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Business Organizations Outline_nima

Business Organizations Outline_nima

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Published by: Chris Dianne Agosto Carreiro on Nov 13, 2010
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BUSINESS ORGANIZATIONS OUTLINE

INTRO
I.

Agency: one person working with another with certain powers

II.

Partnership: when two equals come together

III.

Forms of Business Organizations
a.Proprietorships

i.Single-person businesses
ii.Most businesses are these

b.Partnerships

i.General partnerships- account for about 50%
ii.Limited partnerships
iii.Limited liability partnerships- smallest group
iv.Limited liability companies- second largest group; hybrid that
offers benefits of partnerships without as much of the downsides

c.Corporations

i.Second largest group of businesses
ii.Account for over 75% of receipts

IV.

Types of Authority/Agency
a.Actual- manifestation of consent
b.Apparent- viewed from 3rd

party perspective
c.Implied- viewed from agent’s perspective
d.Inherent- catch all; undisclosed principal & agent exceeding authority
e.The legal consequences of an agent’s act do not depend on the type of
authority the agent possessed

V.

On exam question, always ask how the court is trying to make things more
efficient- make whole economy more efficient

VI.

Important to hire a transactional lawyer in order to get best deal for client and
to lower transactional costs for all, thereby making more money for all

CHAPTER 1: AGENCY

I.

Who Is an Agent?

a.Gorton v. Doty

i.Facts: son injured in wreck on way to football game in car driven
by coach; car belonged to defendant
ii.Establishes PAT Triangle: principal, agent, third party
iii.Legal standard for agency: agency is a relationship that results
from

1.the manifestation of consent by P to A that A shall act
a.on P’s behalf
b.subject to P’s control
2.A’s consent to so act
iv.Doesn’t have to be a contract for there to be an agency relationship

b.A. Gay Jenson Farms v. Cargill

i.Facts: plaintiffs were farmers who sold their crops to Warren.
Warren was the local firm that operated the grain storage facility.

1

Cargill was a world-wide grain dealer. Warren bought grain from
farmers and sold to Cargill- was Warren an agent for Cargill?
Warren became insolvent and farmers sue Cargill.
ii.Principal is liable on contracts made by an agent on principal’s
behalf
iii.You can form an agency relationship without even knowing it-
may not realize that the elements for agency are present
iv.There must be an agreement, but not necessarily a contract; no
consideration needed
v.Creditor becomes a principal at the point at which it assumes
defacto control over the conduct of the debtor
vi.Restatement: one who contracts to acquire property from a third
person and convey it to another is the agent of the other only if it is
agreed that he is to act primarily for the benefit of the other and not
for himself

1.court says that under this approach it must be shown that
the supplier has an independent business before it can be
concluded that he is not an agent
vii.How could Cargill have avoided this?
1.reduce level of control
2.do nothing
3.take on additional control and become more like a franchise

viii.policy issues

1.Cargill got the benefit of controlling Warrant while evading
legal obligations that accompany control
2.holding Cargill liable is a way of forcing it to internalize
the social costs of how it turns its business

II.

Liability of Principal to Third Parties in Contract

a.Restatement: principal is subject to liability upon contracts made by an
agent within his authority if made in proper form and with the
understanding that the principal is a party
b.Authority Intro

i.Authority is the key; agents acting with authority may bind
principals
ii.Authority is the starting point for analysis of contract actions
iii.Authority vs. Power

1.agent may bind the principal even when the agent lacks any
form of authority
2.an agent’s power to bind the principal is broader than an
agent’s authority to bind the principal
3.authority means that the agent has legitimate power to do
so; power is just doing it

c.Actual Authority

i.must be authority from the principal to the agent in order to act on
the principal’s behalf

2

ii.requires manifestation of consent- written or spoken words or other
conduct of the principal which reasonably interpreted causes the
agent to believe that the principal desires him to so act on the
principal’s account
iii.express actual authority- P to A: “do this”
iv.implied actual authority- authority that is inherent in the office; see
below
d.Implied Authority

i.Is actual authority circumstantially proven which the principal
actually intended the agent to possess and includes such powers as
are practically necessary to carry out the duties actually delegated
ii.Often highly contextual, often depending on prior practices or
industry customs
iii.includes authority to do those things that usually accompany or are
reasonably necessary to the actions authorized
iv.also called incidental authority
v.viewed from the agent’s perspective

vi.Mill Street Church v. Hogan

1.Facts: church hires Bill to paint. Bill normally gets Sam to
help and church knows this. Sam gets hurt on the job. Did
Bill have authority to hire Sam?
2.Bill (agent) had both implied and apparent authority
3.Bill had implied authority- had used Sam in the past, knew
needed 2 people to do job; reasonably necessary to hire
another person and to hire Sam; no instructions to the
contrary
vii.Can have implied actual authority and implied apparent authority
1.implied actual: act of putting an agent in such a position
leads agent to reasonably believe he has authority
2.implied apparent: act of putting agent in such a position
that leads third party to reasonably believe agent has
authority

e.Apparent Authority

i.Viewed from the third party’s perspective- manifestations by
principal to third party
ii.Lind v. Schenley Industries
1.must be a manifestation by the principal to the third party
2.this court got it wrong because it confused the forms of
authority
3.notice will defeat apparent authority
4.must prove agency relationship existed and then what
kind(s) of authority agent possessed
5.burden on principal to have good agents
iii.to avoid apparent authority, must take away third party’s
reasonable belief

iv.Three-seventy Leasing v. Ampex

3

1.apparent authority exists only when there is some
connection between the third party and the principal
2.you must always look at how the third party learned of the
agent’s alleged authority and ask whether the principal
reasonably can be said to have been the source of that
knowledge
f.Inherent Agency Power

i.Classic situations: undisclosed principals, agent exceeds authority
ii.Used to impose liability on the principal when there is neither
authority nor apparent authority
iii.Also imposes liability on agent, but usually agent has disappeared
iv.Is a catch-all category
v.Doesn’t derive from authority but solely from the agency
relationship and designed to protect third parties

vi.Watteau v. Fenwick

1.Facts: defendants got an agent to run a beerhouse for them
2.undisclosed principal- principal is liable for all acts which
are within the authority usually confided to an agent of that
character
3.inherent authority is usually a policy issue

vii.Kidd v. Thomas A Edison

1.Facts: singing tour case. Agent exceeded scope of authority
by promising third party Kidd the full tour when principal
only hired agent to travel around
2.not actual, implied, or apparent authority
a.not actual because principal expressly told agent he
did not have this power; not implied actual either
b.not apparent because no communication between
principal and third party
3.inherent authority existed- must establish that reasonable
for third party to believe agent had authority (industry
standard for agent to have this authority)

viii.Nogales Service Center v. Atlantic Richfield Co

1.3 types of situations in which inherent agency exists
a.General agent does something similar to what he is
authorized to do, but in violation of orders
b.Agent acts purely for his own purposes in entering
into a transaction which would be authorized if he
were actuated by a proper motive
c.Agent authorized to dispose of goods and departs
from the authorized method of disposal
2.most commonly at issue: customary for agent conducting a
transaction to have authority to make incidental
arrangements, but principal has made contrary instructions
3.p. 35 problem 2- good exam question

g.Ratification

4

i.Agent acts without authority of any kind and there is no grounds
for estoppel
ii.Requirements:

1.a valid affirmation by principal
a.can be express or implied
b.principal must know or have reason to know all
materials/information
2.to which the law will give effect
iii.will be denied legal effect where necessary to protect the rights of
innocent third parties

iv.Botticello v. Stefanovicz

1.martial status is not enough to establish agency
v.Ratification is a means by which the principal can say, “my agent
didn’t have the right to enter into this contract, but I’m glad she did
so. Accordingly, I’ll affirm the transaction and agree to be bound
by the contract
vi.ratification cases involve 2 questions:
1.what types of acts constitute an affirmation by the
principal?
2.what effect should we give to that affirmation?

h.Estoppel

i.Hoddeson v. Koos Bros

1.Facts: guy pretended to be salesman and pocketed money
2.no actual authority
3.no implied authority
4.no apparent authority (no manifestation by principal to
third party; silence can be manifestation but no holding out
he was its agent here)
5.estoppel elements

a.acts or omissions by the principal, either intentional
or negligent, which create an appearance of
authority in the purported agent AND
b.the third party reasonably and in good faith acts in
reliance on such appearance of authority
6.estoppel only binds the principal, never the third party
a.the third party changed her position in reliance upon
the appearance of authority

i.Agent’s Liability on the Contract

i.Atlantic Salmon A/S v. Curran

1.if agent doesn’t disclose principal (inherent agency), agent
is treated as a contracting party
2.partially disclosed or undisclosed principal:
a.agent is treated as though a party to the contract
b.third party must elect who to sue- principal or agent
c.agent has usually disappeared, so third party is left
with suing principal

5

3.actual knowledge is the test
4.the duty rests upon the agent, if he would avoid personal
liability, to disclose his agency and not upon others to
discover it

III.

Liability of Principal to Third Parties in Tort

a.Servant Versus Independent Contractor
i.A master-servant relationship exists where the servant has agreed
(a) to work on behalf of the master and (b) to be subject to the
master’s control or right to control the “physical conduct” of the
servant

1.Two types of independent contractors (differ in degrees of
control retained by principal)
2.agent-type IC

a.one who has agreed to act on behalf of another, the
principal, but not subject to the principal’s control
over how the result is accomplished
b.can hold principal liable here

3.non-agent IC:

a.one who operates independently and simply enters
into arm’s length transactions with others
b.usually cannot hold principal liable here
ii.generally, principal liable for conduct of his employee but not that

of IC
iii.IC usually paid by the job, not by the hour
iv.Gas Station Cases- Humble Oil v. Martin, Hoover v. Sun Oil
1.similar facts: gas station with repair shop is tied to an oil
co; somebody gets hurt and sues the oil company because
they have the deep pockets
2.3 possibilities: gas station is
a.Completely independent station that buys from
many oil companies
b.Wholly owned by oil company
c.Franchise: intermediate between wholly owned and
independent
3.look at the level of control; the more control franchisor has
more likely will be liable

v.Murphy v. Holiday Inns

1.Facts: plaintiff slip and fell at a Holiday Inn
2.Court found there was not sufficient control by Holiday Inn
to amount to agency- didn’t give defendant right to control
the methods or details of doing the work
3.control is the essential element for agents and IC
relationships
4.key distinction between the servant and IC types of agents
is the differing natures and degrees of control exercised by
the principal

6

b.Tort Liability and Apparent Agency

i.Miller v. McDonald’s

1.Facts: plaintiff bit into sapphire in Big Mac
2.court found both actual and apparent authority- apparent
because third party had no idea if this McD’s owned by
corporate McD’s or a franchisee
3.the RIGHT to control is key, not actual control
ii.problem p. 62- good exam question
c.Scope of Employment

i.Ira S. Bushey & Sons v. US

1.Facts: sailor on boat, drunk, plays with valves and ends up
damaging boat and dock; dock owner sues
2.Restatement: a master is subject to the liability for the torts
of his servant committed while acting in the scope of his
employment
3.this case discards the purpose test (whether the conduct was
motivated at least in part by a purpose to serve the master)
4.this court adopts foreseeability test: if some harm is
foreseeable, master liable even if the particular type of
harm was unforeseeable
a.virtually amounted to a rule of strict liability for the
torts of employees as long as any connection in time
and space could be made between the conduct and
the employment
b.not adopted by all courts
ii.General rules about scope of employment
1.Was the conduct of the same general nature is that which
the servant was employed to perform?
2.Was the conduct substantially removed from the authorized
time and space limits of the employment?
3.Purpose test (Restatement): whether the conduct was
motivated at least in part by a purpose to serve

iii.Manning v. Grimsley

1.Facts: baseball player heckled by fans and intentionally
threw ball at them in the stands
2.Are intentional torts within the scope of employment?
a.Not in early CL
b.Restatement: intentional torts involving the use of
force result in liability if the use of force is “not
unexpected by the master”
c.Restatement: consciously criminal or tortious acts
not per se excluded from scope of employment
3.here, court held principal liable for player’s intentional tort
because the cause of the tort was due to fans interfering
with the agent/player’s duty and scope of employment-
playing baseball

7

iv.Law and economics perspective (Lee likes this better)
1.occasionally employees will do bad things and if hold
principal liable will be able to pay person for injuries
2.deep pockets in the best position to do this because they
can spread the cost around – could prevent at lowest cost
and absorb cost better

d.Statutory Claims

i.Statutes can alter the requirements under CL suit- such as extend
the scope of employment
ii.Can usually sue both under CL (tort) and statute (if a statute exists
in your jurisdiction)

iii.Arguello v. Conoco

1.Facts: plaintiffs sue under §1981 alleging racial
discrimination while purchasing gas
2.5 factors in considering whether an employee’s acts are
within the scope of employment (Restatement)
a.The time, place, and purpose of the act
b.Its similarity to acts which the servant is authorized
to perform
c.Whether the act is commonly performed by servants
d.The extent of departure from normal methods
e.Whether the master would reasonably expect such
act would be performed
e.Liability for Torts of Independent Contractors

i.Majestic Realty v. Toti Contracting

1.Facts: wrecking ball case
2.Generally principal is not liable for torts of IC
3.3 exceptions

a.Where the landowner retains control of the manner
and means of the doing of the work which is the
subject of the contract
b.Incompetent contractor
c.Inherently dangerous activity
4.law and economic analysis: contractor in best position to
absorb and pass on the costs

IV.Fiduciary Obligations of Agents

a.2 components: care and loyalty
i.care: use power granted with due care
ii.loyalty: with respect to power of principal granted to agent, agent
has a duty of loyalty to principal with exercise of his authority
1.no kickbacks
2.no secret profit

a.from transactions with principals
b.use of position (Reading)
3.no usurping business opportunities from principal (Singer)
4.no grabbing and leaving (Town & Country)

8

b.Duties During Agency

i.Reading v. Regem

1.Facts: soldier used his uniform to get truck through security
without having it searched
2.remedy for breach of loyalty: disgorgement of profits
3.think about it in terms of authority given-
a.in this case authority to wear uniform- wearing
uniform gives façade of government approval and
abusing it by converting it to own purpose
b.vs not using that authority for own advantage, not in
payment of authority
c.can’t do anything that would profit yourself; if do
so breach duty of loyalty and doesn’t matter if
company not actually hurt

ii.General Automotive Manufacturing v. Singer

1.Facts: agent/defendant learned of business opportunity
while working for plaintiff and didn’t tell company about it
and took it for himself
2.agent has a duty to exercise good faith by disclosing to
principal all the facts
3.here, agent took away opportunity from employer; if he had
told them about the deal probably wouldn’t have been a
problem
4.agent wasn’t the decision maker, but held himself out as the
decision maker
5.would have been harder for principal to bring breach of K
action because would have had to shown that agent
breached an express term of K (such as not working the
required time each week)
c.Duties During and After Termination of Agency: Grabbing and Leaving

i.Town & Country House & Home v. Newbery

1.Facts: couple of employees want to start own business and
take customer list with them; had access to customer list
from authority give by principal and used it for own
benefit- access to trade secret and took it
2.it’s how you get the trade secret information- if followed
trucks and wrote down addresses wouldn’t be using
authority to gain info
3.duty continues even after relationship ends

CHAPTER 2: PARTNERSHIPS

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