. Secret Profit
b. Remedy – P is entitled to both:
i. Disgorgement of A’s profit
ii. Damages suffered as a result of A’s breach (unless P ratifies K or chooses return of the property)
2. A must not deal with P as or on behalf of an adversary in a transaction connected with the agency relationship (R3d §8.03)
3. Consent to Breach – R3d §8.06
a. Subjective element – Consent – Conduct by A that would breach his duty of loyalty if P consents to the conduct
b. Objective element – In obtaining consent, would a reasonable person see A’s dealings with P as fair and fully disclosed
i. Fair dealing – A must act in good faith and deal fairly with P
ii. Full disclosure – A must disclose all material facts about the transaction to P
4. Trustee Duty of Loyalty
a. Self-Dealing – trustee cannot deal in his individual capacity with trust property (does not matter whether property harmed or not)
b. Profits – A trustee is accountable for any profits made by him through or arising out of the administration of the trust even if profit does not result from a breach of trust
c. Contrast 8.06
II. Law of Partnership
a. Structure
i. What is a partnership? RUPA §§ 101(6), 202(a)
1. An association of two or more persons
2. To carry on as co-owners of a business
3. For profit
ii. Joint venture – a partnership for a single project
iii. Agency & Partnership – RUPA §301
1. Each partner is an agent of the partnership
2. Each partner can bind the partnership to transactions:
a. Apparently in the ordinary course of business of the partnership (however, majority can restrict this ability)
b. Apparently in the kind carried on by the partnership (however, majority can restrict this ability)
c. If outside the ordinary course of business – need consent of ALL partners (RUPA §401(j))
3. Lack of authority – A partner cannot bind the partnership in a matter:
a. If partner had no actual authority to act in the matter AND
b. 3rd party knew or had received notification of the partner’s lack of authority
4. Every partner is a principle for purposes of every other partner’s agency
a. All partners are:
i. Jointly and severally liable for partnership debts
ii. Share in control of partnership property
iv. Why take a partner?
1. Capital – need for capital may outpace the firm’s ability to take on debt
2. In lieu of salary – start up may lack capital to pay salaries and chooses to give ownership stake instead
3. Incentives – ownership stake aligns new partner’s incentives with those of the partnership as a whole
b. Duties of Partners
i. Two key fiduciary duties
1. Duty of Loyalty – RUPA §404(b)
a. Accounting – partner must give an accounting to the partnership for and hold as trustee any property, profit, or benefit derived from: (1) conducting/winding up par
t changes in debt terms
e. Partnership Interests
i. Each partner has no right to control partnership property but only to receive a portion of the profit it earns
1. RUPA §501 – partner is not a co-owner of partnership property – no transferable interest in the property
2. RUPA §502 – the only transferable interest of a partner in the partnership is:
a. His share of profits/losses
b. His right to receive distributions
3. RUPA §203 – property acquired by partnership is partnership property
ii. Priority of Access to Individual Assets – Jingle Rule (Old rule – still applied in UPA states)
1. Partnership creditors – priority claim on partnership assets (secondary claim on individual assets)
2. Individual creditors – priority claim on individual assets (secondary claim on partnership assets)
iii. Priority of Access to Individual Assets – 1978 Bankruptcy Code; RUPA 807(a)
1. Partnership creditors – priority claim on partnership assets and to the extent of any deficiency in those assets, a claim to individual assets on par with individual creditors
2. Individual creditors – have an equal claim to individual assets as partnership creditors and a secondary claim on partnership assets
f. Partnership Governance
i. Default rules – statute provides default rule but partners may contract around them by filing a partnership agreement (RUPA 303(a)(2) – may include provisions limiting the authority of some or all partners to engage in certain kinds of transactions on behalf of the partnership)
ii. Partnership Decision Making – RUPA §401(f), (j)
1. Each partner has equal rights to management of partnership business
a. If in ordinary course of business (“core business” of partnership – fact question) – difference of opinion may be resolved by simple majority (nb – 1/2 is not majority)
b. If outside the ordinary course of business – requires unanimity
2. Equal rights means that each partner has 1 vote of equal weight – no differentiation between amount of capital contribution (cf. corporations where control = % of capital contribution)
g. Withdrawing Partner – treated differently in UPA and RUPA
i. UPA
ii. RUPA – distinguishes between dissolution and dissociation
1. Dissociation – one partner may leave partnership without triggering dissolution of the firm
a. RUPA 601 – list of situations in which a partner may dissociate
b. But see RUPA 801 – where partner who is not being “kicked out” may instead of dissociating himself, call for dissolution in a partnership at will
2. Dissolution – RUPA 801 – triggers winding up of partnership affairs
[TC1]Isnt this a duty of loyality?
