Corporations

Final Exam Review

Requirements for Principal-Agent Relationship

mutual agreement, agent acting on principal’s behalf, and agent acting subject to the principal’s control

When can a Principal-Agent relationship be terminated?

Either party can terminate the relationship at ANY time! However, this termination can lead to a breach of contract claim.

If there is no term on a the contract, it naturally expires after a “reasonable amount of time”

special agent

a one-off agent

ex: a building contractor you hire to build your deck.

general agent

an agent who completes a series of acts.

ex: a pest control contractor, who you hire to do four sprays per year.

disclosed principal

A principal whose existence and identity is known to the third party in the transaction

ex: I buy tires from Jimmy, who I know to be an employee of Bob’s store

partially disclosed principal

A principal whose existence is known to third parties, but whose identity is unknown to third parties.

ex: A recruiting company puts out a job advertisement for a company that wishes to remain anonymous to prospective hires.

undisclosed principal

A principal whose existence is unknown to third parties. Third parties operate believing there to be no principal-agent relationship at all.

ex: I buy clothes from Sarah’s boutique, not knowing that Sarah is merely a distributor for a company that manufactures these clothes in a sweatshop in Myanmar.

employee

an agent that the principal exerts a high degree of control over. The principal controls the details of how the agent’s work is done.

ex: I worked in the admissions department at LEGOLAND NY. They told me what jobs I was to do, ow I was to do them, and when I needed to show up and how often I could take breaks.

independent contractor

an agent that the pricipal exerts a low level of control over. The direction of the work is left to the principal, but the details of the work are left to the agent.

ex: the famous “it’s in my contract that I don’t have to attend the 8AM teamwork meetings, and if you try I will renounce the contract and you will have to pay my “waste of time” fee. Yeah, crazy what I put in there. You guys should really read it sometime.”

Jensen v. Cargill

If a financier is strongly guiding a business, that could be a principal-agent relationship!

Principals are liable for debts incurred by agents

express actual authority

agent “reasonably believes” in accordance with what the principal has told the agent, tat the principal wishes for the agent to act.

Requires specific or detailed information, verbally or in writing.

ex: Boss leaves a note saying to buy 5 of product X from Y store at 5PM tomorrow.

implied actual authority

what the agent reasonably believes they can do based on the principal’s words or conduct

based in he principal’s manifestations in light of their objecties and other known facts.

ex: employee knows the bakery is almost out of flour, and goes out to buy some to tide the business over until the next delivery date, knowing thats what usually is done.

apparent authority

What a third party reasonably believes the agent can do, based on the principal’s words or conduct

ex from White v. Thomas:

• Thomas: “I have power of attorney for Ms. White, and am selling this house for her.”

• Seller: “ok.”

(Note, the seller was NOT reasonable here — they did NOT verify if Thomas had power of attorney! Thomas also had overstepped his authority, as he was only expressly authorized to buy a house)

General agents can bind disclosed or partially disclosed principals for a forbidden act if…

They usually accompany or are incidental to transactions the agent is authorized to conduct, and

SO LONG AS the third party reasonably believes the agent is authorized

General agents can bind undisclosed principals for a forbidden act if…

the act is “usual or necessary” to authorized transactions!

Inherent Authority

A form of P-A authority that allows general agents to bind their principals, even when the agent’s acts are explicitly forbidden by the principal!

Ratification

Principal affirmance of a prior act made — can be by an agent or even a rando! The act is given effect as if done by an agent with actual authority.

Officially taking on a legal responsibility!

ratification methods

manifesting assent that the act will affect their legal relations (ex: “Yeah, I’ll ratify that, sure”)

OR

conduct that justifies a reasonable assumption that the person consented (ex: contractor starts working on the deck in the contract, even though only the companys owners bestie just… signed them up without any authority whatsoever)

Estoppel

When someone allows a third party to rely, to their detriment, on the belief that an agent is acting on their behalf.

What distinguishes an agency relationship from a normal financing relationship?

• An extreme level of control exerted over day-to-day business decisions

  • Veto powers on big purchases are normal, but a strong hand in everyday purchases like repairs, improvements, and investments is abnormal

• Agent used primarily for a purpose other than a return on their loan!

  • ex: Where the alleged principal keeps giving the agent new loans DESPITE the agent being unable to repay them

    • ex: Where the alleged principal dictates buys a large percentage of what the agent produces.

Humble Oil & Refining Co. v. Martin takeaway

1. A master-servant (employer-employee) relationship exists when two parties agree that one party will work on behalf of another party, and be subject to that party’s control of how the job will be performed.

2. Employers are responsible for employee liabilities, BUT

   1. Employers are NOT liable for independent contractors' liability!

What indicates an employer-employee relationship?

1. The agreement is terminable at employer’s discretion, 

2. The agreement provides that the employer set the business’’s hours of operation and furnish its advertising and equipment. 

3. ⭐The agreement requires employee to perform whatever duties the employer requires of him in connection with the operation of the business. 

Hoover v. Sun Oil Co. takeaway

1. An independent contractor relationship is formed when one party works on behalf of another independently with no control exerted by the other party over the contractor's day-to-day operations.

   1. NO respondeat superior liability for the employers of independent contractors

What indicates an independent contractor relationship?

1. Employer has no authority over day-to-day operations or control over the contractor’s business

2. The contractor may…

   1. hold themself out as a proprietor

   2. Assume all risk of loss

   3. Have their own employees that they have complete authority over

2. Think: Who has the ability AND power to take precautions?

Gallant Insurance Co. v. Isaac takeaway

A principal may be bound by the condict of an agent done under his/her inherent authority… even without actual or apparent authority!

Agent fiduciary duties

1. Obedience

2. Loyalty

3. Care

Obedience

Requires the agent to follow all lawful instructions and directions given by the principal within the scope of the agency relationship.

Loyalty

• Requires good faith effort to advance the principal’s goals, to act for the principal’s benefits.

• Requires the agent to act solely in the principal’s best interest, avoiding conflicts of interest and self-dealing in the scope of the agency relationship.

Care

An agent must act reasonably when performing their work – essentially a duty of non-negligence.

Tarnwoski v. Resop takeaway

• Principal can recover any profits an agent derived from being an agent (ex: bribe paid by third party to agent to recommend a product) AND any damages incurred as a result of a breach!

  • Even IF the agent did not breach at all!

  • AND even if there was no harm or the transaction was beneficial.

    • ex: agent didn’t recommend the product, or the product was a REALLY GOOD product!

  • The damages can include attorney’s fees!!

• If the principal recovers damages from one party, even if compensated in full, they can still recover in excess from the breaching agent!

• We WANT to punish disloyal agents!

In re Gleeson takeaway

• Trustees must ONLY deal with the trust property as trustee— NEVER in an individual capacity!

  • Even if it would benefit the beneficiaries, no-can-do.

• A trustee who engages in self-dealing breaches fiduciary duty even IF he was acting in good faith AND even if the trust was not harmed.

  • Damages from breach = pay the profits from the breach into the trust.

• Trustees must act solely as trustees, avoiding any self-dealing.

Partnership

 two or more people who act as co-owners of a business for profit, regardless of intent!

Vohland v. Sweet takeaway

• Share of profits = partners, REGARDLESS of intention!

  • NOT equity, gross revenues, whatever. PROFIT! Post-expenses!!

  • Partnership is formed when both parties agree to carry on a business as owners and intend to do those things that constitute a partnership!

• ⭐To bind a partnership, a partner’s act MUST be for “apparently carrying on in the ordinary course of the partnership business”

LLC characteristics

• Limited personal liability for business debts

• Allows room for active and passive partners – managers and members – to have different levels of liability!

• Requires formal registration with the state (vs a partnership can be formed anytime, anywhere!) 

• Continuity after a member withdraws

Capital structure

Debt and Equity!
Trade-off between these two is interest & fixed payments vs loss of control over the business