Business Law: Express and Implied Authority, Partnerships, and Corporations, Summaries of Business Finance

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R. W. Emerson,

Business law notes

Chapter 35: The Agency Relationship

Agency is a two-party relationship in which one party ( the agent) has the power to act on behalf of, and under the control of, the other party ( the principal). For ex. Toyota dealership hiring a salesman to sell cars. Agency is the fiduciary relationship that arises when one person (a principal) manifest assent to another person (an agent) that the agent will act on the principal’s behalf and be subject to the principal’s control. Agency is a fiduciary relationship because the principal entrusts the agent with power to make contracts for the principal and to possess and use the principal’s property. As a fiduciary, the agent must use the entrusted power and property in the best interest of the principle. Capacity – a principle must have the capacity to do the acts that agent is hired for. Employee agents vs. nonemployee agents ( independent contractors)

1. Whether the principal has right to control Dynamax presumes that anyone who is hired to do a job is an employee. Burden shifts to the “employer” to prove that someone is NOT an employee. “Employer” must prove ALL of the following: Calif
2. Worker is free from control and direction.
3. The work is outside of the usual course of business.
4. The worker is engaged in an independently established business or trade. If all are proven, then the employee is NOT an employee but an established contractor. Federal Law has numerous factors in federal law to prove an independent contractor is an employee. Whereas California State Law everyone is presumed to be an employee and must prove 3 factors in order to establish a presumed employee is actually an independent contractor. Actual Authority: express authority and implied authority. o Express Authority is actual authority that the principal has manifested to the agent in a very specific or detailed language o Implied Authority is given to agents to bind their principals. An agent generally has implied authority to act in a way the agent reasonably believes the principal wants him to act. Apparent Authority is when there is appearance of authority General agent is continuously employed to conduct a series of transactions

Faithless Servant’s Doctrine states faithless servant’s conduct must materially and be substantially infringe on the agent’s job performance.

Duties of Principal to Agent:

Generally, the contract should state the duties the principal to the agent. Principle has:

1. Duty to Compensate Agent A principal must compensate the agent for the task the agent has done. If the agent breaches fiduciary duties the principal does have to compensate agent. 2. Duty of Reimbursement If the agent makes expressly or impliedly authorized expenditures while acting on the principle’s behalf the agent is entitled to reimbursement for those expenditures. 3. Duty of Indemnity The obligation to compensate the agent for losses borne by the principal (for ex. the authorized act of the agent made the agent breach a contract or tort with a third party in which the agent must pay the third party. Since it was an authorized act by the principle for an agent, the principle must pay damages to the third party NOT the agent. The principle is not required to indemnify an agent for losses resulting from o unauthorized acts o from the agent’s negligence or other fault

Termination of an Agency

An Agency can terminate in many ways under two headings:

1. Termination by Acts of the Parties I. at the time of an event happening stated in an agreement (if no such time is stated agency terminates after a reasonable time) II. When specified result has been accomplished. (agency has to be created just to accomplish specified result) III. By mutual agreement IV. At the option of either party. ( Revocation : when done by the principal and Renunciation when done by agent) The parties have the POWER to do so but sometimes don’t have the RIGHT to do so. The party may be liable for damages to the other party, unless termination is justified by the breach of a fiduciary duty. IMPORTANT

2. Termination by Operation of Law I. The death of an individual principle. (however, this termination is effective only when the agent has notice of the principles death.) II. The death of an individual agent. III. The principal’s permanent loss of capacity. (ex. the principal goes crazy. The principal’s incapacity ends the agency even without notice to agent) IV. The suspension of power of an agent or principal that is not an individual, such as the dissolution of a partnership. V. Upon the occurrence of circumstance that the agent believes the principle no longer wants the agent to act for the principal: i. Changes in the value of the agency property or subject matter (ex. significant decline in the value of the land to be sold by agent) ii. Changes in Business Condition (ex. much lower supply and much increased price for goods to be purchased by agent) iii. The loss or destruction of agency property or subject matter or the termination of the principal’s interest (ex. house sold by real estate broker burns down or is taken by mortgage holder to satisfy the debt owed by principal) VI. Agent’s loss of capacity to perform agency business VII. Changes in law that makes agency business illegal VIII. Principal’s Bankruptcy IX. Agent’s Bankruptcy (financial condition must affect agent’s ability to serve principal) X. Impossibility of performance by Agent (such as: destruction of the agency subject matter, termination of principal’s interest in agency subject matter <the principal’s bankruptcy does not allow the agency to focus on a subject matter, say a property for example>) XI. Serious breach of agent’s duty of loyalty XII. The outbreak of war (ex. outbreak of war between principal’s country and agent’s country)

Termination of Agency Powers Given as Security

Agent’s coupled with an interest. The agent has an interest in the subject matter of an agency that is not for the benefit in the agency or principal. The interest is to benefit the agency or a third party by securing performance of an obligation owed by the principle. Power of Sale sometimes just because the agent is given power to sell something however the agent will get something in return (for ex. commission) courts must distinguish whether it is in fact an agency. If agency is coupled with interest cannot be terminated by (1) principals’ revocation. (2) the principal or agent’s loss of capacity (3) the agent’s death (4) principals’ death

Apparent Authority – arises when the principal’s manifestations caused a third party to form reasonable belief that the agent is authorized to act in a certain way. Apparent Authority is based on

1. Manifestations by the principal to the third party.
2. That cause the third party to believe reasonably that the agent had authority (such as trade customs, established business practices often determined whether it is reasonable for a third party to believe apparent authority exists) Agent’s Notification and Knowledge: if an agent gives a notification to the third party, the principal is bound. If a third party gives a notification to an agent, the principal is bound Ratification – is a process whereby principal binds himself to an unauthorized act done by an agent. Ratification related back to the time when the contract was made. IT binds the principal as if the agent had possessed authority at that time. Express Ratification occurs when the principal manifests assent that his legal relation be affected, such as stating orally that he wishes to be bound by a contract that has already been made. (for ex. Owner of apartment says apartment manager did not have the authority to make a lease with new tenant. But the Owner expressing ratifies and say he will continue with the lease) Implied Ratification arises when the principal’s conduct justified a reasonable assumption that he consents to the agent’s act. Estoppel – when someone is justifiably induced to believe an actor had authority to act on behalf of another person The liable person must either
3. Intentionally or Carelessly cause the third party’s belief
4. Having notice that the actor is holding herself out as an agent, fails to take reasonable steps to stop it. (say someone is saying they are financing director of YOUR company when they are not, but you fail to act against this) Estoppel is different from apparent authority, because it does not require that the purported principal have made any manifestation that the purported agent can act for her.

Contract Liability of Agent

(1) Disclosed Principle the other party knows that you’re acting on behalf of a principle as well as knowing the identity of the principle. (this is the only time an agent is generally safe) (2) Unidentified Principle when the other party knows the agent is acting on behalf of a principle but does NOT know who the principle is. (3) Undisclosed principle the other party does not know there is a principle (4) Nonexistent principle when an agent acts for a principle that does not exist. When signing: , agent. OR for [Principal] OR [Principal] by Tort Liability of the Principle

• Employee agents principle is liable for the employee’s torts if the agent was acting within the scope of employment (known as Respondent Superior “let the master answer”) Scope of Employment:

1. When the conduct was the kind the that the employee was hired to perform
2. When the conduct occurred substantially within the authorized time period.
3. Substantially within the location authorized by the employer
4. Motivated at least in party to secure the employer’s interest. Direct Liability here the principle is at fault. Defenses against Discrimination Defenses: (1) Same Decision Defense (I would’ve made the same choice if s/he wasn’t ) (2) Seniority (we promote people who’ve been with the company the longest) (3) Other “merit defenses” pay based on production; a professionally developed aptitude test; okay as long as legitimate and non-discriminatory. Important

(a) refusing to commit an unlawful act; (b) be a whistleblower or (c) exercising a legal right or privilege.

2. Implied covenant of good faith and fair dealing usually based on a termination designed to destroy employee benefits (met your quotas and were going to get bonus but they fired you before bonus date)
3. Promises by employers during or in employee handbooks.

End

Beginning of Course First Midterm

Partnership

Revised Uniform Partnership Act (RUPA) – the statute that sets the basic laws for a partnership. Partnership – “an (1) association of two or more person to (2) carry on as (3) co-owners of a business (4) for profit” (1) Association voluntary and consensual relationship; individuals, trusts corporations may all be partners. (2) Carrying on a business usually requires a series of transactions conducted over a period of time. (3) Co-Ownership two most important factors are sharing of profits and management. Under RUPA , the sharing of profits is presumptive evidence that a partnership exists. (4) The parties must intent to make a profit; non-profit organizations must be partnerships. (5) Intent the parties must intend to create a relationship that the law recognized as a partnership. Joint Ventures : is limited to a single project but is treated like a partnership. Purported Partners In the eyes of a third party. Two persons appear to be partners, even though they are not. A person will have liability as a purported partner when: (1) A purports to be or consents to being represented as a partner of another (2) Third Party relies on the representation; and (3) Third Party transacts with the purported partnership. Property acquired in the name of a partner without an indication that the property was being acquired for the partnership is presumed to be the partner’s separate property even if used for partnership purposes. Rupa Default for when property is acquired by a partnership: (1) Wen the property is transferred to a partnership in its name. (2) When the property is transferred to a partner and the transfer document names the partnership. (3) To a partner by a transfer document that indicated the partner’s statute as a partner or that a partnership exists. (4) Property acquired with partnership funds. Duties in a partnership: (1) Duty of loyalty (2) duty of good faith and fair dealing (such as competing, taking kickback) (3) Duty to serve (4) Duty of Care (such as investigating before making a decision, and acting within best interest) (5) Duty to account (separate accounts and keep track and report) (6) Duty of Confidentiality

Duties of Partnerships to Each Other: Partner’s owe each other fiduciary duties of the “highest order”. These fiduciary duties include: (1) May not have an interested adverse to the partnership without the other partner’s consent. Includes duty not take kickbacks or make secret profits. (2) Duty not to compete with the partnership without the other partner’s consent. (3) Duty to Serve all partners are to undertake his/her share of responsibility for running the business. (4) Duty of Care Partner is liable for losses caused from his/her gross negligence, recklessness or intentional misconduct (also has a duty to make investigation, before making a decision. The decision must be on the partner believes is in the best interest of the partnership) (5) Duty to Act within Actual Authority (6) Duty to Account For use of partnership funds and assets. (7) Other Duties

• Maintain Confidentiality of partnership information. Even if the partnership ends. This still carries on.
• Duty to Disclose information material to partnership business. Compensation of Partners (RUPA default):
• A share of the profits of the business.
• Profits are split equally among the partners. Regardless of who works harder or how much $ you invest.
• Losses are split Equally

Individual Partners are responsible for their own torts.

Partner’s Dissociation, Dissolution, and Winding Up.

Dissociation partner ceases to be associated with the partnership. (1) Non-Wrongful Dissociation when partners dissociation does not violate partnership agreement. Partner is entitled to be paid value of partnership interest, but the partnership continues. If partner dies, 50% of partners may vote to dissolve. (2) Wrongful Dissociation dissociation in violation of the partnership agreement or in any other wrongful way

• in the event of a wrongful dissociation, the partnership continues however 50% of the partners may vote to dissolve.
• Partner is entitled to her partnership interest minus the damages caused to the partnership.
• However, not entitled to receive payment until the term of the partnership is over. Dissolution partnership ceases operations. (1) Winding Up – any partner who is not wrongfully dissociated may wind up the affairs of the partnership. Authority of Partner during Winding up: Express and Implied (power to perform acts appropriate to winding up the business); sometimes partners may temporarily continue to business to preserve value. (reference the Black Ace case, they could keep on racing Black Ace in order to preserve the value of Black Ace despite the winding up of the business)
• Perform Contracts entered into before dissolution
• however, may not enter into new contracts. Apparent Authority: winding up partners have apparent authority to continue partnership business unless: (1) Third Party knows that the partnership has been dissolved (2) Partnership has delivered notification to place of business (3) File a Statement of Dissolution with the Secretary of State (90 days after filed, Third Party deemed to have notice)

1. Give actual notice to everyone who has done business with partnership
   2. Take out newspaper announcement.
      3. File a Statement of Dissolution. Filing for Bankruptcy automatically Dissociates. Limited Partnerships (1) General Partner(s) unlimited liability; power to manage the business; sometimes contribute $ (should try to never have a human general partner) (2) Limited Partner(s) contribute capital; have limited liability; no management powers. General partners are fiduciaries; limited partners are not. Certification Limited Partnerships:

• File a certificate of limited partnership with the Secretary of State.
• Should also have a separate limited partnership agreement to address the operation of the partnership and partner’s relations to each other. If formation is defective, treated as general partner. Rights and Liabilities: (1) Capital Contributions a partner is obligated to contribute as she promised. (2) The share of Profits and Losses shares on the basis of the value of each partners capital contribution $100,000 $50,000 $50, Profit: $20, ^ 10,000 ^5,000 ^5, (3) Voting Rights
• day-to-day operations are in the control of the general partner(s). In order Winding Up

End

Beginning of Course Second Midterm

In the corporation “doing business” in the state that is attempting to regulate it? Depends on the purpose of the regulation:

1. May a foreign corporation be subjected to lawsuits in that state.
2. To determine whether the corporation is subject to taxation.
3. Whether the corporation must qualify to do business within that state

• Under the MBCA, the following activities do not require qualification a) Soliciting orders that are accepted outside of the state; b) Conducting an isolated transaction that is completed within 30 days. Under the MBCA, the following requires a corporation to qualify to do business: a) maintaining an office within the state; b) entering into contracts within the state c) maintaining a stock of goods within the state to fulfill orders. How does a corporation qualify to do business? i. Apply for a certificate of authority AND pay a filing fee ii. Maintain a registered office and a registered agent for service of process iii. Fine an annual report AND pay an annual fee. If a corporation does business within a state WITHOUT qualifying: i. Subject to Fine ii. Corporation is disabled from using the state courts

4. To determine whether the state may regulate the internal affairs of the corporation (Relationship between the corporation, directors, managers, and shareholder) Usually, internal affairs are regulated only by state of incorporation. However, a foreign corporation may conduct most of its business in a state other than the state of incorporation. They are called a pseudo-foreign corporation. In California, a corporation that conducts more than 50% of its business and has more than 50% of its ownership within the state is subject to regulation of its internal affairs. Delaware Supreme Court has declared California’s law unconstitutional. (1) Subjecting Corporation to suit in another state: A. If the corporation owns property in that state B. Entering into a contract with a resident of that State (in that state) C. Corporation commits a tort in that state.