Business Organizations Outline

Business Associations
Professor cummings – Fall 2006
 
I. Agency
 
The basic standard for the existence of an agency relationship is:
 
(1) a manifestation of consent by one person (the principal) that another person act on the principal’s behalf and (b) subject to the principal’s control
(2) the agent’s consent to so act.
 
 
A. Who is an Agent?
 
Agency Law suits:
 
                            Principal
          (always gives something to the agent)
 
 
 
 
Injured Third Party                                     Agent
 
Normally, agency is not questioned – usually clear and easy to see. Authority is usually the issue.
 
1. Restatement 2d of Agency §1
 
Agency – Principal/Agent
 
1) Agency is the fiduciary relation which results from the (1) manifestation of consent by one person to another that (2) the other shall act on his behalf and subject to his control and (3) consent by the other so to act.
 
2) The one for whom action is to be taken is the principal.
 
3) The one who is to act is the agent.
 
 
2. Restatement 2d of Agency §2
 
Master/Servant; Independent Contractor
 
1) A master is a principal who employs an agent to perform service in his affairs and who controls or has the right to control the physical conduct of the other in the performance of the service.
 
2) A servant is an agent employed by a master to perform service in his affairs whose physical conduct in the performance of the service is controlled or is subject to the right to control by the master.
 
3) An independent contractor is a person who contracts with another to do something for him but who is not controlled by the other nor subject tot he other’s right to control with respect to his physical conduct in the performance of the undertaking. He may or may not be an agent.
 
Three types of agency relationships:
Principal/Agent
Master/Servant – employee/employer*
Employer/Independent Contractor
 
*Doctrine of respondent superior – employer responsible for the actions of the employee within the scope of employment
Gordon v. Doty , 57 Idaho 792 (Reckless Driver Coach)
 
Facts: A father, R.S. Gorton, filed suit for hospital expenses for himself. His son also filed suit with his father as guardian ad litem to recover hospital expenses as the result of an accident in which he was being transported to and from a football game as a member of the team in a private vehicle owned by the appellant but driven by the football coach, Mr. Garst.
 
Reasoning: The court based its holding on the appellant’s statement:
“I asked him if he had all the cars necessary for his trip to Paris the next day. He said he needed one more. I said that he might use mine if he drove it. That was the extent of it.”
Because she did not say anything to Mr. Garst about loaning her car and he said nothing about borrowing it, the court held that the jury could have concluded that the principal and agent relationship existed.
 
Dissent – Justice Budge states that agency means more than mere passive permission. It involves request, instruction, or command. He argues that one who borrows a car for his own use is a gratuitous bailee and not an agent of the owner.
Class Notes
 
The basic standard for examining agency relationship
 
1) manifestation of consent by principal to the agent
and be subject to the principal’s control
and that the agent consents to the control
 
Business Law – in business organizations, courts try to find the proper party that can best afford to pay
 
Often, the parties that can best afford are the ones expected to be able to pay.
 
It does not matter what is written in contract – it is substance over form
If it appears to be a relationship, the court will find a relationship – it doesn’t matter what is written.
 
A. Gay Jenson Farms Co. v. Cargill, Inc. , 309 N.W. 2d 285 (Grain Elevator- Share of Profits)
 
Facts: Plaintiffs were farmers who brought suit against Cargill, Inc., a worldwide dealer in grains, and Warren Grain & Seed Co. when Warren became insolvent and did not pay the farmers for the grain. Cargill was brought into the suit because the farmers saw Warren as an agent of Cargill. Warren had obtained financing from Cargill in 1964, in which Warren issued checks from Cargill with both their names on it and Warren would deposit sales monies into Cargill’s account. Cargill became Warren’s agent with the Commodity Credit Corporation. Cargill was given the right of first refusal for grain Warren brought to market. An updated contract was created in 1967, which increased Cargill’s involvement – it opened Warren’s books to Cargill for inspection and limited improvements and investments subject to Cargill’s approval. In 1970, Warren became an agent of Cargill for the distribution of seeds. Further agreements in 1972 and 1976 increased Cargill’s investment in Warren. Warren’s debt grew and Cargill became involved on a daily basis. In 1977, Warren folded with $3.6 million in debt to Cargill and $2 million in debt to the farmers.
 
Rule(s): Agency is the fiduciary relationship that results from the manifestation of consent by one preson to another that the other shall act on his behalf and subject to his control, and consent by the other so to act…
 
Holding: Affirmed. because of the control and influence Cargill had over Warren, it was a principal.
 
Reasoning: There must be an agreement, but not necessarily a contract. Even if an agency was not intended, circumstantial evidence may show through course of dealing that an agency relationship was formed. Court found all three elements of agency:
1) by directing Warren to implement its recommendations, Cargill gave consent.
2) Warren acted on Cargill’s behalf by buying grain with Cargill money.
3) Cargill’s invovlvement with Warren’s internal affairs gave it de facto control.
 
Class Notes
 
Fiduciary Relationships – put the best interests of another party ahead of their own interests
 
trustee
lawyer/attorney
board of directors/shareholders
agent/principal
 
Control – Courts examine who has the control
 
In this case, court recognized that Cargill exercised de facto control over Warren.
 
Fairly clear that Warren became reliant on Cargill – Cargill’s non-commercial lending provisions established the agency relationship
 
Cargill could more easily bear the cost rather than the farmers
 
Protecting small consumers vs. Right to have free and open business practices
– balance between these two ebbs and flows
 
What a creditor can do (without creating agency relationship):
1) insist on receiving info and financial reports
2) provide counselling on discreet matters
3) recommend consultants
 
Beyond the scope:
1) veto power over important decisions
2) coercing the debtor to put a person from the creditor to be in control
3) providing other creditors assurances of payment
 
B. Liability of Principal to Third Parties in Contract
 
1. Authority
 
Actual Authority – authority given to the agent, expressly or implicitly by the principal
 
Apparent Authority – when a principal acts in such a manner as to convey the impression to a third party that an agent has certain powers which he may or may not actually possess.
 
Implied (or Inherent) Authority – actual authority given implicitly (cirumstantial evidence) to an agent
OR – kind of authority arising solely from the designation by the principal of a kind of agent who ordinarily possesses certain powers.
– sometimes viewed as a sub-group of Actual Authority
 
Topic Class Notes
 
Communication between the principal, third party, and the agent is key to resolving disputes of authority.
 
Judges usually primarily motivated by who they want to win and then seek to establish the requisite authority.
 
Actual Express Authority:
– The agent has Express Authority in that the Principal has directly instructed the Agent to so act and the Agent Acts according to the instruction,
·      The principal tells the agent to do X and the Agent does X. Principal is bound.
 
Actual Implied Authority:
– If , in order to carry out the Principal’s explicit instructions, Agent takes some other steps necessary to carry out those instru