Business Association Outline – Spring 2003
I. GENERAL FACTS ABOUT BUSINESS ASSOCIATION
A. Everything comes down to money! Moving money – where it needs to go,
keeping it, etc
B. Refication/Reify à to regard (an abstraction, mental construction, idea) as a
thing and converting it mentally into something concrete. For Example: a corporation is an idea that we have made a thing, however for legal purposes a corporation is an entity in its own right
C. Corporation Law is set up by state statute
D. Four Deal Points:
1. Duration & Termination
2. Control
3. Risk of Loss
4. Sharing and Gain
E. Types of Structures:
1. Sales
a. Pros: you get your $$$ right away
b. Cons:
1) if you haven’t gotten paid yet, and the company goes
bankrupt you will lose all of you money
2) you don’t have control over your goods
2. Consignment
a. Pros: you have some control over your goods, and you may
even get the goods returned back to you
3. Company Set Up (Your Own Shop):
a. employment relationship
1) Advantages and Disadvantages to Employment
a) people might not be as willing/adamant to sell
your product if they don’t get anything out of it…thus, if you could give the employee a stake in the company/commission
b) business owners have costs – overhead
c) you can control who you hire/fire
2) Master/Servant Relationship
a) Pros: your stuff in the company – you have
control over marketing, money, etc
b) Cons: direct liability goes to you, the
owner…everything from slip and fall to product liability
c) Humble Oil: Car backed over family…owner of
station was liable for contractor’s actions (torts) because he had substantial control over the contractor
II. Agencies
A. an agency relationship consists of:
1. Principal à the one who orders the action, owner, master
2. Agent à the one who is to act, employee, servent
a. a non-servant agent is one who agrees to act on behalf of the
principal but is not subject to the principal’s control over how the task is performed
B. Test for an Agency:
1. Agent must consent to act
2. Agent must act on the principal’s behalf, and
3. Principal must have control over the agent
** The key in determining if an agent is control (both actual and the right
of control – ie asking your friends to buy you a drink is a principal/agent relationship)
C. Types of Agents
1. Independent Contractor: may or may not be the principal’s agent;
contracts with principal to do something, but is not controlled by them (however if you give the independent contractor $ and say…go buy wood…he is acting as your agent…but he can only act in the capacity you granted him!)
a. Humble Oil: owner had substantial control over the contractor,
so he was liable for his torts
b. Sun Oil: same situation except different time and the court
held…owner not liable for torts because contractor had day to day control
* cases show that whether or not there is control is a question of fact
2. Employees: key to determining whether an employee is an agent is:
a. how much control you have over the person (control could be
weekly pay checks, scheduled breaks, social security)
b. look at §219 of the restatement 2nd of agency
c. state statutes
3. Franchises: key in determining if a franchise is a principal/agent
relationship is control…both have the right of control and actual control! Look at factors like:
a. employment issues (i.e. hire, fire, wages)
b. maintenance
c. finances à $$$
d. training (commons in franchise contracts not really control)
e. marketing (common in franchise contracts, not really control)
f. trade name use (common in franchise contracts, not control)
g. manual for running the business (if so specific…may go to
control and becomes a question for the jury)
h. control (Billops v. Magnes Construction b/c franchiser had day-
to-day control….it was an agent)
i. a franchise is an entity that provides to an individual to use:
1) some bigger corporation’s system of operation,
intellectual property, name, etc
2) franchiser makes their money by selling licenses
3) owner of franchise must disclose their profits, costs etc
4) franchiser must worry about reputation
4. Creditors
a. A. Gay Jenson Farms v. Cargill: case shows the creditors who
take over business in order to secure their repayment can be held to be agents of that business. Rational is that creditor knows best the financial position of the debtor and t/f is in the best position to protect themselves. When they don’t take defensive actions, but rather take control of debtor’s business, they are more likely to be found to be a principal and t/f liable for the debtor’s other debts
b. Creditors can:
1) check credit history
2) audit loan receiver
3) not allow them to take on other debts or loans to others
4) deny credit to debtor
5) restrict change in ownership and control
6) give little advice on discreet issues
7) buy-out a business
8) call in loan
third party unaware of existence of agency
d. three situations of inherent authority
1) general agent does something similar to what he is
authorized to do but in violation of orders
2) an agent acts purely for his own purposes in entering
into a transaction which would be authorized if he were motivated by proper purpose
3) an agent is authorized to dispose of goods and departs
from authorized method of disposal
4. Ratification:
a. ratification can also make the principal liable by statements,
actions, etc (Lucy lets Ricky work…she ratified her K with Ricky)
b. if your are the attorney on the case…always argue (1) actual
authority; (2) apparent authority, and (3) inherent authority
E. Duties that a Principal owes an Agent
1. principal has a duty to reimburse/indemnify your agent if the agent
exercised “good faith”
2. “Good Faith” and “Duty of Care” are the keys:
a. employers need to provide a good work place for their
employers
b. allow employees to do their work…can’t hire someone and then
not let them do their jobs
3. pay compensation for duty reasonably expected to be compensated
(express compensation)
F. Duties of Agents/Employees
1. Duty of Care
a. mostly we talked about duty of care for presidents/executives
1) directors and executives cannot use their positions to
further their future interests
b. duty of loyalty
1) always must be advancing your employers interests
c. Duty of Good Conduct/Obedience
1) employee cannot take records, employees, if it hurts the
company
2) employee’s cannot lie
3) employees can make preparations to compete, but they
cannot lie
d. duty to indemnify principle if they goofed up…breach the duty
of care
G. Tort Liability
1. Undisclosed Principal: both principal and agent are liable
2. Disclosed Principal: only principal is liable
3. Partially Disclosed Principal: Being changed by 3rd restatement to
unidentified principal – both parties liable at time
III. Fiduciary Duty (in agency situations)
