Business Organizations
Professor Lund
Fall 2017
What is a Bus Org?
Traditionally, a thing
More recently, thought of as people working together
Hierarchical relationships inside org
More efficient than bargaining over each individual transaction
Once you’re inside, law of bizorgs takes over
Like contract law, it
-Fills gaps in arrangements
-Limits the kinds of arrangements that can be reached
-Enforces those rules
Limits of Contracts
-Bounded rationality- Only so much we can predict at time of K that goes longer into future
-Transaction costs- Lawyers for example
-Fairness concerns
Chapter 1: The Law of Agency
1.1 Introduction to Agency
Assent/consent by both P and A
A works on P’s behalf and subject to P’s control
All elements can be inferred- doesn’t have to be written down
Agent will generally want some sort of compensation from P
Agent owes fiduciary duties to P
P will sometimes be liable for Agent’s actions
Agency Costs
-Monitoring costs, bonding costs plus residual shirking
-Shirking- Principals’ interests diverge from Agents’
-Laziness, cheating, etc.
-Benefits realized by A but cost borne by P
-P could monitor A
-Bonding by A
-Ex. Working on commission or some other term that incentivizes A
1.2 Agency Formation, Termination, and Principal’s Liability
1.2.1 Formation
1.2.2 Termination
1.2.3 Parties’ Conception Does Not Control
Jensen Farms Co. v. Cargill, Inc
Facts. Warren operated a grain elevator and purchased grain from farmers for resale. Cargill financed Warren for Warren’s operations to the extent that both defendants’ names appeared on drafts that Warren dispersed. Cargill also had a significant amount of control over Warren, including approving any expenditure over $5,000, approving of any stock sale or dividends, and instructing Warren to explain the nature of any withdrawls on the account. The defendants also contracted into unrelated agreements that clearly established a principal-agent relationship. Warren also sold a majority of its grain to Cargill. Warren had financial problems that worsened until Plaintiffs began questioning the ability of Warren to make payments, and Cargill reassured Plaintiffs otherwise. Warren was forced to close, owing Plaintiffs $2 million. Plaintiffs brought suit against both, claiming Cargill was a principal of Warren.
Held. Cargill was a principal over Warren and is therefore liable for the damages sustained by Plaintiffs. Cargill consented to be a principal once Warren agreed to implement the changes and policies that Cargill suggested. Cargill’s subsequent interference in Warren’s internal operations further established the relationship.
Discussion. Cargill argued that they never consented to the agency relationship, and each of their actions could fall under a debtor-creditor or a buyer-seller relationship. Alternatively, Cargill argues that they are at best an undisclosed principal because they settled with the agent and no third parties entered directly into a contract with them. The court agrees that many of the factors, when taken individually, could fall into another category of a relationship. But the factors need be taken as a whole.
Cargill has control to halt Warren’s business by being sole creditor
Cargill extended more control than usual bank
1.2.4 Liability in Contract
R. 3d 6.01 and 6.02: When an agent w/ actual or apparent authority makes a K on behalf of a disclosed or unidentified principal…P and third parties are bound.
1.2.4.1 Actual and Apparent Authority
Actual Authority: from the perspective of a reasonable person in position of A. The agent must reasonably understand from the action or speech of the principal that she has been authorized to act on the principal’s behalf.
2.01: A acts with actual authority when A reasonably believes (
Express authority: authority was expressly given by principal to agent – look to see if there is a contract etc.
Implied/Incidental Authority: authority to perform implementing steps that are ordinarily done in connection with facilitating the main authorized act.
Apparent Authority: from the perspective of a reasonable third person – authority that a reasonable third party would infer from the actions or statements of the principal.
R.3d 3.03
Applies to 3rd parties
Doesn’t have to be principal-agent relationship
Established by manifestation between P and 3rd party
Key Question: What kind of manifestation by P suffices?
Apparent Authority: reasonable, from contact with the principal, to conclude that the agent has authority. Essentially an equitable remedy provided to prevent unfairness to third parties who reasonably relied on the principal’s actions in dealing with an agent. It holds even if the principal has expressly limited the agent’s actions. Also, if it’s an ordinary transaction that the agent has repeatedly done in the past, it may bind the principal.
This can be in the form of communication, representations made by the principal (such as through a business card), and former history of the principal (such as if the individual is well known for a producing a certain type of good, this can be relevant to apparent authority if he no longer produces this good and does not let buyers know).
White v. Thomas
Facts. Betty Simpson was a part-time employee of Bradford White, Sr. (defendant) who performed various administrative tasks. White had once granted Simpson a power of attorney to sign real estate closing documents on his behalf, but never authorized Simpson to negotiate or undertake any other deals. White asked Simpson to attend an auction and purchase a 217-acre property on his behalf. White authorized Simpson to bid up to $250,000 and gave her a blank check for the deposit. Simpson won the property for a bid of $327,500. Realizing her mistake, Simpson negotiated to sell forty-five acres of the property to Stanley and Mary Thomas (plaintiffs). The Thomases asked if Simpson was authorized to sell the land, and later alleged that Simpson claimed to have a power of attorney. The Thomases did not contact White or ask to examine the power of attorney documents before signing the contract. When White learned about the deals, he was upset. White went through with the purchase of the property, but immediately informed the Thomases that he was repudiating the deal to sell part of the tract. The Thomases sued White and Northwest National Bank (Bank) (defendant), seeking specific performance of the sale contract and release of the Bank’s mortgage on the 45 acres.
arris as its agent. TH’s actual authority included the power to bind Gallant on new insurance policies as well as interim policy endorsements such as adding a new driver. Although it wasn’t authorized to do so, TH bound coverage on Isaac’s new car although the premium wasn’t paid until 3 days later. In between this period, Isaac got into a car accident. Gallant claimed it was not liable for the losses because the policy was not in force since the premium was not paid as dictated in the policy and because TH did not have the authority to renew the insurance policy.
Rule: an agent has inherent authority to bind its principal where the agent acts within the usual and ordinary scope of its authority, a third party can reasonably believe that the agent has authority to conduct the act in question, and the third party is not on notice that the agent is not so authority.
Here, TH was acting within the scope of its normal authority and Isaac could reasonably believe that it was bound – it was customary for TH to tell its customers that they were bound.
Actual authority? NO. TH not supposed to agree to insurance changes w/out payment/approval of insurance brokers in Ind.
Apparent authority? Look between the principle and the 3rd party (Isaac). NO.
Inherent authority? YES. Inherent Agency Power- Gap filler in cases like undisclosed principles where apparent authority cant be used
-Supreme Court of Indiana repudiated the concept of inherent power
– SC uses apparent authority via job title rule to hold Gallant liable
-TH can bind Gallant due to overall communicative actions
-Don’t need inherent agency power with expansive view of apparent authority
Agency by Estoppel or Ratification (p. 22; R. 3d 2.05)
Failure to act when knowledge and an opportunity to act arise plus reasonable change in position on part of the third person
1.2.5 Liability in Tort
Only the master servant relationship triggers respondeat superior and vicarious liability, not independent contractor. Why vicarious liability?
-Loss-spreading- Spread losses among tortfeasor and employer
-Fairness
-Least cost avoider- Put liability on people who are in best position to most cheaply stop accidents from happening (employer)
-R.3d 7.07(1): P is liable for torts committed by (1) employees (2) in the scope of their employment
Agent not always an employee- could be ind. contractor
707 (3): P must have right to control manner and means of performance
P usually not liable for ind. Contractor
