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8/8/2019 Backup of BA I Outline

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Business Associations I

AGENCY

Principles of Agency

What is an Agent?o Definitions

Agencythe fiduciary relation which results from the manifestation of

consent by one person to another that the other shall act on his behalf and

subject to his control, and consent by the other so to act Essential elements

o Consent that the person will be subject to the control of the

other

Either express or implied

o Control of one person over the otherusually the key issue

to determine whether there is an agency relationship

It is not essential that the right of control beexercised, so long as the right actually exists

o Acting on behalf of the principal

Principalthe one for whom action is to be taken

Agentthe one who is to act

o General rule

The principal is liable for the acts of the agent so long as the agent is

acting with authority Is there a principal/agent relationship?

Is the agent acting within his authority?

This language is used for contract, not tort

o Special rules A travel agent is a special agent of the traveler for the purposes of that one

transaction between the parties and all usual duties go with thisrelationship

A real estate agent is primarily the agent of the party who first employs

him

An independent insurance agent is the agent of the insured, not of the

insurance company, and the insured can sue him for breach of contract,

etc.

Proof of the agency relationship cannot be shown by the statements of the

agent alone

Whoever makes the allegation that an agency relationship existshas the burden of proving the relationship

A party who deals with an agent is held to a duty of reasonable

investigation regarding that agents authority

o Buyer-Seller relationships

If a person buys from another with the intention of turning around and

selling it to someone else, there is not an agency relationshipit is abuyer-seller relationship


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Whether the buyer fixes his resale price

Whether title passes from seller to buyer

Whether the buyer is acting primarily for the benefit of the seller or

for his own benefit

How the parties have labeled the relationship (relevant but not

determinative) The amount of control reserved to the seller

Whether the buyer has an independent business

Whether the buyer gets to negotiate the quantity he buys

Whether the buyer always gets all of the sellers goods

The extent to which a middle man is free to negotiate for himself

with the end buyer

Only when a manufacturer controls the day-to-day or operative details of

the dealers business is an agency relationship potentially created

o Distinguished from trusts

A trust cannot be terminated at the will of the donor, but an agency

relationship can be terminated at the will of either party A person can be both an agent and a trustee

When the donor party retains control of the property, an agency

relationship is created, not a trust

A trustee has title to the trust property, but an agent does not have title to

the property of his principal

A trustee is not subject to the control of the beneficiary, but an agent is

subject to the control of his principal

An agency is created by the consent of the principal and the agent, but a

trust may be created without the knowledge or consent of the beneficiary

or of the trustee

General Versus Special Agents

o General rules

The third party has the duty to obtain information of the nature of the

agents authority

The third party must ascertain the nature and authority of the agent and he

cannot rely solely on the statement of the agent

o Definitions

General agentan agent authorized to conduct a series of transactions

involving a continuity of service Broader apparent authority than the special agent

More inherent agency powers than the special agent

Special agentan agent authorized to conduct a single transaction or afinite series of transactions not involving continuity of service

o Rules for special agents

A special agent can bind an undisclosed principal only to contracts made

within the scope of his authority

A special agent for an undisclosed principal has no power to bind his

principal, by contract or conveyances, which he is not authorized to makeunless:


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The agents only departure from his authority is

o In not disclosing his principal, or

o In having an improper motive, or

o In being negligent in determining the facts upon which his

authority is based, or

o In making misrepresentations (if he had the authority tomake representations)

The agent is given possession of goods or commercial documents

with authority to deal with them (like the bona fide purchaser for

value rule in propertythe bfp wins over the principal)

o General agents

Can bind the principal through his representations/misrepresentations if he

is authorized to make representations

Has full power to bind the insurer to the agents contract of insurance or to

issue policies or to accept risks Soliciting agents are special agents and do not have this power

Powers are coextensive with the business entrusted to him, and his

fraudulent act is that of the companys as well

A special agents fraud will be based on vicarious liability, not

agency theory

Sub-Agents

o Definitions

Person appointed by an agent empowered to do so to perform functions

undertaken by the agent for the principal, but for whose conduct the agentagrees with the principal to be primarily responsible

Person whom the agent delegates as his agent to perform an act for theprincipal which the agent has been empowered to perform through his

own representative

o Examples

Real estate broker operating under an exclusive listing contract with the

seller of the property stands in an agency relationship with the seller andthe authority given to the broker by the listing agreement will generally

include the implied authority to appoint a salesperson as a sub-agent to

perform the task assigned to the broker by the listing agent

When you hire a general contractor, it is implied that he will hire

subcontractors, which are sub-agents whom he has the implied authority to

hire on your behalfo Patterns of intent possible with sub-agency

P could intend that A2 is acting independently of A1 and directly under the

control of P, despite the fact that A1 hired A2 A2 is really a co-agent and not a sub-agent

A2 could be acting under A1s control only, and A1 is responsible for his

actions


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A2 is then an agent of both A1 and P and A1 would be liable to P for

A2s actions, and both A1 and P would be liable to third parties for

A2s actions This is the definition of sub-agent under the Restatement

A2 could be strictly A1s agent if P never manifested any intention to A1 to

appoint either a sub-agent or a co-agent P is then generally not responsible for the acts of A2

Vicarious Liability

Introduction

o General rule

A master is subject to liability for the torts of his servants committed while

acting in the scope of their employment

o Justifications for vicarious liability

Compensatorydeep pocket theory, to ensure that the victim will be fully

compensated and the master more likely has the ability to pay

Fairnesssince the servant is generally furthering the business of themaster, it is generally foreseeable as the inevitable result of doing businessand is seen as a business expense, based on the privilege of doing business

Loss spreadingrisk distribution theory, the employer is in the best

position to insure itself against the losses from tortious conduct

Efficiencywill avoid the necessity for detailed and costly judicial

analysis into whether the employer was negligent in hiring, etc. of hisemployees, encouraging careful choice of employees

Employee Versus Independent Contractor

o Definitions

Mastera principal who employs an agent to perform service in his

affairs and who controls or has the right to control the physical conduct ofthe other in the performance of the service

Servantan agent employed by a master to perform service in his affairs

whose physical conduct in the performance of the service is controlled oris subject to the right to control by the master

Independent contractora person who contracts with another to do

something for him but who is not controlled by the other, nor subject to

the others right to control with respect to his physical conduct in theperformance of the undertaking; he may or may not be an agent

o Factors to determine if someone acting for another is a servant or an independent

contractor

Extent of control which by the agreement the master may exercise over thedetails of the work and the degree of supervision

The more control over the details, the more likely he is a servant

Key test is whether the employer has the right of control and

supervision over the work of the alleged employee, and the right todirect the manner in which the work is done, as well as the result

which is to be accomplishednot the actual interference but the

right to do so


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ICs are not subject to the control of the employer except as to the

results or product of his work

Whether or not the one employed is engaged in a distinct occupation or

business

The more specialized and distinct, the more likely he is an IC

The kind of occupation with reference to whether in the locality the workis usually done under the direction of the employer or by a specialistwithout supervision

The skill required in a particular occupation

The more specialized/skilled, the more likely he is an IC

Whether the employer or the workman supplies the tools and place of

work for the person doing the work

ICs supply their own tools

The length of time for which the person is employed

The longer the time, the more likely he is an employee

The method of payment, whether by time or by job

ICs are paid by the job and employees are paid by time

Whether or not the work is part of the regular business of the employer

If regular business, more likely to be an employee

Belief of the parties

Not determinative except that it indicates an assumption of control

by one party and submission in the other

Custom in the community is also important

Whether it furthers the principals business or the others business

ICs have their own business

o Special situation: doctors in hospitals

Where a hospital holds itself out to the public as providing a given service

and where the hospital enters into a contractual agreement with one ormore physicians to direct and provide the service and where the patient

engages the services of the hospital without regard to the identity of aparticular physician, and where as a matter of fact the patient is relying on

the hospital to deliver the desired health care and treatment, the doctrine of

respondeat superior applies and the hospital is vicariously liable for thedamages proximately resulting from the negligence of any physicians

Traditional analysis would result in the physicians being independent

contractors, but in these cases the courts move to an apparent authority

theory Limitations on the Independent Contractor Exception

o Negligent Selection General rule is that no vicarious liability attaches when a physician is an

independent contractor and not an employee or servant of the hospital ifthe patient goes to the hospital specifically for the services of this doctor

Hospital has no right of control

Patient picks the doctor

The doctor is not an employee


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Doctrine of corporate responsibility for the quality of medical care has

been adopted by many courtsa hospital owes a duty to its patients to

exercise reasonable care in the selection of its medical staff and in

granting specialized privileges and to periodically monitor and reviewtheir competency

This is not a vicarious liability theoryit is a negligence theory

o The Borrowed Servant Doctrine

Issuethere are two potential masters and the courts will only hold one of

them liable

General ruleborrowing master, not the loaning master, is liable for the

negligent acts of the loaned servant if the loaned servant becomes aservant of the borrowing master

The master with the primary right of control at the time of the

negligent act is the one who will be held vicariously liable

Crucial question is which employer had the right to control the

particular act giving rise to the injury Orders of the borrowing employer must be commands and not

requests if the worker is to be found to be a loaned servant

Tests to determine when an employee becomes a borrowed servant

Right of control test (majority)

o Assumes to place the responsibility for the servants

negligence on the employer having the right to control the

servants actions at the time the negligent act occurred

Both have a degree of control, but it is based on

who has the control at the time of the act

The special employer has the power to detail how

the job is done Sometimes the courts will look to what caused the

injury

Whose business test (minority)

o At the time of the negligent act, which employers business

was being done or furthered

The problem is that both employers businesses are

being furthered

Focus on the act itself and see whose business is

being furthered the mostquestion of fact

Factors to examine in determining whether the employee is a loaned

servant (making the borrowing master, not the loaning master, liable ifanything goes wrong)

Did the employee consent, actually or implicitly, to work for a

special employer Whose was the work he was performing at the time of the injury

Whose was the right to control the details of the work being

performed

For whose benefit primarily was the work being done


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Dual liability approach (minority view)both the borrowing employer

and the loaning employer may be held liable in tort to the third party who

sustains injuries caused by the negligence of the loaned employee when

the loaning employer retains broad control over the loaned employee andthe borrowing employer has control over the details of the loaned

employees worko Non-Delegable Duty

General rule

The master is not subject to liability for the torts of his servants

acting outside the scope of their employment, unless:

o The master intended the conduct or the consequences

o The master was negligent or reckless

o The conduct violated a non-delegable duty of the master

o The servant purported to act or to speak on behalf of the

principal and there was reliance upon apparent authority orhe was aided in accomplishing the tort by the exercise of

the agency relation Inherent danger exception

In general, the employer of an IC is not liable for physical harm

caused by the acts or omissions of the IC, but there are exceptions

in special situations where the employer is in the best position toidentify, minimize, and administer the risks involved in the

contractors activities

One who employs an IC to do work involving a special danger to

others which the employer knows or has reason to know to be

inherent in or normal to the work, or which he contemplates or hasreason to contemplate when making the contract, is subject to

liability for physical harm caused to such others by the ICs failureto take reasonable precautions against the danger

This exception is not limited to generally hazardous workit is

sufficient that the work involve a risk recognizable in advance of

physical harm to others which is inherent in the work itself or

normally to be expected in the ordinary course of the usual orprescribed way of doing it, or that the employer has special reason

to contemplate such a risk under the particular circumstances under

which the work is to be done If the employer takes all reasonable precautions, he may be

excused from liabilityif he does do so, though, he runs the risk

of losing the IC relationship because he has too much control Peculiar risk doctrine

Employer is subject to liability caused by the actions of its ICs if

the employer fails to exercise reasonable care in preventing the risk

that arises out of the character of the work or out of the placewhere it is to be done

Look to the conduct of other businesses, past history, insurance and

its coverage, etc.


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Scope of Employment

o In General

General rule

An employer is no longer liable for the negligent acts of its

employees if the employees have diverted from the employers

business until the employees are once again doing the employersbusiness

o Detours are generally okay, but frolics are nottime and

distance aspect

Scope of EmploymentGeneral Statement

Conduct of a servant is within the scope of employment if, but

only if

o It is the kind he is employed to perform,

o It occurs substantially within the authorized time and space

limits,

o It is actuated at least in part by a purpose to serve the

master, ando If force is intentionally used by the servant against another,

the use of force is not unexpectable by the master Conduct of a servant is not within the scope of employment if it is

different in kind from that authorized, far beyond the authorized

time or space limits, or too little actuated by a purpose to serve the

master

Kind of Conduct within Scope of Employment

To be within the scope of employment, conduct must be of the

same general nature as that authorized, or incidental to the conductauthorized

In determining whether the conduct, although not authorized, isnevertheless so similar to or incidental to the conduct authorized as

to be within the scope of employment, the following matters are tobe considered

o Whether the act is one commonly done by such servants

o The time, place, and purpose of the act

o The previous relations between the master and servant

o The extent to which the business of the master is

apportioned between different servants

o Whether the act is outside the enterprise of the master, or, if

in the enterprise, has not been entrusted to any servant

o Whether or not the master has reason to expect that such an

act will be done

o The similarity in quality of the act done to the act

authorized

o Whether the instrumentality of the harm that is done has

been furnished by the master to the servant


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o The extent o departure from the normal method of

accomplishing an authorized result

o Whether the act is seriously criminal

Forbidden Acts

An act, although forbidden or done in a forbidden manner, may be

within the scope of employment A master is liable for the negligence of his servant if at the time of

the negligent act the servant is acting within the scope of hisemployment, and this liability applies even in instances where the

servant, while disobeying his masters orders, injures a third party

o Intentional Torts

General rule

A servant may be acting within the scope of his employment when

he commits an intentional tort, although it is less likely that it will

fall into the scope of employment than a negligent tort

Factors to consider

Extent of the wrong

o An employer is more likely to anticipate minor crimes than

major ones

Foreseeability of the conduct

o Some courts apply this rule

o An employer is liable for the intentional torts of his

employees if they were reasonably foreseeable or

characteristic

Drunk sailor case

o Limited to torts which can be fairly said to be characteristic

of the enterprise

Whether the servants purpose was to serve the master

o A master may be liable for the intentional torts of his

servants if the torts are done, at least in part, with a purposeto serve the master

Drunken boatswain who orders sailor around and

beats him up

Sexual misconduct is obviously not to serve the

master

o Punitive Damages

Approaches to liability of the employer

Always fault rulerecovery is permitted against an employer

whenever he is liable for the same conduct in compensatory

damages

Complicity rulepunitive damages can be properly awarded

against a master or other principal because of an act by an agent if,but only if


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o The principal or a managerial agent authorized the doing

and the manner of the act, or

o The agent was unfit and the principal or managerial agent

was reckless in employing or retaining him, or

o The agent was employed in a managerial capacity and was

acting within the scope of his employment, oro The principal or a managerial agent of the principal ratified

or approved the act Some fault rulebefore an employer may be held vicariously

liable for punitive damages under the doctrine of respondeat

superior, there must be some fault on his part; although the

misconduct of the employee must be willful and wanton, it is notnecessary that the fault of the employer, independent of his

employees conduct, also be willful and wantonit is sufficient

that the plaintiff allege some fault on the part of the employerwhich foreseeably contributed to the plaintiffs injury to make the

employer vicariously liable for punitive damages No fault rulea few states prohibit vicarious punitive damages

altogether

Statutory Inroads on the Common Law Definition of Employee

o Right of Control testcommon law test

Used by ERISA

General characteristics of employers

Select and engage the employee

Pay the wages

Power of dismissal

Power and control over the employees conduct

o Economic Realities testemployees are those who as a matter of economicreality are dependent on the business to which they render service

Used by FLSA and SSA

o Hybrid testright of control and economic realitiesit is the economic realities

of the relationship viewed in light of the common law principles of agency and

the right of the employer to control the employee that are determinative

Used by Title VII

o Relative Nature of the Work testin determining the existence of an employee-

employer relationship, one examines the nature of the claimants work in relation

to the regular business of the employer, focusing on

The nature of the claimants work

Skills required to do the work

The degree to which the work constitutes a separate calling or

enterprise The extent to which the work might be expected to carry its own

accident burden

The relation of that work to the alleged employers regular business

Whether the claimants work is continuous or intermittent


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Whether the duration of the claimants work is sufficient to amount

to the hiring of continuous services as distinguished from the

contracting for completion of a particular job

Bases of Authority

Express Authorityo Definitionexpressed either orally or in writing (some require a writing like

powers of attorney)

o Equal dignity ruleif the underlying contract is required to be in writing, then the

authority to do it must also be in writing

Implied Authority

o Definitionthe authority that an has and/or needs in order to carry out express

authority (a recognition that we can never say everything that we intend)

Actual authority that is circumstantially proven from the facts and

circumstances attending the transaction in question and may be implied

from the words used, from customs, and from relations of the parties

If there is no express authority, then there is no implied authority

o Secret limitations on authority

If not communicated to the third party, will not be binding on the third

partytrue with implied/inherent authority and apparent authority

o Examples

Attorneys authority to negotiate with opposing counsel (not to settle)

Presidents of corporations

Managers of stores

Apparent Authority and Estoppel

o Definitionthe authority that the agent has because the principal has done or

taken some action that leads a reasonable third party to believe that the agent had

that authority A type of circumstantial authoritynot actual

The principal is only liable to those third parties who have no notice of the

secret limitations on the agents authority and who are relying in good

faith on the apparent authority

Can never have apparent authority when the principal is wholly

undisclosed

The principals manifestation is given to the third party, either directly or

indirectly, by words or acts, and not given to the agent, as with expressauthority

o Acts to Focus on to Determine Apparent Authority

If the principal created the appearance of authority by providing businesscards, office space, etc.

Principal neglects to inform the third party that the agent no longer has the

authority and the principals actions in the past create a course of conduct

The actual words of the principal may give the agent apparent authority

beyond what he originally intendedgive him what he wants and I will

pay


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Failure of the principal to do something when a reasonably prudent person

would do somethingfailing to take back POA papers

o Differences between apparent authority and estoppel

Dont have to show a change of position with apparent authority

Apparent authority is real authority and will get you expectation damages

for a breach of contract In an apparent authority situation, the principal has rights to enforce the

contract, but not in an estoppel situation

Courts may not find enough for apparent authority and still be able to use

estoppel argument

Inherent Agency Power/Inherent Authority

o Definitionthe authority that an agent has simply because of the position that he

occupies, based on what this type of agent usually does

Designed to protect innocent third parties

A third party must reasonably believe that an agent of this type would

have this type of authority based on customary practice

Based on what agents of this kind can typically do

A term used in the restatement to indicate the power of an agent which is

derived not from authority, apparent authority, or estoppel, but solely from

the agency relation itself and exists solely for the protection of personsharmed by or dealing with a servant or other agent

o Acts of Manager Appearing to be Owner

An undisclosed principal who entrusts an agent with the management of

his business is subject to liability to third persons with whom the agent

enters into transactions usual to such businesses and on the principalsaccount, although contrary to the direction of the principal

o Unauthorized Acts of General Agents

A general agent for a disclosed or partially disclosed principal subjects hisprincipal to liability for acts done on his account which usually

accompany or are incidental to transactions which the agent is authorized

to conduct, if although they are forbidden by the principal, the other partyreasonably believes that the agent is authorized to do them and has no

notice that he is not so authorized

The Equal Dignity Rule

o If the underlying contract has to be in writing, then the agents authority to

negotiate the contract has to be in writing as well

o The act creating the agency shall be executed with the same formality (and need

have no more) as the law prescribes for the execution of the act for which the

agency shall be created Ratification and Adoption

o Definitions

Ratificationthe affirmance by a person of a prior act which did not bind

him but which was done or professedly done on his account whereby the

act as to some or all persons is given effect as if originally authorized byhim


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Relates back to the time the unauthorized act occurred and is

sufficient to create the relationship of principal and agent

Requires the principal to have knowledge of all the material facts

and an intent to ratify

Cannot later be revoked or recalledit is binding

When an agent exceeds his authority, a principal is not boundunless he ratifies the act committed

When this conflicts with the equal dignity rule, the equal dignity

rule wins

Affirmanceeither

A manifestation of an election by one on whose account an

unauthorized act has been done, to treat the act as authorized, or

o Express conduct

Conduct by him justifiable only if there were such an election

o Implied conductwhen the principal takes a position

inconsistent with non-affirmation, with full knowledge of

the material factso What Acts Can be Ratified

An act which, when done, could have been authorized by a purported

principal, or if an act of service by an intended principal, can be ratified if,at the time of affirmance, he could authorize such an act

An act which, when done, the purported or intended principal could not

have authorized, he cannot ratify, except an act affirmed by a legal

representative whose appointment relates back to or before the time ofsuch act

o Purporting to Act as Agent as a Requisite for Ratification

Ratification does not result from the affirmance of a transaction with a

third person unless the one acting purported to be acting for the ratifier Cannot have ratification if the principal is wholly undisclosed

An act of service not involving a transaction with a third person is subject

to ratification if, but only if, the one doing the act intends or purports to

perform it as the servant of another

o Who Can Affirm

To become effective as ratification, the affirmance must be by the person

identified as the principal at the time of the original act, or, if no personwas then identified, by the one for whom the agent intended to act

o Adoption

When a corporation comes into existence, it can treat the actions of the

promoter of its own, but this is technically not ratification because theprincipal did not exist at the time the acts were done

o Methods and Formalities of Affirmance

Except as below, affirmance can be established by any conduct of the

purported principal manifesting that he consents to be a party to thetransaction, or by conduct justifiable only if there is ratification


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Where formalities are requisite for the authorization of an act, its

affirmance must be by the same formality in order to constitute a

ratification (the equal dignity rule)

The affirmance may be made by an agent authorized to do so

o Failure to Act as Affirmance

An affirmance of an unauthorized transaction can be inferred from afailure to repudiate it

o Effect of Ratification; In General

The liabilities resulting from ratification are the same as those resulting

from authorization if, between the time when the original act was

performed and when it was affirmed, there have been no change in the

capacity of the principal or third party or in the legality of authorizing orperforming the original act

o Relation Back in Time and Place

The liabilities of the parties to a ratified act or contract are determined in

accordance with the laws governing the act or contract at the time andplace it was done or made

Whether the conduct of the purported principal is an affirmance depends

upon the law at the time and place when and where the principal consentsor acts

Termination of Agency and Notice Termination of Authority

o There is no specific requirement to do anything specific to terminate an agency

relationshipa principal has an absolute right to terminate the agency

relationship at any time

All you have to do is tell the agent its over, but this may only terminateexpress authority

Telling just the agent does not terminate apparent authority

May have to give notice to third parties

Actual notice to those third parties with whom the agent has had

dealings Constructive notice to everyone elseposting in the newspaper

Authority of an agent terminates according to the terms of any agreement

the principal and agent may have entered into during the agency

A principal is privileged to discharge before the time fixed by the

contract of employment an agent that has committed such a

violation of duty that his conduct constitutes a material breach ofthe contract

If the termination of the agency relationship breaches a contract, then the

non-breaching party has the right to seek damages

o Requirement of notice

When the agent as begun to deal with a third person, the agents apparent

authority cannot be terminated unless the third person has notice of the

termination


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Similar notice of termination is required when the principal has entrusted

the agent with a writing which manifests the agents authority and which is

meant to be shown to the third party

o Death or Incapacity of the Principal

Death revokes agency even if the agent does not know that the principal is

deadanything the agent does after the death of the principal is withoutauthority, either express or apparent

General rule is that incapacity also revokes agency

There is a question whether temporary incapacity revokes agency

or not

Irrevocable Agency

o General rule

Agency coupled with an interest is not revocable

Requires security and consideration

o Securityagency power is granted to the agent as security

for the protection of the agent or a third person

o Considerationthe agent gives consideration for theagency power

o Definition

An agency coupled with an interest exists when the agent has a vested

interest in the subject matter of the agency and is given authority toexercise a power over the subject matterthis cannot be revoked

o Examples

Interest in profits is not enoughany kind of monetary compensation is

not enough

Interest in land is enough to create this

Right to manage building in which A rents a floor is given to A as a means

of preserving his interest in the building A had a power (to manage the building) coupled with an interest

(the 20 year lease) and the agency is not revocable

o Termination of Irrevocable Agency

Not terminated by:

Revocation by the principal

Surrender of the power by the agent if he holds it for another

person

Death or incapacity of either the principal or the agent

Terminated only by surrender by the agent (if capable) or if its terms

become illegal, or if the terms are met Notice and Knowledge

o General rule

The principal will be charged with the knowledge of the agent

Except when

The agent is not acting on the principals behalf


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The agent has been defrauded into not telling the principal or has

been deceived into believing that the principal already knows

o Imputed knowledge

A principal will not be liable on the basis of imputed knowledge unless the

knowledge attributed to him is that of a person who can reasonably be

identified as his agento Agent acting adversely to the principal

Knowledge and misconduct of an agent will not be imputed to a principal

if an agent if an agent is secretly acting adversely to a principal and

entirely for his own or anothers purpose

Not all activity by the agent which results in some personal benefits to him

is considered adverse to the interests of the principal

A principal will be held to the knowledge of an agent who acts adversely

to the principal if The agent entered into negotiations within the scope of his powers

and the person with whom he deals reasonably believes him to be

authorized to conduct the transaction, or Before he has changed his position, the principal knowingly retains

a benefit through the act of the agent, which otherwise he wouldnot have received

If the agent is a sole actor (the sole representative of the principal), the

principal will be charged with the agents knowledge if the principal

benefits, even if the agent is entirely adverse

The Relationship between Principal, Agent, and Third Parties

Duties of Agent to Principal

o The Agent as a Fiduciary

Agency relationship is one founded on trust and reliance Principals fiduciary duties

Compensation of agent for the agents duties

Reimbursement for advances made by the agent on behalf of the

principal

Duty of reasonable care to prevent injury to the agent

Duty to deal fairly and in good faith with the agent

Duty to follow social legislation

Agents fiduciary duties

Duty to use reasonable care and skill that a regular agent of that

type would do

Duty to disclose all information

Duty to engage in good conduct

Obey the reasonable instructions of the principal

Duty to keep and render the accounts

Duty to act with the highest degree of faith and loyalty

o Duty not to compete

o Duty not to act for an adverse party

o Duty not to use the principals confidential information


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o Duty to keep the principals property separate

o Duty of Care

Agent has a duty to act with the care, skill, and diligence the fiduciary

rendering that kind of service would reasonably be expected to use

Duty to promptly communicate all information

Duty to disclose material dangers known to the agent

o Duty of Loyalty

Secret Commissions

Includes the duty to not put himself in such a position where his

interests may conflict with the interests of the principal

Duty to act solely for the benefit of the principal on matters within

the scope of his agency

Cannot accept secret commissions because the agent is taking

advantage of his position and acting on his own behalfmakes nodifference if the principal actually suffered damages

Agent has to forfeit his commissions to the principal

Appropriating Customers An agent is under a fiduciary duty not to use or disclose trade

secrets of his employer

An agent also has a duty not to appropriate customers of his

employer even in the absence of a non-competition agreement

Self-Dealing

Agent has the duty to refrain from self-dealing until the agency

relationship is terminated Duties of Principal to Agent

o An agent may recover any expenditures necessarily incurred in the transaction of

his principals affairs

o An agent compelled to defend a baseless suit grounded upon acts performed in hisprincipals business may recover from the principal the expenses of his defense

o An agent has the right to indemnification

o Contracts

Agents are entitled to recover commissions on a sale only when his efforts

can be shown to be the procuring cause if the contract doesnt say when

the agent gets the commissions

Where the principal enters into a nonexclusive representation agreement

with the agent, he is not precluded from competing with the agentpersonally or through another agent

o Types of exclusive representation agreements

An exclusive right to sellconfers on the agent the sole right to sell in a

certain geographical areathe agent gets commissions no matter who

sells the items, even the principal

An exclusive agencythe principal is prohibited only from employing

other agents to sell the goods of propertyhe can sell them himself andnot be liable to the agent for commissions

Liability of Agent to Third Party


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o General rule

Principal is liable for the acts of the agent whether he is disclosed,

partially disclosed, or undisclosed (assuming that the third party has found

out about the principal)

An agent is not liable to the third party for acts which are within the scope

of his authority (if the agent is outside the scope of his authority, he will beliable to the principal unless the principal knew he was acting without

authority)

Agent is liable under K law for acts done for wholly undisclosed

principals because the agents name is on the K If agent says he is acting on behalf of a principal but is not, the

agent is liable based on

o Breach of warranty of authoritycontract action, where the

agent mistakenly believed he had authority

o Fraud or misrepresentationtort action, where the agent

knew he had no authority

Agent making a K on behalf of the principal (if disclosed) is notliable for nonperformance of the K

An agent incurs personal liability regardless of disclosure of the principal

when the agent contracts in his own name rather than on behalf of theprincipal

o Disclosure of Principals

Definitions

Disclosed principalthe other party knows both that the agent is

acting for a principal and the principals identity

Partially disclosed principalthe other party knows that the agent

is acting for a principal, but has no notice of the principals identity

Wholly undisclosed principalthe other party has no notice thatthe agent is acting for a principal

Disclosed principala person making or purporting to make a K with

another as agent for a disclosed principal does not become party to the K

Partially disclosed principala person purporting to make a K with

another as agent for a partially disclosed principal is a party to the K

Undisclosed principalan agent purporting to act upon his own account,

but in fact making a K on account of an undisclosed principal, is a party tothe K

Both the principal and the agent are liable in the last two situations

o Agent who warrants authority

A person who purports to make a K, conveyance, or representation onbehalf of another who has full capacity but whom he has no power to bind,

thereby becomes subject to liability to the other party upon an implied

warranty of authority, unless he has manifested that he does not make suchwarranty, or the other party knows that the agent is not authorized

o Unauthorized acts of general agents

A general agent for an undisclosed principal authorized to conduct

transactions subjects his principal to liability for acts done on his account,


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if usual or necessary in such transactions, although forbidden by the

principal to do them

o Third party can sue both the agent and the principal and get judgments against

both, but can only get satisfaction from one

PARTNERSHIP

Principles of Partnership

Definition

o Partnership Defined (UPA 6)

Association of 2 or more people who carry on as co-owners a business for

profit

Factors

2 or more people acting together

Contribution of moneyas opposed to a loan

o Contribution of services can be the capital contribution ifthe agreement says so

How decisions are madecontrol

Sharing of profitsprima facie evidence that it is a partnership

Sharing of losses

Intent of the parties to do those things that look and act like a

partnership Right to review the books and records

Entitlement to get accounting of activity

Things that do not make a partnership

Joint tenancy, tenancy in common, joint property

Sharing of gross returns

Repayment of debts, payment of wages

Sharing of profits as compensation for services does not make you

a partner

o Partner Agent of Partnership as to Partnership Business (UPA 9)

Every partner is an agent of the partnership for the purpose of its business

and he binds the business unless he had no authority and the third party

knew he had no authority

o Nature of partners liability (UPA 15)

All partners are liable in tort and in contract jointly for everything

chargeable to the partnership

If the liability is from the wrongful act or breach of trust by a partner, thenthe partners are jointly and severally liable

The Uniform Partnership Act

o Enacted to regulate the rights and duties of partners against third parties more

precisely than at common law

o UPA applies in the absence of an agreement to the contrary (the partnership

agreement)

Entity Versus Aggregate Theories


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o Entitysees the partnership as a separate entity that can sue and be sued

o Aggregatebases everything on the separate partners (still do this for taxes)

Rights and Duties of Partners

Relations Between Parties

o Rules Determining Rights and Duties of Partners (UPA 18) Each gets his contribution repaid (whether it was by capital or advances)

and shares equally in profits after all debts paid, and must contribute to the

losses according to his share in the profits

Partners are entitled to indemnification from the other partners

Partners get interest on any advances they make to the partnership from

the date it was made

An advance is anything in excess of the agreed-upon capital

contribution

Partner gets interest on his capital contribution from the date it was to be

repaid

Each has equal management rights No compensation for acting in the business except for winding up

Unless the partnership agreement says so

No right to get more money upon dissolution just because you did

more either

No one can become a member of the partnership without all of their

consent

Majority gets to decide differences for ordinary matters, but all must

consent to a change from the agreement

Status quo wins if all do not consent to a major change

o Partnership Books (UPA 19)

To be kept at PPOB and all have the right to access themo Duty of Partners to Render Information (UPA 20)

Partners have to give true and full info to any partner or his legal

representative

o Partner Accountable as Fiduciary (UPA 21)

Partners must account to the partnership for any benefit and act in a

fiduciary manner toward the partnership and the other partners

Partners remain fiduciaries until they are no longer partners

o Right to an Account (UPA 22)

Every partner has the right to an accounting of the affairs

If he is wrongly excluded

As part of the agreement

As provided by 21

Whenever it is just and reasonable

The Partners Right to Indemnity

o General rule:


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The partnership must indemnify every partner in respect of payments

made and personal liabilities reasonably incurred by him in the ordinary

and proper conduct of his business or for the preservation of his business

or property

Only for the ordinary and proper conduct in the course of business

Have to show fraud in order to not have to indemnify your partnero Wrongful Acts

Partnership Bound by Partners Wrongful Act (UPA 13)

If a partner, acting in the normal course of business, commits a

wrongful act that injures a third party, then the partnership is liable

to the third party to the same extent that the partner is

Partnership Bound by Partners Breach of Trust (UPA 14)

Partnerships is bound if a partner misuses a third persons money

within the scope of his apparent authority, or if the partnership

misuses the money Relations of Partners to Third Parties

o Ordinary course of businessconsider factors Character of the business (external view)

Manner in which it is usual to carry on the business (external view)

Manner this particular business has been carried on (internal view)

Going to come down to knowledge level of knowledge/notice the

partner has will shape whether they are bound Third parties can bind the partnership

But the point is whether its in the ordinary course of business if

its not, should raise some red flags

o Intentional torts

Never a part of the ordinary course of business of a partnership

Therefore the partnership is not liable for a partners intentional torts Partnership Property

o Definitions

Partnership propertyall property originally brought into the partnership,

or subsequently acquired by purchase or otherwise, on account of the

partnership, is partnership property

Property acquired with partnership funds is partnership property

unless another intention is shown Any estate in real property may be acquired in the partnership

name A conveyance to a partnership in the partnerships name without

words of inheritance passes the entire estate to the grantor unless acontrary intention appears

o Extent of Property Rights of a Partnership

The property rights of a partner are

His rights in specific partnership property

o The right to possess or use it for partnership purposes, but

not for other purposes without the consent of the other

partners


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o Co-owners of this property hold as tenants in partnership

o Cannot be encumbered for personal debts, but can be for

partnership debts

o Stays with the partnershipit is not assignable except as a

whole, and stays when a partner dies unless hes the last

one and then it goes to his heirs His interest in the partnership

o Share of the profits, surpluses and lossesthis is personal

property

o Can be assigned

His right to participate in the management of the partnership

o Partnership Interest

Conveyance of your interest in the partnership does not dissolve it, nor can

the assignee participate in the management of the partnership (unless there

is an agreement)

Assignee just gets the rights to the profits

Assignee gets full value of his interest upon dissolution of the partnershipo New Partner Liability

When a new partner is admitted to an existing partnership, he is liable for

all obligations of the partnership arising before his admission, except that

this liability can only be satisfied out of partnership property (he is notpersonally liable)

Dissolution, Winding Up, and Termination

In General

o Definitions

Dissolution

The change in relation of the partners caused by any partnerceasing to be associated with the other partners

Partnership is not terminated by dissolution

Terminationthe point in time when all partnership affairs are wound up

Winding upthe time between dissolution and termination

o Causes of dissolution

Without violation of the agreement

End of a term or undertaking specified in the agreement

Express will of any partner when no definite term is specified

Express will of all of the partners, either before or after the term

specified

By the expulsion of any partner from the business if there is a

power to do this in the agreement

In contravention of the agreement

By express will of any partner at any timeyou always have the

power but not necessarily the right

o Dissolution by Court


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On application by a partner to the court, the court shall decree a

dissolution if:

Partner has been declared a lunatic in any judicial proceeding

Partner is incapable of performing his part of the agreement

Partner has been guilty of such conduct that prejudices the carrying

on of the business Partner willfully or persistently breaches the agreement or is not

reasonably practical to carry on the business with Partnership can only be carried on at a loss

o Effect of Dissolution on Partners Authority

Dissolution terminates all authority to act for the partnership except for

winding up Rights of Partners on Dissolution

o Contribution

Each partner is liable for his share of any liability created by any partner in

the partnership

You may have to pay extra to one of the partnerso Power to bind the partnership upon dissolution

Only to the extent that the partner is winding up the affairs of the

partnership

o Existing liability

Dissolution does not discharge any partner from existing liability unless he

has an agreement with the creditor

o Rules for Distribution in settling accounts after dissolution

Liabilities ranked in order of payment as follows

Those owed to creditors not partners

Those owed to partners other than for capital or profits (partners as

creditors) Capital contributions

Profits

Continuation Agreements

o Liabilities of Persons Continuing the Business in Certain Cases

If one or more of the partners is replaced or is gone, and the departing

partner has assigned his rights, and the business continues, then thecreditors of the first partnership become the creditors of the new

partnership

Same rule applies when there is only one partner left and he continues the

business as a sole proprietorship

Same rule applies if the retiring or dead partner did not assign his rightsbut the business continues with his consent

Any change in membership dissolves the partnership and creates a new

partnership The property of the old partnership becomes the property of the

partnership continuing the business


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o Rights of retiring partners of estates of deceased partners when the business is

continued

When a partner dies or retires and the business is continued without

settlement of accounts between the departing partner and the partner(s)

continuing the business, then he may have the value of his interest at the

date of dissolution ascertained and shall receive as an ordinary creditor thevalue of his interest in the dissolved partnership with interest or in lieu of

interest, the profits attributed to the use of his right in the property of thedissolved partnership

Post-Dissolution Problems

o When one partner renews a note made to a partnership after dissolution, the note

is seen as a personal debt to him, and not to the other partnersthe old note has

been satisfied by the new one

o Partners continue to be liable for any debts created while they were partners

unless there is an agreement with the other partners and the creditors that the oldpartner will no longer be liable

Novation

Partners whose obligations have been assumed are not liable if the creditor

shows his assent like a change in the nature of the payment of such

obligations

LIMITED PARTNERSHIPS

In General

Definition

o A partnership composed of one or more people who control the business and who

are personally liable for partnership debts (the general partners), and one or morepeople who contribute capital and share profits but who cannot manage thebusiness and who are liable only for the amount of their contribution

Liability to Third Parties

o Limited partner is not liable for the obligations of a limited partnership unless he

is also a general partner or participates in the control of the business (but then

only liable to persons who transact business with him reasonably believing he is a

general partner)

o Limited partner is not participating in the control of the business by:

Contracting or being a shareholder or agent or employee

Consulting Guaranteeing loans

Attending meetings

Voting on stuff like

Dissolution or winding up

Sale of assets

Incurrence of indebtedness

Change of business nature


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Admission or removal of GP or LP

Changing partnership agreement

Business matters

Winding up

Formation of Limited Partnership

o By statuteo Requires certificate in writing and filed appropriatelynot formed until this is

filed

o If you do it wrong according to the statute, the LP will be liable as GP to third

parties who didnt know it was a LP

People who thought they were a limited partner

o If you make a contribution believing that you are a LP and not a GP, you do not

assume the liability if you

Cause appropriate certificate to be filed

Withdraw from future equity participation in the business by filing a

withdrawal

o A person who made such contributions is liable as a GP to any third party whotransacted business with them before the withdrawal or filing of certificateshowing that he is not a GP, but only if the third party believed in good faith that

he was a GP at the time of the transaction

Limited Partnerships with Corporate General Partners

General rule

o If a limited partner is an officer of the corporation that was the general partner, the

limited partner does not become a general partner (per exception in RULPA

303)

CORPORATIONS

Formation Incorporators

o One or more people may act as incorporator by delivering the articles of

incorporation to the secretary of state for filing Articles of Incorporations

o Must include

Name, number of shares, address, and name and address of incorporators

o May include

Directors, bylaws, etc.

Incorporation

o Corp is formed upon filing of the articles unless delay is specified

Liability for Preincorporation Transactions

o Everyone purporting to act as or on behalf of a corporation, knowing there was no

corporation under this Act, is jointly and severally liable for all liabilities created

Existence of Corporation


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Doctrine of de facto corporation gives the officer limited liability and is used when there

are elements showing

o Existence of laws authorizing incorporation

o Effort in good faith to incorporate under existing laws

o Actual use or exercise of corporate powers

Doctrine of estoppel is used when the third party thought it was dealing with acorporation and gives the officers limited liability

Promoters are liable for their actions unless they have an agreement saying that they are

not liable Alter Ego Doctrinewhether a parent company is liable for its subsidiarys liabilities

o Must show that the parent and subsidiary act as a single economic entity

Whether the corporation was adequately capitalized for the corporate

undertaking

Whether the corporation was solvent

Whether dividends were paid, corporate records were kept, officers and

directors functioned properly, and other corporate formalities were

observed Whether the dominant shareholder siphoned corporate funds

Whether in general the corporation simply functioned as a faade for the

corporate shareholder

o Must show that an overall element of injustice or unfairness is present

Corporate veil

o General rule

Courts will disregard the corporate form or pierce the corporate veil

whenever necessary to prevent fraud or to achieve equity Can do this to a parent corporation as well as to a human owner

This holds the owner responsible despite legislature saying there is

limited liabilityo When the corporate veil will be pierced

Such unity of interest and ownership that the separate personalities of the

corporation and the individual no longer exist, AND

The failure to maintain adequate corporate records and to comply

with corporate formalities

The commingling of funds or assets

Undercapitalization

One corporation treating the assets of another corporation as its

own

Such that adherence to the fiction of separate corporate existence would

sanction a fraud or promote injustice Must show unjust enrichmentsome wrong beyond a creditors

inability to collect


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LIMITED LIABILITY COMPANIES

In General

Definitions

o

Limited Liability Company as Legal Entity A LLC is a legal entity distinct from its members

o Organization

By one or more persons

By delivery of articles to the Secretary of State

Begins when the articles are filed

Intentto permit individuals to operate a business entity somewhere between a

partnership and a corporation and still maintain limited liability for the members of the

LLC

o All of the corporate structure without the limitations (dont have to have board of

directors)

o All of the freedom of a partnership without the liability The LLC constitutes a separate legal entity that cannot represent itself in court, but must

act through its agents

UNINCORPORATED ASSOCIATIONS

In General

A candidate or other member of an unincorporated political association or committee is

not personally liable simply by virtue of his membership

o Unless he actually authorized, assented to, or ratified the obligation

Unless you are in a state that allows you to sue an unincorporated association, you cannotsue it because it is a nonentity

Members suing the association

o Old common law rulea member of an unincorporated association cannot sue the

association for the negligence of another member

Suing other members is like suing yourself because of the co-principal

theory

o New ruleunincorporated associations are amenable to suits by their members,

subject to the principals of comparative fault Third parties suing

o At common law and in the majority of jurisdictions today, an unincorporated

association is not a legal entity, so cannot sue or be sued, so the agent ispersonally liable because you cannot be an agent for a nonexistent entity

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