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

® Agency relationships themselves do not create new business entities; they hold these entities together
® Agency is a legal relationship that helps define the relationships of individuals w/in the companies
® Restatement of Agency is the controlling law of agency
® Agent is a fiduciary w/ respect to the matters w/in the scope of her agency; she is responsible for the profits arising from the actions which she undertakes
® If agent breaches this fiduciary relationship, she will have to disgorge any profits she receives from that breach
® This fiduciary duty prevents the agent from acting in an adverse manner toward the principal or aiding an adverse party to the principal
® Scope of agency is determined usually by K b/w principal and agent or by the nature of the instructions given by the principal
® Scope of agent’s fiduciary duty is shaped by these terms, but the fiduciary obligation exists even though the K is silent toward the duties of the agent or purports to abolish the fiduciary duty, i.e. very difficult for agent to avoid the fiduciary duty
® If there is no principal-agent relationship, there can be no fiduciary duty/responsibility on the part of the agent toward the principal
® Agent must act w/ reasonable care in carrying out the agency and must meet a level of competence and skill consistent w/ the level of work: duty of reasonable care standard
® Principals owe duties to agents; must act in good faith and cooperate w/ the agent; must not interfere w/ the agent
® Principal can break its duty to agent by making it difficult for agent to perform her job
® Agency may be difficult to determine b/c it is often informal; need consent, control and action for an agency relationship
® Principal and agent must both consent to the relationship; explicit consent is not required
® But, there must be consent for the agent to act on behalf of the principal
® The principal controls the agency
® “Acting on behalf of “ means agent disregards her own interests in favor of the principal
® A trust is not an agency; trustee is not subject to the beneficiary’s control even though he acts to the benefit of the beneficiary
® Principal needs to be in control of the agent for there to be an agency relationship
® A servant is a type of agent, as defined by the Restatement
® Most employees are considered servants, and therefore they are considered agents
® Partnership – two or more people or entities coming together to form an business for profit
® Can enter into a partnership w/o knowing
® A general partnership exposes the partners to unlimited personal liability
® Limited Partnership – formed under Uniform Limited Partnership Act
® In general, limited partners are not exposed to unlimited personal liability
® General partners take an active part in the business thereby exposing them to unlimited personal liability
® Limited partners do not take part in the day to day activities of running the partnership’s entity
Fowler v. Pennsylvania Tire Co., 1(t), 3(c)
® A transaction in goods is considered a consignment if the K called for title to remain in the party delivering the goods
® In a consignment, title to goods remains with the delivering party
® In a sale, the receiving party takes title to the goods
® UCC § 2-326: goods sold under a name other than that of the person delivering them are subject to the claims of the buyer’s creditors while in the buyer’s possession (Penn Tires will lose)
® If UCC was applied, Penn Tire could protect its interest by filing document under Article IX
® Could sell tires on consignment, through independent contractors, or through company stores
® There are greater capital costs (including inventory), risk of loss, etc if the company owns the store itself
® Important deal points: should there be an employment K? most employees in the US are “at-will” employees
® What is an appropriate salary? Duration of agreement? Hours of work? Terms of termination? Etc
® If Martin is an independent contractor (not an agent of Penn Tire): there may not be a purchase K; he may sell other tires instead; Penn Tire would not have all the capital costs in this scenario; reduced risks (risk is shared)
® Consignment: Martin is then a agent of Penn Tire b/c he is under the control of Penn Tire and is acting on Penn Tire’s behalf
® Who has the right to control the operation? Who bears the risk of loss and who reaps the profit?
® Here, there is an agreement and there is conduct for an agency relationship; where is the consent?

Employee v. Independent Contractor
Humble Oil & Refining Co. v. Martin, 12(t), 4(c)
® A party may be liable for a contractor’s torts if he exercises substantial control over the contractor’s operations
® D exercised substantial control over the details of the service station’s operation
® A party is not normally liable for the torts of his contractors
® However, when that party so substantially controls the manner of the contractor’s operations, the contractor relationship breaks down and a master-servant relationship is formed
® D mandated much of the day-to-day operations of the station, certainly enough to justify the trial court’s finding of a master-servant relationship rather than a contractor relationship
® Under theory of apparent agency, the mere appearance of a master-servant relationship may subject the principal to liability
® No affirmative negligence on the part of Humble Oil; attempting to assign liability based on relationship
® Independent contractor (non-agent) are hired to obtain a certain objective; principal cannot control how that objective is achieved; this person is not a servant
® Independent contractor (agent) – principal has ability to control how the objective is attained; ex. Auctioneer, factor, real estate agent
® Could argue that Schneider is an agent of Humble Oil in selling oil and gas, but is an independent contractor w/ respect to performing service on vehicles – need to distinguish liability w/ respect to selling oil and gas and performing service
Hoover v. Sun Oil Co., 14(t), 5(c)
® A franchisee is considered an independent contractor of the franchisor if the franchise retains control of inventory and operations
® Franchisee had to comply w/ standards of parent company Sun, but franchisee was left in control of day-to-day operations of the station and made all inventory decisions
® The test in such a situation is whether the franchisor retains the right to control the details of the day-to-day operations of the franchisee
® Where the employee has the burden of the risk of loss, cts are more likely to find a independent contractor
® A franchisor’s control or influence over the results alone are insufficient to establish a principal-agent relationship
® If franchisor

Fiduciary Obligation
5 categories of Agent’s Duties
® Duty to act w/ good faith and consistent w/ the duty of loyalty
® Duty to use reasonable care and skill in carrying out the purpose of the agency
® Duty to disclose to the principal all relevant information
® Duty to render accounts
® Duty to act only as authorized
® Prime duty is the one of loyalty
® Duty of Loyalty: agent places the principal’s interest ahead of his own
® Duty of Care: agent must use reasonable care and skill in carrying out the purpose of the agency (this encompasses the business judgment rule)
® When agent goes outside scope of agency, principal is liable b/c he picked the agent
® Agent must place principal’s interest above his own; where this is not done, personal liability and disgorgement of all profits may be required
® The breach of a duty of loyalty, and sometimes the breach of a duty of care, may result in a shareholder derivative action – an action brought by stock holder on behalf of a corporation
® Recovery generally accrues to the corporation in theory; in practice, recovery accrues to the P’s attorney
General Automotive Manufacturing Co. v. Singer, 57(t), 15(c) – Know this case well
® An agent who draws business away from his principal for his own enrichment is liable to the principal for his profits therefrom
® An agent has a fiduciary relationship to his principal
® A fiduciary owes a high degree of loyalty to the principal; part of this duty of loyalty is not to do anything to the principal’s economic detriment
® An agent who “moonlights” or otherwise engages in activities that draws profits away from the principal does precisely this
® Whether an employee’s side work constitutes a breach of fiduciary duty depends on:
(1) Employee’s position – the higher up the employee, the higher the fiduciary duty
(2) Closeness of the side work to the type of economic activity of the principal
® Court should have determined whether P could have handled theses job offers; if P could not, it would be r

partners may be oral or written and express or implied; you can nod your head an imply a partnership
® Generally a partnership agreement requires unanimity; the agreement may allow for agreements that are less than unanimous

UPA § 6 (19)
® A partnership is an association of 2 or more persons to carry on as co-owners a business for profit
® If it is not for profit, it is not a partnership
® If 2 people come together for profit and wind up not working for a profit; so you could run a not-for profit business, but pay yourself a salary; this is a way for people to come together and not face partnership liability
® Partnerships provide for flow through (to the partner) profits and losses
® Threatens to make p-ship obsolete
® Taxed like a p-ship
® Most/all of the liability protections as a corp
® Combo of LLC and gen p-ship

Partners Compared w/ Employers
Fenwick v. Unemployment Compensation Commission, 84(t), 22(c)
® A partnership is an association of two or more persons to carry on as co-owners a business for profit
® P’s employee asked for higher wage; P agreed if the income from the shop warranted it
® Agreement provided that her wage would remain the same, but she would receive a year-end bonus of 20% of the net profits of the shop, if the business warranted it, and that the partnership could be terminated by either party upon 10 days notice
® When relationship was terminated, UCC sought to determine whether employee was a partner or employee for 1939 in order to determine P’s liability under the unemployment compensation statute
® Although the agreement b/w P and employee was termed a “partnership” agreement, the essential element of co-ownership was lacking
® Factors used in determining whether a partnership exists include:
(a) Intentions of the parties as evidenced through the language of any written agreements
(b) The right to share in profits
(c) The obligation to share in losses, the ownership and control of the partnership property
(d) Control over management of the business
(e) Rights of the parties upon dissolution
® P contributed all capital, managed the business, and took over all assets upon dissolution
® Employee got nothing from the agreement other than a new wage scale, and risked nothing from it
® Ownership was w/ P
® Intent of parties was this: employee would get a raise at end of year if owner could afford it; this essentially was a profit sharing agreement
® There should be an agreement among parties as to what should happen upon dissolution of the partnership
® Look to UPA §7, p. 19 of supplement for rules for determining the existence of a partnership
® UPA §9 – partner is an agent of the partnership
® UPA §13 – partnership is bound by a partner’s wrongful act as he acts in the ordinary course of the business of the partnership
® UPA §21 – partner is accountable as a fiduciary
® Courts will look beyond the language of an agreement to determine the true nature of a business association
® Similarly, the absence of a written agreement will not preclude a finding that a partnership did exist
® Although profit sharing is often strong evidence that a partnership was intended, it is never conclusive
® Party alleging p-ship has the burden of proving existence
Frank v. R.A. Pickens & Son Company, 89(t), 23(c)
® If a buy-out agreement exists among partners, a partner’s disassociation from the partnership does not cause the dissolution of the partnership
P refused to accept a check for the amount of his interest