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Business Associations/Corporations
Wayne State University Law School
Davidoff, Steven M.

I. Agents and Employees
A) Agency Relationships
1) They do not create new business forms.
2) Holds unincorp’ed businesses, incorp’ed businesses, partnerships, and other business entities together.
3) Agency:
a) Legal relationship. Defines rights and responsibilities of ee’s of a business.
b) Typically an informal relationship—can exist w/out a written, filing, or explicit acknowledgment.
4) Principle source of agency law = Rest 2nd (1957) → Rest 2nd: def’ns in here are not consistently referred to by the cts.
5) Scope of agency
a) Agent is a fiduciary with respect to matters within scope of his agency.
b) An agent is accountable to profits arising out of a transaction.
c) If agent breaches duty to principle, agent may be likely to disgorge any profits thereby.
d) Can agent compete with principle concerning subj matter of the agency? No!
e) Scope of agency is determ’ed by K bet principle and agent or by nature of instructions given by principle.
f) Scope of agent’s fid duty may be shaped by terms. Fid duty exists even though the K is silent as to the duties of the agent.
6) Duties
a) Agent must act with reasonable care.
b) Unpaid agents have a duty—although it may be a lesser duty.
c) Principles owe duties to agents. Thus, principles must act in good faith, cooperate with agent, and cannot interfere with the agent.
7) **3 components of an agency:
a) Consent by agent and principle.
b) Control by principle.
c) Action by agent on behalf of principle.
8) Explicit consent not required in an agency. Generally, agent must follow
principle’s instructions.
9) “Acting on behalf”= agent disregards her int’s and acts in benefit of principle.
a) Distinguish agency from non-agency relationship.
b) A trust is not an agency; trustee not subj to beneficiary’s control.
10) An “employee” = a “servant”
a) Servant is a type of agent.
b) Ask: was servant acting in scope of his/her employment? → if yes, then master must answer to servant’s actions.
11) Partnership: ass’n of more than 2 persons to carry on a business for profit.
a) Uniform Partnership Act (1914)
b) Disadvantages: expose each partnership to unlimited personal liability—if it’s a general partnership.
c) Limited partnership
§ formed under Uniform Limited Partnership Act
§ not exposed to unlimited personal liability—unless they participate actively in business.
B) Organization of Business
1) Fowler v. Pennsylvania Tire Co: P (Penn Tire Co) had agreement wherein it delivered to Martin tires it manufactured for Martin to sell. K said arrangement was in nature of a consignment (i.e. sale on consignment: send goods to another for that comp to resell). Title was to remain with P until ultimate sale. K called for return of tires upon termination of agreement. After P filed for bankruptcy, P petitioned for reclamation. D (trustee) said tires were inventory and therefore prop of the estate.
a) Ct said a transaction in goods is a consignment if the K calls for title to remain in the party delivering the goods. Distinguishing characteristic of a consignment vs. right of sale is that in a consignment, title to the goods remains in the delivering party, while in a sale the receiving party takes title to the goods. The intent of the parties controls as to which form the transaction takes.
b) When the K is unambiguous, it will be the sole determinant of the parties’ intention. (note: look at intent of parties to ascertain whether there’s consent). Here, the K was quite unambiguous in the nature of the transaction: as title was to remain in P, the transaction was a consignment.
c) Ct says tires were NOT segregated. Tires at issue could be sold on consignment, via indep K’ers, or through comp-owned stores.
d) Ct focuses not on law, but on alternative ways a business can be organized.
e) Ask: should there be an employment K?
f) Adv’s/disadv’s selling tires via indep K’er.
§ If Martin is an indep K’er, indep K’er not required to purchase a set # of tires.
§ Adv’s: no tort liability for agency relationship; risk is shared.
§ Disadv’s: less control over indep K’er
g) Under U.C.C. §2-326(3), P should lose under course of performance
C) Employee vs. Independent Contractor
1) Humble Oil Refining Co. v. Martin: unoccupied car (left by Mrs. Love) left at
gas station for servicing. Before any station ee touched the car, the car rolled
by gravity off the premises across the street and hit Mr. Martin. Station owned
by Humble. Humble says he is not liable to Martin or Mrs. Love cause the
station was operated by an indep K’er, Schneider. Humble says he’s not
responsible for his negligence nor that of the station ee that was present.
a) Ct found that Humble was responsible for the operation of the station.
Humble controlled the details of the station work with regards to
Schneider himself and therefore as to ee’s which it was expressly
contemplated that he would hire. The K suggests an agreement b/t
indep K’ers—including a provision requiring Schneider to “make
reports and perform other duties in connection with the operation of
said station that may be required of him from time to time by
Company.” Humble had to pay ¾ of one of the most important
operational expense items; title remained in Humble until delivery to
the consumer. Financial control and supervision done by Humble.
Humble furnished location, equipment, advertising media, the products
and a lot of the operating costs. Agreement required Schneider to do
anything Humble might tell him to do. Schneider was Humble’s
b) Issue: do we impose vicarious liability (liability w/out fault) onto
c) When servant is under right of control to master, and if servant agrees
to work on behalf of master, then master-servant relationship exists.
d) There’s 2 types of indep K’ers: 1) indep K’er non agent, and 2) indep
K’er agent. However, don’t worry about this distinction. Focus on whether there is an indep K’er or an agent.
e) This case concerns whether actual agency or apparent agency.
f) Issue: is Schneider a K’er or pure ee? He is a pure indep K’er with
respect to service, but sold gas directly to customers; sale of gas vs.
sale of service. Thus, he is an indiv that is an agent with respect to a
part of a business, and is an indep K’er with another part of the
2) Hoover v. Sun Oil Company: D (Barone) operated as a franchisee of D (Sun Oil Co.). Agreement called for a certain level of compliance by Barone with Sun stds, but Barone was left in control of day-to-day operations of station, and made all inventory decisions. He carried primarily Sun products, but was allowed to carry products by other comp’s as well. P (Hoover) suffered burns when

ost wages (restitution for lost time).
c) Restatement of Restitution §197: theory of constructive trust.
§ Beneficiary = General Automotive (G.A.)
§ Trustee = D
§ Body/money of the trust would accrue to G.A. and at end of trusteeship, $ should be going to G.A.
§ Similar to disgorgement remedy.
d) **Most things that are accomplished through agents → must put int of their principal ahead of their own.
e) Bonding: form of insurance. To protect principal against acts by agent, the principal can ask for this.
3) Bancroft-Whitney Co. v. Glen: (61)Glen (D) was Pres of Bancroft Co.(P), a publisher of law books. Bender Co (D) was a competitor. Bender, wishing to expand onto west coast mkt, began discussions with Glen about leaving P and working for Bender. During negotiations, Glen discussed with other P ee’s, mostly senior editors, the possibility of moving with him. At one point, Glen acted to prevent raises from being given to the editorial staff, so as to make staying at P less desirable. He also disclosed to Bender the salaries of P editors, so that it could better formulate competing offers. Finally, Glen officially terminated his employment at P. Not long after, 16 other ee’s imp to P’s operation resigned, and went to work for Bender. P sued Bender for unfair comp and Glen for breach of fid duty.
a) An exec who recruits co-ee’s to join him in moving to a competitor breaches his fid duty to the former comp. Ct said when an officer uses his position to recruit personnel imp to his corp, the departure of which will work to the detriment of the comp, the line b/t appropriate and inappropriate conduct clearly has been breached.
b) A corporate officer or dir must protect the int’s of the corp committed to his charge, and refrain from doing anything that would work injury to it; this includes depriving the corp of profit or adv which his skill and ability might properly bring to it, or enable it to benefit in the reasonable and lawful exercise of its powers. That an officer negotiates with a competitor prior to taking employment therewith does not in itself violate this duty.
c) At issue in this case is the fid duty of loyalty → absence of good faith; there was nondisclosure; he put his int ahead of his er. Ct said damages are appropriate. Glen could leave P for a competitor w/out violating a fid duty. Δ could begin/prepare to leave for a competitor, but with limitations.
d) Note – since glen had signed a K w/ Bender before leaving π, if he had disclosed Bender’s raid to π, he may have violated FD to Bender
e) RATIFICATION rstmt § 82 – Bender ratified Glen’s acts – same legal effect as if Bender had performed them himself depreives him of the defense that Glen acted on his own