Law final exam notes - Summary Business Law 2 PDF

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Law 2 Agency  Principal to Agent think of them as an extension of the principal  Agent is not part of the contract at all  Ex: An agent is a hand part of the body. The agent is part of the principal. The agent is only a device of the principal  The agent is the device  Triangle of love o Agent, principal, and third party  Contract between agent and 3rd party for the principal  Example, a lawyer is an agent  An agent is someone who represents someone else  An agent has the power to bind the principal on “his behalf”.  Business could not function without agency owner of business would have to make all contracts personally.  The larger the business becomes, the more practical agency becomes.  Ex: Apple company without agency law=mess  A lawyer is an agent of a client. Certain employees are an agent.  An agent is someone who represents someone else. A CONTRACT MADE OUTSIDE THE AGENT'S AUTHORITY IS NOT BINDING TO THE PRINCIPAL. • • • •

Professor can’t go and buy a building on behalf of Johnson & Wales because he doesn’t have that authority Cashier is a store’s agent when it comes to cash transactions Mit Roomie- goes down to the building (professor went to) and buys the building on the behalf of JWU the contract is most likely binding Sub-agency: An agent hires an agent to represent a principal

How an Agency is formed• An agency requires consent, from both parties (concerned more about the principal) • Agency that is made by an agreement- an express agreement (that has actually been put into words) There is written express agreement, and oral agreement. Technically binding Authority A contract made within the confines of the agents authority is binding on the principal  company’s agent for money transaction.  Go higher up the hierarchy of a company etc., the more likely that someone is an agent and the more power or authority probably exists  Narrower opportunities=less likely to be an agent  Broader opportunities= more likely to be an agent

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An agency requires consent.

Consent comes in different forms: Express: (put into words) 1. Actually written 2. Actually oral (both are binding) Agency by Agreement Most obvious, an express agreement: written or oral  Human memory is fallible but some contracts must be in writing anyway, under the common law Equal Dignity Rule If the contracts of the agent are going (empowered to make) to legally have to be written. Agency agreement must be written. • If the contract states that the agent is going to make decisions on behalf of the principal then it would have to be on paper • Less obviously, implied agreement: when instructions imply an agency agreement, meaning that the principal and agent have a contract that isn’t talked about or written down ◦ Example: Cashier! It is implied that they are an agent of their company by action of accepting/giving out money on behalf of their employer • Power of Attorney: a written agency agreement/formal contract (real estate agreement, literacy, hiring a lawyer) Agency by Ratification• To approve something that has already happened • Agent performsprincipal approves something after • When there was no agency in place at the time, the principal gives permission after and turns him into an agent ◦ Example: “At the time you acted on behalf of the principal, you were not an agent...but the principal then approved of your action...you were then retrospectively made into an agent.” ◦ Example: Professor gets Kim K. to come to JWU for $10,000. He has no authority to do so for the University: Mim sends a letter to Kimmy saying she is pumped for her to come to campus...aka Mim was happy about what the professor did and accepted it Agency of Estoppel• Without agreement—to a certain point, you are held to your representation/approval ◦ Example: If the principal does something to persuade a third party that an agency exists, then it does exist if the third party acts upon it. That

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principal is bound by whatever deal is made! By repeated actions by someone approve by a principal afterwards creates the person into become an agent When a senior agent leaves a company, an employer sends notes to the agent’s customers to prevent agency by estoppel

Rule of Capacity• If you are an insane drunken child, you may NOT make contracts • Children have no authority to be principals. There is no binding contract. *Inure: accustom (someone) to something, especially something unpleasant Legality- if you enter into a contract that is illegal Agency- legally defined relationship where one is principal and one is agent  If agent reports contract with a third party on principals behalf then the contract is between principal and third party  Agent can bind contract in principals behalf  Requires consent of principal written or oral  Might happen by ratification  Principal should not be a minor, mentally incompetent, and must be for a lawful purpose Agency formation relationship  

Consent of principal (express, oral, ratification, implied, estoppel) Principal should have contractual capacity Principal should not be a minor or incompetent

Duties that arise within a legal relationshipDuties owed by Agent to the Principal  Definition: o Duties- an obligation owed by one person to another person to do a certain thing or behavior a certain way  Obligation meaning if agent fails to live up to duty and principal suffers lose, agent must compensate principal for that loss  Principal and agent are not strangers  If an agent breaches his duty, then the agent has to compensate the principal First Duty, most important- agents duty of Performance Agent owes to principal a duty to do her level best to actual carry out purpose of agency

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Agency has obligation to make the attempt, to try, best effort, all the skills in her command to carry out purpose of agency If agency does not make any effort, or attempt, and the principal suffers lose, the agent owes cost of damages to principal It has limited value if the agent has no money (sue someone with no money= no money) Principal normally has greater money than agent

Agent’s duty of Notification The moment the agent learns anything that information must immediately be conveyed to principal  Agent is regarded as extension to principal  Moment agent knows something as far as judge concerned I know it too  And if I say to judge in lawsuit agent never told me judge will say im not hearing argument  If agent fails to tells principal in a timely manner and principal has a lose agent owes principal whatever lose was Most significant is the Duty of Loyalty When you are acting as an agent you owe to principal 100% of your loyalty  In the best interest of your principal, to the exclusion of anybody else interest  More important then yours and everyone else’s besides the law  Prohibition of No Conflicts of Interest o Arises when the agent has some other obligation that conflicts with the best interest of his principal o Classic example: when agent is defending two principals in same transaction  Example: represent buyer and seller in same sales transaction  No Self Dealing o Enriching yourself at the expense of your principal o Taking yourself what should belong to your principal Duty of Confidentially, is pretty straight forward  If you have found out anything about or from your principal as agent then all things you learn from or about principal should be treated as (secret) confidential. *(it is permanent and never ends)*  Not allowed to repeat to anyone, except for these circumstances: o Exceptions: 1. Principals permission 2. Happen to be involved in lawsuit against principals, only way to defend self you can use secrets 3. When under order of the court or judge has instructed you to say the secret, when you are ordered to under law

4. Necessary to do so in order to prevent a crime from being committed, MUST reveal 

Not permitted to decide for yourself which to keep secrets or not, you assume to keep all a secret

Duty of Obedience If principal gives you an instruction, you carry it out o As long as instruction is: 1. Clear 2. Legal  Must obey even if think instructions are immoral or stupid  Have legal obligation  Ex: legal obligation to notify and be loyal to act in the principal’s best interests *Other duties are designed for you to serve the principal besides the duty of obedience Accounting Obligation to maintain accurate records available for principal inspection at all times. Money or property taken in and out.  Accurate Records  Segregation of Assets (No Commingling) separate from agent and principal  Money for principal is the principal’s  Banks provide special accounts for this- client trust accounts Principal’s duties1. Compensation ------ Performance (paying the agent for work he does)  Will agree in advance how much a principal owes an agent. Even if no agreement, there is still a duty of compensation (unless specifically said for free).  Owe standard rate of level of skill.  Owe specific agreed amount  No specific of money contract duty of performance  No guarantee of duty of obligation (agent) 2. Reimbursement- give agent back what they paid expense  Ex: agent travels to represent principal  Unless explicit agreement otherwise, the principal has to compensate the agent  An agent expends, a principal owes. 3. Indemnification- principal cover costs of agent’s liabilities with lawsuit against agent that they are found responsible for 4. Cooperation- requires that the principal must do whatever principal can do to assist agents duties  Principal must provide agent with what agent needs (info) to get the job done.  Must not create any barriers to make it hard for agent to perform

Termination of the Agency Relationship  Contract is only affective during the time of principal and agent agreement  Beginning: principal and agent consent  Remember that contracts are made by principal on his behalf during the agency  Before agency exists… doesn’t count against principal  Really important to know when agency comes to end Several ways an agency can end, whichever happens first is way it ends: 1. Lapse- enough time gone by. Agency comes to an end. Some agreements specify agency end, others it’s reasonable time 2. Purpose was Achieved- if agency was to do a specific thing and that thing was done, then no reason for Agency to exists 3. Specific (named) event- including both parties of the agreement (Ex: both go off to war) 4. Agreement- (mutually agree) if both agree then obviously the agency could be terminated 5. Could be terminated if upon death or mental incompetence of principal a. After principal has died, cannot fight estate Exception 6.  New agency called: Durable Power of Attorney o Special kind of agency which lasts even if its principal then becomes mentally incompetent o Not the same kind of agency as learned above, that has been defined by common law _ this is created by state statute follows specific rules and forms o Can last beyond incompetence principal Also possible for agency to be terminated, Unilaterally, meaning that either agent or principal (especially principal) can terminate agency at any time at will  Agency is a relationship of consent from the moment consent no longer exists the agency no longer exists  However in this context, need to make distinction between having the power to do something as opposed to having the right to do something o Power meaning, that if you do it is in fact done, it is accomplished o Right meaning, that if you do it you do not insure any liability for having done it, no one can successfully sue you Topics of Authority and Disclosure, and Consequences

Authority  Actual authorization  Expressed  Implied  Apparent Authority (by essoppel) Disclosure  Full disclosure Principal  Partially disclosed Principal  Undisclosed Principal Agent acted within authority Fully disclosed principal

Is Principal liable on contract?

Yes

No, agent Is Agent is merely liable on contract? conduit

Partially disclosed principal

Undisclosed principal

Election Doctrine

Election Doctrine

Election Doctrine

Election Doctrine

Agent acted outside authority Fully disclosed principal

Partially disclosed principal

Undisclosed principal

No

No, only liability within authority

No

Implied warranty of authority

Implied warranty of authority

Yes

Election Doctrine  Either to pursue lawsuit against agent or pursue lawsuit against principal  Kicks in once third party finds out who principal was Business Organization Control? How much liability? Equity capital? Debt Capital? Taxation? 1. Sole Proprietor  Human being, single individual doing business  If you are sole proprietor, you are the business

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Control? Total Liability? Total Equity Capital? Impossible Debt Capital? Difficult to raise Taxation? Personal

2. General Partnership  Control?  Liability?  Equity Capital?  Debt Capital?  Taxation? 3. Corporation  Control? Total control  Liability?  Equity Capital?  Debt Capital?  Taxation? *All other forms are either reactions to or permutations of these three

Sole Proprietor General partnership Corporationshareholders, directors, officers

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CONTROL

LIABILITY

DEBT CAPITAL Difficult

TAXATION

Total

EQUITY CAPITAL Impossible

Total Shared

Unlimited

Easier

Easier

None

Limited Liability / Zero Liability

Tremendous Possibilities

Harder

Pass through Double

Perpetual

Taxation scenario is not as good as a general partnership General partnership especially because there are now other kinds of partnerships Partnership is ONLY form of business organization (not sole proprietorship) that can be formed with a HAND SHAKE o All other organizations require paperwork with the state o If two or more people share profits or control of enterprise and those people don’t form LLC then by default what they are is a general partnership whether they think that or not

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o Share profits of control with someone? General partnership no matter what you think or feel Paper work is a good idea for partnership General partnership: wherever two or more people share profit and counted. If they don’t form an LLC corporation and the like, they are a general partnership. Partnership agreement- there are rules that will be imposed by the law of partnership if an agreement is not reached Contract made between partners as to what the rules of operations for this partnership will be o If do not have written rules, there are still rules and they will be imposed on you by the law of partnership automatically, any rules other than law you need partnership agreement that states those additional rules o WRITTEN CONTRACT = GOOD IDEA TO LOOK BACK ON

What the rules will be if you don’t have an agreement1. Consider issue of Profits Distribution within a general partnership: rule as defined is, profits among partners are to be SHARED among the partners on the basis that one partner gets one share, share and share alike.  Equal  One partner = one share 2. Management Control- partnership shared between all the partners  Done by majority vote  One partner = one vote  The bigger partnership gets the more unwieldy it gets 3. New Partner? – How do we decide if you can be partner? – New partner requires unanimous consent of ALL existing partners  Even if one partner says no, then no new partner can be applied  If a, b, c, and d were deciding whether to add new partner or not and a,b,c said yes, but d said no and that person became partner there would be no consent which is why unanimous consent is required  Unanimous consent, hard to get New Partners? Unanimous consent 4. Partner Withdrawal? – Dissolution  Dissolves if/when a partner dies/quits/becomes mentally incompetent  Dissolution is a single moment in time where the partnership ceases to be a partnership.  Partners stop being agents of each other.  Immediately triggers a process which is called winding up.  Winding up is the distribution of assets to the partners.  Each one is entitled to the part of their property. 

Another way is for a single person to buy all the assets from the other so that the partnership can continue to run.  Partnership agreement provided a partner would not withdraw  Agreement contained formal for paying off that partner  Partner = part owner, can take assets with him/her Marriage is not a partnership, people who consider getting married before getting married to have a conversation about children, religion, finance, and bank accounts. General partnership to have a conversation is smart so issues show up before becoming partners rather than after All partners are EQUAL You can have a general partnership agreement and you can control all perimeters of your agreement If you don’t have an agreement then the general rules of partnership law take over and that means that all partners get an equal share of profits and equal votes, unanimous consent. 

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Winding Up 1. Collect all debts, reduce assets to liquid where they can be distributed Distribute assets in order; a. Pay outside creditors, anybody that owes money who is not a partner (ex) lenders, employees b. Then if any money left you would pay any partner creditors- partners who have loaned money to partnership at some time in the past c. Then you would return to partners their original capital investments- (ex) money to become a partner, buy your way in d. Distribute remainder according to profit share (anything left over, profits) Ex: We have a partnership and there are 4 partners a, b, c d C makes a loan in the amount of 50k Partnership dissolves At the time of dissolution A B C d 100k 50k 50k o 40% of profits

25%

Gross assets: Outside Debts: Winding up

1,000k 500,000k

25% 50k

A Assets

1,000k

Capital contribution Profit share loan

10%

B

C

D

Pay outside Pay partners Return cap. Distr. remain

(500k) (50k)

50k

450k (200k) 250k

100k

50k

50k

100k

62.5k

62.5k

25k

Total left over:

200k

112.5k

162.5k

25k

“JOINT AND SEVERAL LIABILITY” Back in the day: General Partnerships Corporations

Liability: unlimited  Liability: limited 

Taxation: pass-through (low)  Taxation: double taxation 

Legislatures tried to provide some kind of a business entity that would provide both limited liability and pass-through taxation.

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Limited partnershipo Two types of partnerships:  General partners- in limited are just like partners in a general  Bigger general partnership grows and bigger debts getless likely someone will want to be a new partner o General partners are just like partners in a general partnership. GP enjoy the management, agents, and principals, control the business, unlimited liability. Limited partners- must have at least one of each (general and limited)  Passive investors- invest money  Limited liability If you want to be limited partner is that you are a passive investor, if you do anything else that might give impression you are general partner…. You become general partner and get un limited liability If you allow your name to be used for business, you are general partner All they do is invest money in it and wait for a profit (if any). They have limited liability. They have more ability to obtain more capital than a general pa...