Core Rules: Business Associations

What is the most important factor in distinguishing an employee from an independent contractor?

degree of control over agent’s behavior that the principal has the right to exercise

When is a purported principal liable for an agent’s contract?

only if the purported principal ratifies contract OR court estops denial of contract’s existence

Can an agent create apparent authority?

No.

What are the 4 basic elements of an agency relationship?

1. assent to relationship;

2. act on principal’s behalf;

3. agent subject to principal’s control; AND

4. agent manifests assent

Can an agent have coprincipals?

Yes.

unincorporated association

group of persons who unite for a common, noncommercial purpose such as religion, charity, or education

Does an unincorporated association have a separate legal personality?

No.

What are the legal consequences of an agency relationship?

tort and contractual liability to third parties

Can there be a contractual relationship even if there is no agency?

Yes.

Is express intent need to create an agency relationship?

No.

principal capacity requirements

age of majority, mental competence, and not incapacitated by drugs/alcohol

How is the assent to create an agency relationship assessed?

by examining words and actions objectively

agent capacity requirement

minimal capacity

Can minors be agents?

Yes, but they CANNOT enter contracts on principal’s behalf.

What is required to create an agency relationship lasting one year or longer?

writing per SOF

What is the most common means of establishing assent to an agency relationship?

employment contract

What type of duty does an agent have to the principal?

fiduciary

dual agency requirements

agent’s full disclosure to both parties and consent of both parties

What are the principal’s two rights about controlling agents?

provide instructions and clarify/expand/contract directives

Who may terminate an agency relationship?

either party at will

Does the termination of an agency relationship preclude a breach of contract claim r/t termination?

No.

What are the ways to terminate an agency relationship?

1. agency purpose accomplished

2. expiration of term or reasonable time

3. termination by either party

4. illegality

5. change of circumstances that caused agent’s reasonable belief that principal withdrew consent

6. agent’s neglect/dishonesty/breach of duty

7. death/mental incapacity of either party

When is an agency relationship irrevocable?

if agency coupled with security interest

What are two exceptions to agency termination?

• State law that principal’s death does not end agency

• durable POA by principal

actual authority: defined

authority granted by principal to agent that exists regardless of third party knowledge

actual authority: creation requirements

communications by principal to agent AND agent’s reasonable understanding of authority granted

What factors are used to analyze the creation of actual authority?

principal’s manifestations of acts to be done and clarifying/constraining directives to agent

What is the standard for creation of actual authority?

reasonable person in agent’s position

actual authority: scope

agent’s reasonable belief or understanding of principal’s manifestation

What creates express actual authority?

agent reasonably understood principal’s oral/written words that conferred power for the agent to act on the principal’s behalf

implied actual authority: scope

actions reasonably necessary, usual, and proper to accomplish task requested by principal

implied actual authority: standard

similarly situated reasonable person

When may implied actual authority arise?

• prior dealings of principal and agent

• general custom of industry provided agent knows custom at time of action

• agent’s position implies authority to act on principal’s behalf

• principal’s knowing acquiescence

What are the elements of the exception to the general rule against delegation by agents?

1. purely mechanical act;

2. agent may not personally perform but subagent may; AND

3. acts commonly delegated in business

Who possesses actual authority in a corporation?

officers

Who possesses actual authority to bind in a general partnership?

each partner

Who possesses actual authority to bind in a member-managed LLC?

each member

Who possesses actual authority to bind in a manager-managed LLC?

only managers

What is also terminated when actual authority terminates?

implied actual authority

How can actual authority be terminated?

agency relationship terminates OR principal revokes

apparent authority: elements

Principal represents to third party that agent has authority AND third party reasonably believes the agent has authority.

Does apparent authority require an intentional act by the principal?

No.

What is the focus of apparent authority?

reasonableness of third party belief in agent’s authority

What may support a third party’s belief in apparent authority?

• principal’s statements

• agent’s title/position

Can custom create apparent authority?

not without principal’s manifestation to a third party

apparent authority: principal’s liability

bound by agent’s actions

When is a principal liable for the actions of a falsely purported agent using apparent authority?

if principal’s failure to exercise ordinary care created the appearance of authority

What is the effect of an agent with apparent authority taking actions inconsistent with the principal’s wishes?

duty of obedience violation and principal may sue to recover losses

Who is liable when there is a partially disclosed principal and third party’s reasonable belief in agent?

principal and agent

What is the liability of an undisclosed principal for an agent taking action with apparent authority?

not liable for unauthorized acts

How long does apparent authority persist?

until third party receives notice of circumstances that makes it unreasonable to continuing believing in agent’s authority

What circumstances terminate apparent authority?

• principal revokes agent’s actual authority

• agent renounces authority

• agent’s authority limited to specific time/undertaking

Does an agent still have apparent authority after the principal’s death or incapacity?

Yes, if the third party is unaware.

When is a principal vicariously liable for an agent’s torts?

if tort committed while agent acting with apparent authority OR by agent-employee in scope of employment

tort liability: purported agents with apparent authority

Principal only liable if actions that constitute a tort or allow agent to conceal a tort are taken while agent is exercising authority.

What is the most important factor in tort liability of independent contractors?

principal’s degree of control over agent’s actions

What factors make it more likely that someone is an independent contractor?

1. more skill/special training

2. less supervision

3. multiple clients

4. distinct occupation

5. bringing own tools

6. paid by job

7. principal only controls final outcome

What factors make it more likely that someone is an employee?

1. more supervision

2. only works for principal

3. part of principal’s usual business

4. salary or hourly pay over long duration

5. more control by principal

borrowed servant rule

When employer “lends” an employee to another employer, the first employer is not liable for employee’s torts.

When is an agent acting within the scope of employment?

performing work assigned by principal OR act intended by agent to serve only purpose of principal

What are the elements for use of force in the scope of employment?

1. conduct of kind employed to perform;

2. in time and space of employment; AND

3. motivated in any way by desire to serve employer

May a principal be held liable for an agent’s serious criminal conduct?

No.

detour

de minimus deviation from assigned route that is still within scope of employment

frolic

significant deviation from assigned route that is outside the scope of employment

When is a commute within the scope of employment?

only if employer supplies vehicle

Who is liable for the torts of a purported employee?

the party responsible for creating the impression of an employee if a third party reasonably relied on agent and agent’s actions would have been in scope of employment

In what situations may a principal be liable for the torts of an independent contractor?

1. Principal retains too much control; OR

2. inherently dangerous activities

joint venture

association with limited duration and scope

What defines the duties and authority of a joint venture?

scope

What rules do courts generally apply to joint ventures?

partnership rules

duty of loyalty: definition

Agent must put principal’s interests ahead of their own at all times.

What are an agent’s fiduciary duties?

loyalty and care

Can the duty of loyalty be breached even if there was no harm?

Yes.

duty of loyalty “don’ts”

1. compete with principal;

2. receive material benefit that might interfere with principal’s interest; OR

3. act on behalf of party with interests adverse to principal

May an agent “prepare to compete” without breaching the duty of loyalty?

Yes.

May an agent solicit clients or employees?

No.

What are the requirements for an agent to prove the principal’s valid consent to an act that would otherwise breach the duty of loyalty?

1. good faith;

2. disclosure of all material information to principal; AND

3. deal fairly with principal

duty of care

An agent must act with the reasonable care, competence, and diligence of a similarly situated agent.

partnership—profits and losses: RUPA default rule

All partners share equally.

Does revenue satisfy the profit-sharing rule for partnerships?

No.

profits

all partnership revenue less expenses

distributions

cash or other assets paid by a partnership to a partner

Can distributions be a reduction to a partner’s liability?

Yes.

What governs distributions in a partnership?

partnership agreement

May a partner demand distribution in kind?

No.

How are partnership accounts credited?

with net contributions and partner’s share of profits

How are partnership accounts charged?

with partner’s share of losses and other liabilities

When do fiduciary duties apply to a general partnership?

conduct of business and winding up

When do fiduciary duties NOT apply in partnerships?

to occurrences before partnership OR withdrawn partners

Other than loyalty and care, what is the main fiduciary duty in a partnership?

good faith and fair dealing

Is the duty of good faith and fair dealing breached solely because a partner’s conduct promotes their own interests?

No.

To whom do partners of the duty of care and duty of loyalty?

partnership and each other

duty of loyalty

must put partnership or corporation’s interests ahead of one’s own

Does RUPA permit partnership agreements to alter or eliminate the duty of loyalty?

Yes.

What is the limitation for altering the duty of loyalty under RUPA?

not “manifestly unreasonable”

Per RUPA, what are the requirements to authorize or ratify actions that may violate the duty of loyalty?

full disclosure of all material facts and approval by one or more disinterested person

In a partnership, when does the duty of loyalty terminate?

upon dissociation

conduct violating duty of loyalty: appropriation of partnership opportunities factors

1. closely related to existing/potential line of business

2. would competitively benefit partnership

3. partnership’s financial ability/expertise to pursue opportunity

If the right to acquire a partnership opportunity comes to a partner’s attention, what is the next step?

must disclose opportunity to other partners

self-dealing

Partner on both sides of a transaction violates the duty of loyalty absent consent of other partners.