Business Associations

Part One:  Agency

1. FORMATION [Is there an agency relationship?]

1. Agency = fiduciary relation which results from manifestation of consent by one person to another that other shall act on his behalf and subject to his control, and consent by the other so to act. Elements:

1. Consent → mutual consent [P manifests consent to A’s action, and A consents to engage in action]

1. Outward expressions considered (manifestation of consent)—subjective intentions irrelevant 
2. No need to have intent to form relationship, or label of agency, or any of legal consequences
3. Disclaimers of agency relationship = court might consider, but not dispositive

1. Action on behalf of → that A will take action on behalf of P

1. A must agree that serving P’s goals is primary purpose of relationship [even if for payment]

1. Control → and that A is subject to P’s control

1. At minimum, P must have right to control goal of relationship
2. But not required that P control the physical conduct of achieving the goal

1. Three players in an agency relationship = (1) agent; (2) principal; (3) third party

1. Two types of agents [§ 3]:

1. General agent = authorized to conduct series of transactions involving continuity of service
2. Specific agent = authorized to conduct single transaction or series of transactions not involving continuity of service 

1. Three types of principals [§ 4]:

1. Disclosed principal = 3P has notice that A is acting for a principal, and of P’s identity
2. Partially disclosed principal = 3P has notice A is acting for a principal, but P’s identity unknown
3. Undisclosed principal = 3P has no notice that agent is acting for a principal at all

1. Other important notes:

1. Goal of business associations (generally) = balance efficiency and accountability
2. Agency is default structure of sole proprietorship (single owner hires other factors of production)
3. Market vs. firm = (1) market is governed by contract law, okay to maximize self-interest; (2) firm is governed by law of business associations
4. No formal contract needed to establish an agency relationship
5. Need not be ongoing relationship; can have agency relationship for single act [Gorton]
6. Agency relationship can occur outside of business context [Gorton]—unlike partnership

1. Gorton v. Doty (Idaho 1937) – Court found agency where teacher lent car to coach for game transportation “if he drove it” (showed control)

1. Main policy:  Courts place liability on party in best position to avoid the loss

1. Constructive agency [debtor/creditor context]: Creditor/security holder who assumes de facto control of debtor’s business may become liable as principal for acts of debtor in connection w/ the business. [§ 14 O]

1. Requires that creditor directs what contracts may or may not be made [de facto control]
2. No consent requirement (instead, focuses exclusively on control)
3. In Cargill, not clear Cargill had such control (court seemed to hedge its bets)

1. A. Gay Jenson Farms Co. v. Cargill, Inc. (Minn. 1981) – Found creditor liable for grain-operator-debtor’s contract where debtor paid operating expenses and farmers w/ checks from creditor, gave creditor ROFR on grain, sold 90% of grain to creditor, and had to obtain permission from creditor for certain activities. [But all creditors do this!]
2. Point:  finding agency relationship is highly fact-specific and sometimes controversial

1. PRINCIPAL LIABILITY [If agency relationship, is P liable for A’s action?]

1. CONTRACT = P only bound by contract entered into by A if A had authority to enter into contract

1. Actual authority = based on P’s manifestations of consent to A. Two types:

1. Express actual authority = two requirements…

1. P made a manifestation to A [words or conduct (e.g., nodding in affirmation)]
2. Reasonable for A to believe P’s words/conduct authorized A to act for P  [objectively]

1. Implied actual authority = authority to do acts incidental to what’s expressly authorized

1. Test:  Proven by circumstantial evidence based on two factors

1. Past practices [i.e., A had done this many times in past]
2. Nature of task/job [i.e., not a one-person job]

1. Exception: No implied actual authority where P tells A not to do specific act
2. Effect: Two-way liability
3. Policy:  (1) efficiency; (2) reflects probable intent of P to give A authority 
4. Mill Street Church of Christ v. Hogan (Ky. Ct. App. 1990) – Court found implied authority for painter to hire brother where had done so in past, and wasn’t one-person job

1. Apparent authority = based on P’s manifestations of consent to third party (as opposed to A)

1. Generally

1. Test: two requirements…

1. P indicated to 3P that A was authorized to act on P’s behalf

1. Must be some “peppercorn” (words or conduct) of manifestation
2. Manifestation can come from agent itself = where A had actual authority, A conveyed to 3P, and then P revoked actual authority w/o notifying 3P.
3. Secret instructions = if disclosed P authorizes A to make contract, w/ secret instructions to A, look to communication made to 3P only

1. Third party reasonably believed A was so authorized 

1. Exception: No apparent authority where 3P knows of the lack of authority

1. Apparent authority by position = P’s placement of A in position acts as manifestation. 2 req’s:

1. Third party must know P placed A in certain position [i.e., know A’s title/function]
2. It’s customary for person in that position to have authority to enter into arrangement

1. Effect:  Two-way liability
2. Policy: fairness/equity (protects 3Ps reasonably misled by appearances)
3. 370 Leasing Corp. v. Ampex Corp. (5th Cir. 1976) – Court found apparent authority where: (1) Kays sent doc to 370; (2) Mueller’s assent to all communications channeled through Kays; (3) letter from Kays to 370 confirming delivery dates; (4) apparent authority by position

1. Inherent agency power = exists for protection of persons harmed by or dealing w/ a servant or other agent

1. Test:  § 194 lays out following three requirements:

1. A was general agent for undisclosed P, and had authority to conduct some types of transactions 

1. Or was entrusted w/ mgmt of business [§ 195]

1. Transactions in question were usual or necessary in such business;
2. A was acting on P’s account [means P stood to gain something, broadly]

1. Exception: No inherent agency if 3P knows agent acting w/o actual authority

1. BUT doesn’t matter if P told A specifically not to take the action!

1. Other caveats:

1. Only use inherent agency power when principal is undisclosed
2. Only use inherent agency power when no actual or apparent authority

1. Watteau v. Fenwick →  Inherent agency power where A, bar mgr, bought cigars/ Bovril against P’s express wishes. A was previous owner; 3P kept ownership secret

1. Ratification = affirmance by P of prior act which did not bind P, but was professedly done on his account

1. Test:  two requirements…

1. A must have purported to act on behalf of P w/o any agent authority
2. Purported P must objectively manifest affirmance of transaction. 2 ways:

1. Express affirmance = words or conduct from that person
2. Implied affirmance = acceptance of results  w/ intent to ratify and full knowledge of all material circumstances

1. Effect: Two-way liability

1. All-or-nothing ratification—cannot ratify only parts of the contract

1. Botticello v. Stefanovicz → D’s wife (tenant in common) did not ratify D’s sale of farm because (1) D not purporting to act on her behalf and (2) no objective affirmance, either express or implied.

1. Estoppel → P who is otherwise not liable, is subject to liability to persons who have detrimentally relied

1. Test:  Three requirements:

1. Appearance of authority, which

1. P intentionally or carelessly creates
2. Through acts or omissions [knowing of belief but saying nothing]

1. Reasonable reliance by 3P
2. Change in position by 3P

1. Effect:  One-way liability [3P can enforce contract against P, but P can’t enforce against 3P]
2. Hoddeson v. Koos Bros → P bought furniture in store from salesman w/ cash; now furniture store claims man was impostor.  Remanded. (Would probably lose on carelessness issue).
3. Example:  Janitor orders coffee beans and copies P. P reads e-mail and does nothing.

1. TORT → Two questions: (1) master/servant relationship? (2) Within scope of employment?

1. WAS THERE A MASTER-SERVANT RELATIONSHIP? [triggers respondeat superior]

1. Master = P  controls or has right to control A’s “physical conduct” [ex: janitor]

1. Right to control = legal right, even if not actually exercised
2. Physical conduct = specific way in which A goes about achieving goal

1. Independent contractor = P does not qualify for liability. [§ 2(3)] Two types:

1. Non-employee agent = agent, but P has no control over how result accomplished [lawyer]
2. Non-agent service provider = no control over physical conduct; not agent [dry cleaner]

1. Control factors [§ 220] =

1. To what extent does P have right to control details of work?
2. Does A engage in distinct occupation/business? (“doctor”) [yes = servant]
3. Is type of work done by A customarily done under a P’s direction or w/o supervision
4. Does agent’s occupation require skill? [no = servant]
5. Does P supply tools, place, and other instrumentalities for person doing work?
6. Was A employed for a long time? [yes = servant]
7. Was payment made by time or by job [time = servant]
8. Is work part of P’s regular business? [yes = servant]
9. Did parties believe they were creating m/s relationship?
10. Is P “in business”? [yes = servant]

1. Respondeat superior applies even where P forbade or tried to prevent conduct
2. Servant’s employees: If A is found P’s servant, A’s employees also P’s servants.[Hoover]
3. Franchises = often unclear whether master/servant relationship present [cf. Humble and Hoover]:

1. IF SO, IS THE CONDUCT WITHIN THE SCOPE OF EMPLOYMENT?

1. Four requirements must be met [§ 228(1)]:

1. Conduct is of kind servant is employed to perform
2. Conduct occurs substantially within authorized time/space limits [hours/on premises]
3. Conduct is actuated, at least in part, by purpose to serve master [P stands to benefit]
4. If force intentionally used by servant, use of force not unexpectable by master [bouncer] 

1. If above requirements are met, generally within scope of employment [§§ 228-229]
2. POLICY:  Incentivizes “masters” (employers) to take safety precautions

1. AGENT LIABILITY / FIDUCIARY DUTY

1. Agent liability for contracts

1. Principal is undisclosed = A always liable for contract
2. Principal is partially disclosed = agent almost always liable contract [exception for auctioneers]
3. Principal is disclosed = agent NOT liable contract

1. Agent liability for torts 

1. A is always  jointly and severally liable under respondeat superior

1. Agent’s fiduciary duties to P 

1. Duty of care = paid agent has duty to P to act w/ standard care (ordinary negligence), and with:

1. Standard skill for work employed to perform under circumstances, considering:

1. Industry standards, and
2. Geographic standards

1. Any special skill he has

1. Typically matter of expert testimony

1. Duty of loyalty = two key provisions:

1. Duty to act solely for benefit of P in matters connected w/ agency 

1. Duty not to compete w/ P concerning subject matter of agency

Part Two:  Partnership

1. FORMATION

1. Partnership = an association of two or more persons to carry on as co-owners a business for profit 

1. Partnership is default legal classification for joint ownership [i.e., more than one owner]
2. Even if persons don’t intend legal title, can still have a p’ship
3. There must be intent to form a business for there to be a partnership (i.e., money-making venture)
4. Partnership law is a mix of statutes and common law [statutes passed, then judges fill in gaps]

1. Two main statutes used in this class:

1. Uniform Partnership Act (1914) [UPA] = Originally adopted in all states but LA
2. Revised Uniform Partnership Act (1997) [RUPA] = 30 states (CA) have adopted

1. Rules in UPA/RUPA are default rules [apply where not contracted around]. Generally:

1. Inter se rules [relationship among partners] = can be altered by partnership agreement
2. Rules giving rights to third parties = cannot be altered [but can limit fiduciary duty]

1. Aggregate theory vs. entity theory = two different views on what a “partnership” is

1. Aggregate theory = partnership is association of individual partners [UPA]
2. Entity theory = partnership is separate legal person [RUPA]

1. Five reasons to form a partnership 

1. Raise capital = unlike loan, no guarantee of payment until p’ship makes money (but must give control)
2. Draw in diverse entrepreneurial skills = ex: I know how to make money; you know the industry
3. Tax purposes = “pass through entity”; avoid double taxation [only partners themselves taxed]
4. Some other forms not available = ex:  used to be that professionals not allowed to form corps
5. Flexibility = can contract around many of provisions [cf. corps; less likely to hash out ex ante]

1. Key attributes of a partnership

1. Partners are agents of partnership → see right to participate in mgmt—may be bound in contract/tort
2. Partners are liable as principals [UPA § 15] → like personal guarantee to every  obligation; procedure =