agency other country

8/11/2019 Agency Other Country

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Business OrganizationsOUTLINE

I. Agency

A. Who is an Agent?- an agent is:o one who acts for anotherby authority from him,

o one who undertakes to transat business or manage some affairfor anotherby

authority and on account of the latter

Three Required Elements of an Agency Relationship:- !" a manifestation by the #rini#a$ that the agent wi$$ at for him%

o consentby a #erson &the #rini#a$' that the other &the agent' sha$$ act on her/his

behalfo If they consentto eah other, then ageny resu$ts and they are now bound in a

re$ationshi# that the $aw reognizes &it now has $ega$ im#$iations'- (" ae#tane by the agent of the undertaking% and- )" an understanding between the #arties that theprincipal will be in controlof the

undertaking

NOTE:The re$ationshi# of #rini#a$ and agent does not need to involve some matter of business

Legal Implications:- In order to reate an ageny, there must be an agreement, but not neessari$y a contract

between the #artieso there doesn*t ha+e to be a ontrat between #rini#a$ and agent

o the agent doesn*t ha+e to #romise to at as suho neither one has to reei+e om#ensation

- geny is its own kind of $ega$ re$ationshi# that has its own im#$iationso Legal implication: the #rini#a$ is res#onsib$e for what the agent does

Responsibility for Acts of Agents

- rini#a$s are res#onsib$e for the ats of their agents- If one is an agent, then his ations are attributab$e to the #rini#a$

o orton v! "oty#where teaher $oaned her ar to footba$$ oah and #$ayer was

in.ured" The /ourt found that the oah was ating as the teaher*s agent when hedro+e her ar" 0he ou$d ha+e dri+en the #$ayers herse$f, but instead she hose for

the oah to dri+e her ar, with the ondition #reedent that only he drives thecar. The ourt thinks it*s an im#ortant fat that she s#eifia$$y said that on$y hewas su##osed to dri+e the ar, nobody e$sethat is e+idene that the oah wasatingsub$ect to her control. The ourt fee$s that sine the oah was the atua$dri+er and was under her control, he onsented to the agreement"

RS 161%eneral agent# an agent authorized to ondut a series of transations in+o$+ing acontinuity of service

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&urden of 'roof

- has the burden to #ro+e ageny by afair preponderance of the evidence- geny is a 1uestion offact- NOTE: ageny is traditiona$$y #art of state $aw

Three 'rincipal (orms of Agency- !" the re$ation ofprincipal and agent- (" the re$ation of master and servant% and- )" the re$ation of employer/proprietor and independent contractor

TEST FOR AGENC:

- 2as a #arty agreed to at on beha$f of a seond #arty, sub.et to the seond #arty*sontro$3

o If 4E0, an ageny re$ationshi# is reated

Reality of the )ircumstances

- an agreement may resu$t in the reation of an ageny re$ationshi# even if the parties didnot call it an agency and did not intend the legal consequences of the relation to follow- ourt $ooks to the fats and the reality of the actual situationto deide whether there was

an ageny re$ationshi# or a business re$ationshi#o intent of the #arties does not matter5on$y their actions toward each other!

- The e6istene of the ageny may be #ro+ed by circumstantial evidence which shows acourse of dealing between the two parties

o when an ageny re$ationshi# is to be #ro+en by irumstantia$ e+idene, the

#rini#a$ ha+e consented to the agencyo one annot be the agent of another e*cept by consent of the principal

- an ageny re$ationshi# resu$ts when ob$ectiveriteria are met, regard$ess of the #arties

sub$ective#ersona$ be$iefs- when #eo#$e beha+e towards eah other as #rini#a$ and agent, the $aw wi$$ ho$d them to

this- reditor who assumes control of his debtor+s businessmay beome $iab$e as a #rini#a$

for the ats of the debtor in onnetion with the business"o ay ,enson (arms )o! v! )argill- Inc!# where farmers wou$d gi+e 7arren grain,

and they wou$d gi+e it to /argi$$" 8armers &*s' $aim that 7arren bought grain asan agent for /argi$$, so when 7arren fai$s to #ay the farmers for their grain,/argi$$ shou$d #ay their debt" 7arren doesn*t ha+e any money so /argi$$ makesan agreement to he$# them out5/argi$$ wou$d $oan money to 7arren, and thenwhen 7arren made money, the money wou$d be de#osited with /argi$$" 7arren

had to get /argi$$*s #ermission before doing many things &se$$9#urhase stoks,making re#airs worth o+er ;


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/argi$$ and 7arren did not e6#$iit$y onsent to an ageny re$ationshi#, but/argi$$ &reditor' had suffiient ontro$ o+er 7arren &debtor', so they had anageny re$ationshi#, where reditor is $iab$e for the ations of the debtor"

The ourt says =we dea$ here with a business enter#rise marked$y different

from an ordinary bank finaning, sine /argi$$ was an active participantin

7arren*s o#erations rather than sim#$y a finanier" /argi$$*s ourse ofdea$ing with 7arren was a #aterna$isti re$ationshi#, where /argi$$ madethe key eonomi deisions and ke#t 7arren in e6istene">

- NOTE:a seurity ho$der who mere$y e6erises a +eto #ower o+er the business ats of hisdebtor is not a #rini#a$, but if he takes o+er the management of the businessand diretswhih ontrats may or may not be made, he has beome the #rini#a$ and is liable forthe agent+s actions

'ublic 'olicy

- in our soiety, when someone is e6erising ontro$ o+er someone and doing somethingfor that #ersons* benefit, it seems fair that they be res#onsib$e for that outome

o

we want fairness and .ustie- It is unfair if one #arty e6erises ontro$ o+er another, but takes no res#onsibi$ity for the

other #arty*s ationso E6" /argi$$ $aimed that whi$e they had ontro$ o+er 7arren, they were not

res#onsib$e for what ha##ened to them ?this is a rei#e for a sma$$ #ie@- The #rini#a$ is not aountab$e for every at that the agent does, on$y those that the

agent has authority to doo E6" of the teaher and the oah5e+en if the oah was her agent when dri+ing

her ar, if he goes out and buys #ro#erty, she is not $iab$e for #ayment of the $and,b9 she on$y onsented to the use of the ar"

ie na$ogy:- Two Aiews:

o 4ou an be onerned with di+ision of the #ie5who gets what in the #ie5

fairness Oo 4ou an be onerned with the growth of the #ie5efficiency

- 7e shou$d be $ess onerned about the distribution of the #ie and more onerned aboutthe size of the #ie

- 4ou ou$d say you are more onerned with a fair distribution of the #ie than with yourown s$ie of the #ie

!. "ia#i$ity o% &'inci(a$ to Thi') &a'ties in Cont'act

1. A*tho'ity

Actual authority- uthority that the #rini#a$, e6#ress$y or im#$iit$y, ga+e the agent

Implied authority- Under the =atua$ authority> ategory

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o The atua$ authority gi+en to the agent by the #rini#a$ a$so in$udes #owers that

arepractically necessaryto arry out the duties atua$$y de$egated"- FOC+S:upon the agent+s understanding of his authority!- the agent must reasonably believe-beause of #resent or #ast ondut of the #rini#a$,

that the #rini#a$ wishes him to at in a ertain way or to ha+e ertain authority

o 0#eifi ondut by the #rini#a$ in the #ast #ermitting the agent to e6erisesimi$ar #owers is ruia$

o gent an use irumstantia$ e+idene

the ats and ondut of the #arties suh as the ontinuous ourse of

ondut of the #arties o+ering a number of suessi+e transations- the agent has the authority to do anything that a reasonable personwou$d think are

neessary to aom#$ish the task that he was gi+en actual authorityto doo 0ill 1treet )hurch of )hrist v! 2ogan- where hurh hired Bi$$ to #aint and he

then hired his brother, 0am" 0am be$ie+es that Bi$$ had the authority to hire him%0am was e+en #aid for the ha$f hour of his work" 0am argues that Bi$$ was the/hurh*s agent when he hired him" The /hurh says they ga+e ne+er ga+e Bi$$

the authority to hire 0am5on$y ga+e him authority to #aint the /hurh" The/ourt found that 0am was an em#$oyee b9 Bi$$ 2ogan had the im#$ied authorityto hire 0am as his he$#er b9 he needed he$# #aining &he had the actual authorityto #aint'" In the #ast, the /hurh had gi+en Bi$$ authority to hire others as need"The hurh is being he$d $iab$e for something they did not gi+e the agentsomething to do, in fat it is something they rea$$y didn*t want him to do5theywanted another guy to do it"

&urden of 'roof:the #erson a$$eging has to #ro+e that he is the agent and has the authority to atas an agent

,. A((a'ent A*tho'ity

Two Cain /$assifiations of uthority:- !" actual authority- authority that the #rini#a$ e6#ress$y or im#$iit$y ga+e the agent

o implied authorityis a sub-grou# of actual authority

atua$ authority gi+en im#$iit$y by a #rini#a$ to his agent

- (" apparent authority# when a #rini#a$ ats in suh a manner as to convey the impressionto a third #arty that an agent has ertain #owers whih he may or may not atua$$y#ossess

Apparent Authority

- the authority that the agent appearsto #ossesso It is a matter of a##earanes on whih third #arties ome to re$y

- FOC+S:on the perspective of a reasonable third party- If #rini#a$ ho$ds out agent as ha+ing authority to bind #rini#a$ then agent wi$$ ha+e that

authority:o e+en if #rini#a$ ne+er ga+e the agent authority% ND

o e+en if #rini#a$ to$d agent that he does NOT ha+e the authority"


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- Lind v! 1chenley Industries- Inc!- where is suing for om#ensation that is due to him outof a ontrat" A to$d he was going to be mo+ed u# and to$d to re#ort to Faufmanand he wou$d te$$ him about his new duties and om#ensation" was #romoted andFaufman to$d him that he wou$d get !G ommission on the sa$es of the men under him"The /ourt found that Faufman did ha+e the authority to offer the !G ommission b9

there is e+idene of ageny" $though Faufman was ne+er to$d that he had the#ermission to make u# Lind*s sa$ary, and was atua$$y to$d that he did NOT ha+e theauthority, the 3' held out 4aufmanto as ha+ing the authority to te$$ Lind his sa$ary5therefore there was a##arent authority" The ourt finds that that the om#any an be he$daountab$e for Faufman*s #romises on the #rini#a$ of =a##arent authority>% as far asLind was onerned, Faufman was the s#okesman for the om#any"

NOTE: inherent agencyand apparent agencyare both theories under whih the #rini#a$ may behe$d $iab$e for the ats of an agent where there is no actual authority

-. Inhe'ent Agency &oe'

- If an agent does something ontrary to the #rini#a$*s instrutions, the #rini#a$ is sti$$$iab$e if he has he$d the agent out as having the authority to ma5e his decisions- 7hen an agent is #$aed in #osition that genera$$y omes with ertain #owers to bind

#rini#a$s, then the #rini#a$ wi$$ be $iab$e- RS 1/0- an undisclosed principalis $iab$e for ats of an agent done on his aount, if

usua$ or neessary in suh transations, a$though forbidden by the #rini#a$- RS 1/- n undisclosed principalwho entrusts an agent with the management of his

business is $iab$e to third #ersons with whom the agent enters into transations usua$ insuh business and on the #rini#a$*s aount, a$though ontrary to the diretion of the#rini#a$

o .atteau v! (enwic5# 2umb$e used to own the bar and then so$d it to D &a firm of

brewers'! D makes 2umb$e the manager and 2umb$e*s name is sti$$ on the frontof the bar! 2umb$e on$y had the authority to buy a$es and minera$ water5D*swere su##osed to do the rest! 2umb$e ends u# buying igars and Bo+ri$ from+endors" They ask 2umb$e to #ay &whose name is on the door'! 2umb$e te$$sthem that he has no money, so sues 8enwik for the money sine he is the rea$owner" 2ere, the #rini#a$ is not ho$ding out his redit and the business is arriedon in the agent*s name and the goods are su##$ied on his redit, agency in factmust be shown to make the #rini#a$ $iab$e! The rea$ owner of the bar argues thathe is not $iab$e on these ontrats b9 2umb$e did not ha+e the authority to buy thegoods, and no reasonab$e #erson wou$d think that he had the authority" The /ourtsays it is we$$ known in soiety that genera$ managers of bars ha+e the authorityto bind their #rini#a$s to the sa$es of igars and Bo+ri$"

- One it is estab$ished that 8enwik is the #rini#a$, then the regu$ar ru$es a##$y:o The #rini#a$ is $iab$e for a$$ of the ats of the agent whih are within the

authority usua$$y onfided to an agent of that harater, notwithstanding$imitations &as between the #rini#a$ and the agent' #ut u#on that authority

- Inagency in fact, the #rini#a$ wi$$ on$y be $iab$e if the at done by the agent is within theso#e of his ageny5not where there has been an e6ess of authority

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TEST FOR "IA!"IT OF T2E &RINCI&A":

- Was the agent #eing he$) o*t as ha3ing the a*tho'ity to act %o' his ('inci(a$?

'ublic 'olicy

- The 8enwiks of the wor$d do not want to bother with these thingso they don*t want to ha+e to answer to e+ery +endor that wa$ks through the door, so

they hire someone e$se to do it- if we donHt ha+e the one#t ofinherent agency, it wi$$ be hard to get the igars into the

bars b9 +endors wi$$ ne+er be$ie+e or trust #eo#$e $ike 2umb$e5they wonHt trust that hehas authority and then wi$$ re1uire +endors to do $ots of researh on who they are se$$ingto et"

o this is not effiient &$ess #ie'

- Inherent agencyis $ooked down u#on in or#orate $aw and ourts try to find apparentagency-so need not rest on inherent ageny"

Summary of Agency

Three .ays to 1how Liability of a 'rincipal to Third 'arties for the Acts of Agent:

- !" e*press or real authority, whih has been definite$y granted%- (" implied authority-that is, to do a$$ that is #ro#er, ustomari$y inidenta$ and reasonab$y

a##ro#riate to the e6erise of the authority granted% and- )" apparent authority-suh as where the #rini#a$ by words, ondut or other indiate

manifestations has =he$d out> the #erson to be his agent

geny- a human re$ationshi# founded in $aw that arises in the way that #eo#$e treat eah other- regard$ess of the sub.eti+e intent of the #arties

- the #rini#a$ wi$$ be hargeab$e9$iab$e for the ations of the agento but on$y those ations that the agent has authority from the #rini#a$ to do

Theories of Agency:

- actualo e*press##rini#a$ and agent agree on what authority the agent has

o implied#an used #ast ations to im#$y the ageny re$ationshi#5this fouses on

the #ers#eti+e of the reasonable agent- apparent#does not $ook at the #ers#eti+e of the reasonab$e agent, but to the #ers#eti+e

of the reasonable third partyo an em#$oyee-agent has apparent authority to make an agreement binding on his

em#$oyer-#rini#a$, if, but on$y if, the em#$oyer-#rini#a$ through offiers orother agents authorized to do so has held out that the employee#agent has suchauthority

o e+en if authority was ne+er gi+en, or e+en if the agent was s#eifia$$y to$d that he

did not ha+e that authorityo most firms want there to be this ageny, so that $ients be$ie+e what the agent

says, then the #resident an easi$y de$egate authority- he doesn*t ha+e to bea+ai$ab$e for e+ery $itt$e 1uestion, his agents an take that res#onsibi$ity


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- inherento general agent-for a dis$osed or #artia$$y dis$osedprincipal, sub.ets his

#rini#a$ to $iabi$ity for ats done on his aount, which usually accompany or areincidental to transactions, whih the agent is authorized to ondut if, a$thoughthey are forbidden by the #rini#a$, the other party reasonably believes that the

agent is authori6ed to do them and has no notice that he is not so authori6ed!o rini#a$ an be $iab$e for ondut whih he did not desire or diret, to #ersons

who may or may not ha+e known of his e6istene or who did not re$y u#onanything whih the #rini#a$ said or did

rini#a$ is $iab$e e+en when an agent has ated im#ro#er$y in entering

into ontrats or making on+eyaneso where a genera$ agent does somethingsimilar to what he is authori6ed to do-but

in +io$ation of orders The #rini#a$ wi$$ beome $iab$e as a #arty to the transation, e+en though

he is undis$osedo FOC+S: this is a$so onerned with the #ers#eti+e of the third party

o re1uires that the #rini#a$ has #$aed the agent in a situation with a ustomaryauthority that wou$d bind the #rini#a$

- ratification- estoppel

0. Rati%ication

Elements of Ratification:

- !" ae#tane of the resu$ts of the at- (" with an intent to ratify% ND- )" with fu$$ know$edge of a$$ the materia$ irumstanes">

RS 4,- =atifiation is =the affirmane by a #erson of a #rior at whih did not bind him, butwhih was done or #rofessed$y done on his aount>

- the #rini#a$ an say that, a$though his agent did not ha+e the right to enter into theontrat, he is ha##y the agent did, and the #rini#a$ wi$$ affirm the transactionand agreeto be bound by the contract

- atifiation ha##ens when somebody affirms a dea$ that was done on their beha$f, but thedea$ was not binding at the beginning5one ratifiation ours, he9she is then bound tothe terms of the agreement

o &otticello v! 1tefanovic6- where Cary and 7a$ter &D*s' owned a farm and

beame interested in the $and" They negotiate, D*s refuse the first offer and then

the buyers ome bak and say J;,


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7a$ter had not been signing douments for her in the #ast5she had signedanything in+o$+ed with the #ro#erty" $aims that Cary ratified the ontrat*sterms by her subse1uent ondut &reei+ing9ae#ting #ayments, et"' The ourtdisagrees" 0ine 7a$ter ne+er #ur#orted to be ating on his wife*s beha$f, as isessentia$ to the effeti+e subse1uent ratifiation, Cary is not bound by the terms

of the agreement" 7a$ter is $iab$e for his share of the ontrat, but Cary is not"- NOTE:&efore the receipt of benefits may constitute ratification- the other requisites forratification must first be present

o One annot #ur#osefu$$y en.oy the benefits of the $and without ratifying the dea$

There must be an intent to ratify

E6" =I hereby ratify this dea$>

- NOTE: Carita$ status does not in and of itse$f #ro+e the agency relationshipNor doesowning land togethermake one the agent for the other

. Esto((e$

- 7hen a #rini#a$ ho$ds someone out to be his agent, there is a ontrat with the #rini#a$

by estoppel, regard$ess of how muh the agent e6eeds his authority, but when there hasbeen no ho$ding out by the #rini#a$,proof must be given of agency to ma5e the principalliable

o The a##earane of authority must be shown to ha+e been reated by the

manifestations of the alleged principal, and not a$one and so$e$y by #roof of thoseof the su##osed agent

- The #rini#a$ wi$$ be estoppedfrom denying the ageny re$ation if the third #arty hada$tered her irumstane in reasonab$e re$iane

- If a #rini#a$ fai$s to take reasonab$e #reautions to kee# =wou$d be agents> out of his#$ae of business, where a reasonab$e #erson wou$d take im#ostor as agent, the #rini#a$will be estopped from denying the agency relationshipif the )rd #arty a$tered

irumstane in reasonable reliance on the supposed relationshipo 2oddeson v! 4oos &ros# goes to D*s furniture store and is a##roahed by a sa$es

#erson, who shows her the furniture, and then starts writing the a$u$ations on a#ad of #a#er" 0he gi+es him the money in ash, but does not get a reei#t" 7henthe furniture doesn*t arri+e, she a$$s the store and they ha+e no reord of thetransation" It turns out the sa$esman was an im#oster. says the store shou$d be$iab$e as the #rini#a$, but none of the ty#es of ageny seem to fit" The isa$$eging #ri+ity of ontrat with the D through the relationship of agency betweenthe " and the salesman. The duty of the owner of the stores in$udes the e6eriseof reasonab$e are and +igi$ane to #rotet the ustomer from $oss oasioned bythe dee#tions of an a##arent sa$esman. D fai$ed to take reasonab$e #reautions to

take wou$d be im#osters out of their store. /ustomers shou$d not ha+e to in1uireinto the $egitimay of a$$ sa$es#ersons before making her #urhases"

'artially "isclosed 'rincipal

- when the other #arty to the transation has notie that the agent is or may be acting for aprincipalfor whom the agent is ating

- un$ess otherwise agreed, an agent who makes a ontrat with another for apartiallydisclosed principalis a #arty to the ontrat

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- Duty of gento it is the duty of the agent, if he wants to a+oid #ersona$ $iabi$ity on a ontrat

entered into by him on beha$f of his #rini#a$ to: !" dis$ose not on$y that he is ating in a re#resentati+e a#aity% ND

(" the identity of his principal!

- 0ust be actual 5nowledge# It is not enough that the other #arty has the means ofasertaining the name of the #rini#a$

TEST FOR &ARTIA"" 5ISC"OSE5 &RINCI&A"S:

- 5i) the agent ('o3i)e the thi') (a'ty ith actual knowledge that:o 1. the agent as o'ing %o' a ('inci(a$7 AN5

o ,. the i)entity o% that ('inci(a$?

- I% ES8 then agent is not $ia#$e %o' the cont'act

C. "ia#i$ity o% &'inci(a$ to Thi') &a'ties in To't

'rincipal#Agent relationship: &subategories of this re$ationshi#'- master#servant5master is e6erising ontro$ o+er the dai$y ati+ities of the ser+ant

o $iab$e for both ontrats and torts

o ser+ant agrees to work for the master and sub.et to the master*s ontro$

o master has agreed that ser+ant wi$$ work on his beha$f when ontrating with third

#arties- principal%non#servant agent

o agent is agreeing to work on beha$f of the #rini#a$ and the #rini#a$ agrees to

ha+e the agent work on his beha$f, but the #rini#a$ does not agree to the way thatthe agent goes about it

o this on$y a##$ies in ontrat ases, not in torto rini#a$ is not e6erising ontro$ o+er how the agent aom#$ishes the task of the

agenyo rini#a$ is $iab$e for ontrats that the agent enters into, but not the Torts &T'

the #rini#a$ is not in a #osition to #re+ent any torts, therefore he is not

$iab$e for the torts ommitted by the agento independent contractor5this is not a #rini#a$9agent re$ationshi#5it is a non-

agent Not an agent at a$$% this is an arms-$ength transation

- NOTE: non-ser+ant theory M inde#endent ontrator theoryo

?.ust two different terms for it@

7on#Agency- ontratua$ re$ationshi#s b9t business #eo#$e- one #arty agrees to #ro+ide some kinds of good and ser+ies to another #arty- the ontrating #arty is not authorized to enter into any ontrats with )rd#arty5no

authority to re#resent the #arty with whom they are ontrating in any a#aity- the term independent contractoris used in both ageny and non-ageny re$ationshi#s


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1. Se'3ant 3s. In)e(en)ent Cont'acto'

- dotrine of respondeat superior#a master &em#$oyer' is $iab$e for the torts of its ser+ants&em#$oyees'

- a master-ser+ant re$ationshi# e6ists where the ser+ant has agreed:o

&a' to work on beha$f of the master % ando &b' to be sub.et to the master*s ontro$ or right to ontro$ the =#hysia$ ondut>

of the ser+ant &that is the manner in whih the .ob is #erformed, as o##osed to theresu$t a$one'

- Inde#endent ontrators an be both agents and non-agentso Agent#type I)#one who has agreed to at on beha$f of another, the #rini#a$, but

not sub.et to the #rini#a$*s ontro$ o+er how the resu$t is aom#$ishedrini#a$ does not ontro$ the =#hysia$ ondut> of the task'

o 7on#agent I)# one who o#erates inde#endent$y and sim#$y enters into arm*s

$ength transations with others E*!if a ar#enter is su##osed to bui$d a garage for a homeowner, and

doesn*t take any instrutions from him, but is .ust su##osed to get the .obdone, then he is an independent contractor &not ating as an agent'

0aster 1ervant- 2umble 8il 9 Refining )o! v! 0artin# where 2umb$e owns the gas station that 0hneider

runs! ar was being ser+ied and ro$$s down a hi$$, in.uring the " 2umb$e &owner'says this is an arms-$ength transation, and he shou$d not be $iab$e for 0hneider*sations" 2umb$e says he is not $iab$e b9 0hneider was an inde#endent ontrator" The/ourt found D is $iab$e for *s in.uries" The ourt $ooks at the re$ationshi# and finds thatthe ontrat s#eifia$$y states they do not ha+e a master9ser+ant re$ationshi# &no oneonsidered 2umb$e as the em#$oyer or master, 0hneider was onsidered the boss'" But

the /ourt says it does not matter that the ontrat said this, b9 there was other e+idene#resent indiating the master9ser+ant re$ationshi#" The /ourt notes that 0hneider isre1uired to make re#orts to 2umb$e onsistent$y, 2umb$e ontro$s the hours of the gasstation, and gi+es 0hneider instrutions" 2umb$e maintained strit finania$ ontro$ andsu#er+ision o+er his ations and the agreement re1uired 0hneider to do anything2umb$e might te$$ him to do" The /ourt says 0hneider is a ser+ant, as a matter of $aw"

- 2oover v! 1un 8il )ompany- There was a fire at the ser+ie station o#erated by Barone,The oi$ om#any &0un' says Barone was an I/, and therefore 0un is not $iab$e for hisneg$igene" *s say Barone was 0un*s agent" 0un owned a$most a$$ the e1ui#ment at thestation, and ontro$$ed how Barone so$d and managed the e1ui#ment" Barone*sem#$oyees wore 0un uniforms and there was a huge sign at the station that said 0un

#roduts were so$d there" 2e went to a ourse on how to #ro#er$y run a 0un ser+iestation" 0un re#s wou$d a$so make week$y +isits, but &arone was only given suggestionsand was under no obligation to follow the advice" The /ourt says this is different than2umb$e b9 Barone does not make week$y re#orts, as in 2umb$e% Barone assumes a$$ riskof #rofit or $oss in his business o#eration% he determines his own hours of o#eration% hewas not gi+en instrutions, as in 2umb$e, and the re$ationshi# seems more $ike aninde#endent ontrator" The ourt finds that Barone is an I/" The agreement seems to

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on$y estab$ish a LL9T re$ationshi# and an I/" 0un had no ontro$ o+er the detai$s ofBarone*s day-to-day o#eration, so 0un is not $iab$e for the neg$igent ats of Barone"

TEST FOR IN5E&EN5ENT CONTRACTOR:

- 2as the 9aste'; co(any 'etaine) the 'ight to cont'o$ the )etai$s o% the )ay8to8)ay

o(e'ation o% the 9se'3ant; sto'e?o cont'o$ o' in%$*ence o3e' 9'es*$ts; a$one is ins*%%icient

)ontract 'rovisions

- Actual Agency is a )onsensual Relationship:o rini#a$ must onsent to the idea that the agent shall act on his behalf and

sub$ect to his control

o gent must onsent to do so

- 7hen a re$ationshi# onsidered as a who$e, estab$ishes an ageny re$ationshi#, the #artiesannot effeti+e$y dis$aim it by forma$ =onsent>

o The re$ationshi# of the #arties does not de#end on what the #arties a$$ it, but

rather in $aw what it atua$$y is- It doesn*t matter whether there is a disclaimer clause in the contract-whether there is an

ageny re$ationshi# de#ends on the ations of the #arties- In determining whether a ontrat estab$ishes an ageny re$ationshi#,the critical test is

the nature and e*tent of the control agreed upon

(ranchises- 0 (!&!'5=a master is sub.et to $iabi$ity for the torts of his ser+ants ommitted

whi$e ating in the so#e of their em#$oyment>o a #rini#a$ is not $iab$e for the torts of hisnon#servant agents&inde#endent

ontrators'o controlis an essentia$ e$ement of the definition of an ageny re$ationshi#, whether

one is dea$ing with aservant or I)- 8ranhise:

o 7here indi+idua$ out$ets, owned by indi+idua$ businessmen, distribute goods and

ser+ies under a brand nameo The franhisee en.oys the right to #rofit and runs the risk of $oss

o The franhisor ontro$s the distribution of his goods and9or ser+ies through a

ontrat whih regu$ates the ati+ities of the franhisee, in order to ahie+estandardization

- Being in a franhise agreement, doesn*t e6$ude the ontrating #arties from an ageny

re$ationshi#- If a franhise ontrat so =regu$ates the ati+ities of the franhisee> as to +est the

franhisor with ontro$ within the definition of ageny, the ageny re$ationshi# arisese+en though the #arties e6#ress$y deny it"

o 0urphy v! 2oliday Inn where sued 2o$iday Inn, saying that they owned and

o#erated the mote$ where was in.ured" D says its on$y re$ationshi# with themote$ is an agreement to a$$ow them to use the name =2o$iday Inn"> The ourtfound that D did not own the #remises and there was no #rini#a$9agent or

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master9ser+ant re$ationshi#" This was a franhise agreement" The /ourtreognizes that both D and the mote$ agreed to ertain re1uirements in theagreement, but those re1uirements ga+e D no =ontro$ or right to ontro$ themethods or detai$s of doing the work"> The regu$atory #ro+isions didn*t gi+e Dontro$ o+er the day#to#day operationof the mote$ &e6" D was gi+en no #ower to

ontro$ the dai$y maintenane of the #remises5on$y the sty$e of the bui$dings andthe arhiteture, no #ower to hire and fire em#$oyees'" $$ suh #owers and othermanagement ontro$s were retained by the mote$52o$iday Inn is not $iab$e"

,. "ia#i$ity %o' To'ts o% In)e(en)ent Cont'acto's

- where a #erson engages a ontrator, who onduts an independent businessby means ofhis own em#$oyees to do work, not in itse$f a nuisane, he is not liable for the negligentacts of the contractorin the #erformane of the ontrat

o E6e#tions:

7here the $andowner retains ontro$ of the manner and means of the doing

of the work whih is the sub.et of the ontrat

7here he engages an inom#etent ontrator If a #rini#a$ hires incompetent non#servant agents-then dotrine

is ignored and the #rini#a$ is $iab$e for torts 7here the ati+ity ontrated for onstitutes a nuisane #er se

Inherently "angerous .or5

- RS 016- $andowner is $iab$e if he engages an I/ to do work whih he shou$d reognizeas neessari$y re1uiring the reation of a ondition in+o$+ing a peculiar ris5 of harm toothers unless special precautions are ta5en-if the ontrator is neg$igent in fai$ing to takethose #reautions

o This is onsidered work that is =inherent$y dangerous,> not =u$trahazardous>

Liability is absolute where the wor5 is ultraha6ardous;o If it is an inherent$y dangerous ation, then the /ourts wi$$ ignore dotrine and

om#any wi$$ be $iab$e for torts- The ontratee shou$d be res#onsib$e for any $oss arising out of the tortuous ondut of a

finania$$y irres#onsib$e ontratoro 0a$estic Realty Associates- Inc v! Toti )ontracting )o!- The /ity was bui$ding a

#arking struture, so they had to demo$ish many bui$dings on the surroundingstreets5it hired D to do the work" D was demo$ishing strutures &owned by the/ity' and damaged *s bui$ding" D used a $arge meta$ ba$$ and e+ery time the ba$$wou$d hit, debris and dirt wou$d f$y and *s bui$ding wou$d rok" The /ity is$iab$e for the ats of D, its I/" N4 has a $aw that demo$ishing a bui$ding in a busy

setion of the ity is inherent$y dangerous to surrounding bui$dings"

E*ceptions to the )ontractor/Independent )ontractor Relationships

- if you hire somebody to knok down some bui$dings for you, we wou$d a$$ this a sing$einde#endent ontrator re$ationshi# b9 there is no ageny

- but, if you hire someone neg$igent$y &hire an inom#etent' and they end u# hurting third#arties, then you wi$$ be he$d $iab$e

- if you hire them to do an inherent$y dangerous ati+ity, then you wi$$ be he$d $iab$e

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'ublic 'olicy

- 7hy does the ourt fous on ontro$ in trying to determine whether or not the #rini#a$shou$d be $iab$e3

o 7e want to #$ae res#onsibi$ity on the #arty that is in the #osition to #re+ent the

harm from taking #$ae in the first #$aeo e6" now #robab$y due torespondeat superior gas station attendants are not

a$$owed to smoke anymore - b9 gas station owners wi$$ be $iab$e-. Sco(e o% E($oyent

Two 3iews of 0aster 1ervant: !RING +& !OT2- )ommon Law

o 0otive test#under the ommon $aw, the way we deide whether a tort is within

the so#e of the ageny is whether the tort was moti+ated by a #ur#ose to ser+ethe master" If it was, then we wi$$ onsider the master $iab$e for the ations of the

ser+ant This $aw has been rea$$y hard to im#$ement &rea$$y nebu$ous'

&ushey overturned the common law

This o*$) #e the %ai'ness a(('oacho'e conce'ne) ith the

)ist'i#*tion o% the (ie

- 0odern Lawo (orseeable# The em#$oyer shou$d be he$d $iab$e for e6#eted risks, whih arise

out of and in the ourse of his em#$oyment of $abor /ourt re$ies on dee#$y rooted human sentiment that one shou$d not esa#e

$iabi$ity for torts that you ommit if it was forseeable by your employero Ira 1! &ushey 9 1ons- Inc! v!


14/84

'ublic 'olicy

- Caybe making the go+" $iab$e wi$$ gi+e them inenti+e to better sreen sai$ors beforehiring them and we wont* ha+e these shi#s rashing into the dok"

o 7e shou$d not e6#and =+iarious $iabi$ity>

- Qudge 8riend$y says: It is not at a$$ $ear that making the go+" $iab$e is the best way to

grow the #ieo The best way is to make the dok manager $iab$e to gi+e him an inenti+e to #ut

$oks on the +a$+es5it wi$$ ost more to sreen e+ery sai$or, then it wi$$ to #ut$oks on the +a$+es

o They are more onerned with the broad soia$ im#$iations

- 8riend$y had shown that the tria$ ourt*s +iew of what wou$d be more effiient isom#$ete$y =f$i##ab$e>5an swith it either way

- It is no more #reise a dotrine than the ommon $aw dotrine

0. Stat*to'y C$ais

- in order to im#ose $iabi$ity on a D for the discriminatory actions of an employee, the

must demonstrate that there is an ageny re$ationshi# b9t the D and the third #arty- eneral agency#a master is sub.et to $iabi$ity for the torts of his ser+ants whih ating

in the so#e of their em#$oyment- Arguello v! )onoco- Inc!#b$aks and 2is#anis said they were disriminated against at the

/onoo gas station" 0ome of the gas stations are franhised &/onoo-branded' and someare owned by /onoo"

o s for the branded stores, the ourt dismisses the ause of ation against /onoo

itse$f" The /onoo-branded stores are inde#endent$y owned, and ha+e anagreement where they are a$$owed to market and se$$ /onoo brand gaso$ine andsu##$ies in their store" To establish an agency relationship b/t )onoco- Inc! andthe branded stores- the 's must show that )onoco- Inc! has given consent for the

branded stores to act on its behalf and that the branded stores are sub$ect to thecontrol of )onoco- Inc! The agreement states that they are om#$ete$y se#arateentities and that the /onoo-branded stores are not em#$oyees of /onoo5therefore there is no agency relationshipb9t /onoo and the branded stores"

o /onoo-owned 0tores: The 1uestion beomes whether /onoo is res#onsib$e for

the ations of its attendant" It does not matter what the stores think about theirre$ationshi#s with the om#any% it matters how they at in rea$ity" In regards toraia$ e#ithets being s#oken o+er the miro#hone and IDs refused, /onoo saiddisriminating against ustomers was not #art of the ageny re$ationshi#, so theyshou$d not be he$d $iab$e" The /ourt a##$ied the fators to determine when an atis within the scope of employment" The attendant*s ations ourred whi$e on duty

inside the store" The use of raia$ s$urs ourred 0mith was om#$eting *s#urhase of her items" 0he was authorized to use the interom and make #urhasetransations" 0he was authorized to interat with ustomers whi$e making thesetransations, so she did not de#art from norma$ methods of onduting business"The /ourt re+ersed the summary .udgment, and $eft it for the $ower ourt todeide whether she was in the so#e of her em#$oyment

(actors used to "etermine .hether Action was .ithin 1cope of Employment:

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- !" The time, #$ae and #ur#ose of the at- (" Its simi$arity to ats whih the ser+ant is authorized to #erform- )" 7hether the at is ommon$y #erformed by ser+ants- " The e6tent of de#arture from norma$ methods- ;" whether the master wou$d reasonab$y e6#et suh at wou$d be #erformed

'ublic 'olicy

- The best way to ensure that you an deter this beha+ior is by making /onoo $iab$e, b9they are in the best #osition to #rotet against these harms &by a sreening #roess, et"'

o This wou$d be #retty e6#ensi+e for /onoo to sreen dee#$y into the #syho$ogy

of its em#$oyees, it might be better to #ut the res#onsibi$ity on the ustomer tofigure out whih stores are raist and whih aren*t

- 2ow do we +a$ue those e$ements for the #ur#ose of doing a +a$ue ana$ysis3- 4ou an*t figure this out without ta$king about the #ie &how we want the #ie to taste35

how do we want human affairs to be in meria3 7e want them to taste $ike .ustie ande1uity'

5. Fi)*cia'y O#$igation o% Agents

- geny re1uires a fiduiary duty of good faith and $oya$ty &an agent has a fiduiary dutytoward his or her #rini#a$'

o This is defau$t ru$e5meaning it a##$ies in the absene of agreement

- n agent has a duty to at so$e$y for the master, and any #rofit earned whi$e +io$ating thisduty be$ongs to the master

- it doesn*t matter that a #rini#a$ is a or#oration rather than an indi+idua$o eneral Automotive 0anufacturing )o! v! 1inger# agreed to #ay D a sa$ary and

D agreed not to engage in any other business whi$e working there and not to shareany om#any information he $earned whi$e working there" D started working

against the om#any by bringing in $ients, but kee#ing the #rofits for himse$f"2e brought in a $ot of business b9 of his re#utation and the om#any ou$dn*t doa$$ of it so he did it himse$f" sues for breah of fiduiary duty" says this wasinonsistent with D*s ob$igations as a faithfu$ agent or em#$oyee" 2e ondutedati+ities under their name and without te$$ing them about it" s an agent toRenera$ utomoti+e, 0inger owed them a duty of =utmost good faith and $oya$ty>&fiduiary duty'" D was $iab$e for the amount of #rofits that he took from them

Review of Agency:- 7hen wi$$ the #rini#$e be $iab$e for the torts of the agent3

o in the Caster9ser+ant re$ationshi#

o It is not .ust any kind of tort, there must be some kind of one#tua$ frameworko P.ustie friend$y set the boundaries at what wou$d be most efficient%forseeabi$ity

- Liabi$ity of the agent:o The agent is a$ways $iab$e for his own ations in tort, in addition to the where the

principal is liable

o 7hen is the agent $iab$e for the ontrats3 Is he bound by the ontrats he enters

into on beha$f of the #rini#$e3

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the agent is $iab$e on the ontrat when the principle is not disclosedor is

on$ypartially disclosed&where third #arty knows that the agent is workingon beha$f of somebody, but the agent does not know who that #erson is'

II. &a'tne'shi(s

- a form of business enter#rise organized by two or more #eo#$e for a #rofit- a onsensua$ arrangement, usua$$y entered into mutua$$y with onsent

o un$ike a or#oration, this an ome into e6istene without fi$ing forma$ #a#erwork

- an arrangement where indi+idua$s agree to share in #rofits in $osses5the $aw wi$$onsider this a #artnershi#

- where these e$ements are e+ident, a #artnershi# wi$$ be found to e6ist, but even wherethey are not evident- the law may find that they are still partners, a$so e+en if #eo#$e saythat they are in a #artnershi#, absent these e$ements, the $aw may find that they are notatua$$y #artners

- a$$ #artners are agents of #artners, and are $iab$e for eah others tortso a$$ #artners are $iab$e #ersona$$y for a$$ of the debts and $iabi$ities of #artners &no

matter whih one aused them'o eah #artner is $iab$e for a$$ the debts of the #artnershi#

o In #artnershi# arrangements, you are res#onsib$e for a$$ of the $osses of your

#artner5you don*t want your #artner srewing u# &ma$#ratie, et"' 4ou ha+e to make sure that your #artner is not going srew you o+er

- a #artnershi# is not ta6ed as an entity as or#orations are, but money earned by the#artnershi# is ta6ed indi+idua$$y as inome ta6 by both of the #arties

- one of the most im#ortant #arts is that it gi+es rise to a fiduiary duty- NOTE:the $aw ofpartnershipis a branh of the law of agency

o artners are onsidered agents of the #artnershi# with #ower to inur ob$igations

on beha$f of the #artnershi#5a$$ #artners are $iab$e, as #rini#a$s, for #artnershi#

ob$igationso ny #artner an inur debts for whih the other #artners wi$$ be $iab$e

A. What is a &a'tne'shi(? Who A'e the &a'tne's?

1. &a'tne's Co(a'e) ith E($oyees

- E$ements e1uired 8or artnershi#s:o !" intent of the #arties

o (" the right to share in #rofit

o )" ob$igation to share in $osses

o " the ownershi# and ontro$ of the #artnershi# #ro#erty and business

o ;" ommunity of #ower in administration, and the reser+ation in the agreement of

the e6$usi+e ontro$ of the management of the businesso " $anguage in the agreement

o K" ondut of the #arties toward third #ersons

fi$ing #artnershi# inome ta6, ho$ding yourse$f out as #artners to third

#arties, et"o J" the rights of the #arties on disso$ution

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- It doesn*t matter what the #arties intend to $abe$ the #erson5the intent is based on thety#e of re$ationshi# they intended to enter into with eah other

- rofit-sharing a$one does not a$one reate a #artnershi#, des#ite the #arty*s intentionso (enwic5 v!


18/84

-. &a'tne'shi( #y Esto((e$

- eneral Rule:#artners are .oint$y and se+era$$y $iab$e for e+erything hargeab$e to the#artnershi#

- #ersons who are not #artners as to eah other are not #artners to third #ersons

- e+en if two #eo#$e do not intend to be #artners, they an be found to ha+e reated a#artnershi# =by esto##e$> if they re#resent to the outside wor$d that they are in a#artnershi#

o they wi$$ be $iab$e to any #erson to whom suh a re#resentation is made who has,

on the faith of the re#resentation, gi+en redit to the atua$ or a##arent #artnershi#- If a third #arty has reasonab$y re$ied on the #artnershi#, based on the re#resentation of

one #artner, then the #arties arepartners by estoppelo =oung v! ,ones- 7/ Bahamas sent out a $etter regarding the finania$ statement

of a bank, so in re$iane on this statement, *s de#osited money into the bank andit disa##eared" Turns out the finania$ statement was fa$sified" The $etter was on7/ $etterhead and was signed by =rie 7aterhouse"> says it was forseeab$e

that others wou$d re$y on it" The stam# of a##ro+a$ by 7/, a re#utab$eom#any, made s in+est to their detriment" $aims that 7-meria and 7-Bahamas are a #artnershi#, or at $east #artners by esto##e$" an*t sue the bank,so they sue 7/ meria" argues that 7/ offies a$$ o+er the wor$d stand inbak of this firm by their marketing and their $etterhead" If they are #artners byesto##e$, then 7-meria an be $iab$e for the neg$igent ats of its #artner57-Bahamas" *s $aim that 7 makes no distintion in its ad+ertising betweenitse$f and entities situated in foreign .6 &foreign 7*s use same name andtrademark'" E+en 7*s brohure makes them sound $ike one and the same" But,*s do not ontend that the brohure was seen or re$ied on by them in making thedeision to in+est" There is nothing that shows that the '+s relied on any act or

statement by any '.#5/ardozoo 2onesty a$one is not enough

- Eah #artner in a #artnershi# owes the other #artners a fiduiary duty to at in the bestinterests of the #artnershi# o+er the indi+idua$ in matters onerning the #artnershi#o 0einhard v! 1almon- 0a$mon $eased the 2ote$ Bristo$ for a (< year term" 0a$mon

&$essee' hanged the hote$ into sho#s and offies" 2e didn*t ha+e the money, so he#artnered with Ceinhard &', who funds the remode$ing" This was a .oint +entureand they agreed to s#$it the money to onstrut it, then s#$it the #rofits and s#$it$osses e1ua$$y" 0a$mon had the so$e #ower to manage" They both had fiduiaryduties, but 0a$mon had the hea+ier one b9 he had to manage" 0a$mon was then

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19/84

a##roahed by the owner of the $and to engage in a $onger term #ro.et" 2e entersinto the new dea$, and doesn*t te$$ Ceinhard anything about it" The /ourt says:=0a$mon e6$uded his oad+enturer from any hane to om#ete, from any haneto en.oy the o##ortunity for benefit that had ome to him a$one by the +irtue of hisageny"> Ceinhard assumed from D*s si$ene that D wou$d ha+e wanted to

e6tend the $ease, as it was ending" 0a$mon wasn*t ating in bad faith, he was nottrying to defraud" The /ourt found that he breahed his fiduiary duties to "o Dissent: Qustie ndrews

They were #artners and that re$ationshi# re1uires trust and onfidene to a

high degree. 7here #arties engage in a .oint enter#rise eah owes to theother the duty of the utmost good faith in a$$ that re$ates to their ommon+enture. They are in a fiduiary re$ationshi#" But the +enture had a$imited time and ob.eti+e. Ceinhard had an interest, but this interestterminated when the .oint ad+enture terminated. 0a$mon fu$fi$$ed hisduties to Ceinhard when the $ease was o+er. Their ad+enture togetherended on a s#eifi date

'ublic 'olicy

- Do we onstrue the fiduiary duty narrow$y $ike Qudge ndrews wou$d ha+e us do3o ndrews agreed there was a fiduiary duty, but said that it ended when the $ease

ended- Do we onstrue it broad$y $ike /ardozo3

o If we are going to onstrue these fiduiary ob$igations as broad$y as /ardozo

wants, we may deter the 0a$mon*s of the wor$d from entering into these ontrats- 7hy do we ha+e this ru$e of fiduiary ob$igation35they didn*t s#eify how muh of

themse$+es they eah owed the other oneo It omes from the $aw5the bakground $aw that go+erns situations where the

#arties don*t s#eify what they owe to eah othero 8iduiary ob$igation is effiient and makes more #ie for us a$$

o Ceinhard is an in+estor5he $ikes to #$ay go$f and s$ee# $ate, if they didn*t ha+e

this agreement he wou$d ha+e to get u# ear$y and go to work, instead the $aw ismonitoring 0a$mon so he doesn*t ha+e to

o 7e want 0a$mon*s mind to be foused on the business of the #artnershi#

Types of 'artnership Law

- default ruleso P defau$t $aws are going to be $aws that most #eo#$e wou$d want

o two +iews on defau$t ru$es:

!"0a$oritarian

the defau$t $aws e6ist so that the 0a$mons of the wor$d don*t ha+e

to sit around $isting the things that they wou$d want to be ru$es intheir agreements

("'enalty

O##osite of ma.oritarian

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This +iew says that we shou$d make the defau$t ru$es rea$$y bad so

that #eo#$e wi$$ sit down and $ist what they want out of theagreement

- )ommon law- 1tatutory law

o U""" &!!' Uniform artnershi# t &most states ha+e this $aw'

o "U""" &!K'5e+ised Uniform artnershi# t

This is .ust an im#ro+ement on U based on hanging business #raties

and the diffiu$ties found in a##$ying ito /a$ifornia

0imi$ar to U, but has some of its own idiosynrasies

U is re$ati+e$y new, so some states are sti$$ on the U trak and

others ha+e mo+ed on to U- Agreement

o $$ of the abo+e $aws an be modified byagreement of the parties

0@0Gene'a$ Stan)a')s o% a &a'tne's Con)*ct" !!;'- 8iduiary duties owed by a #artner to a #artnershi# are the duty of loyaltyand the duty of

care- 0hou$d not ha+e any interests ad+erse to the #artnershi#- efrain from om#eting with the #artnershi#- efrain from engaging in gross$y neg$igent or rek$ess ondut, intentiona$ misondut,

or a knowing +io$ation of the $aw- a #artner*s duty of $oya$ty is $imited to the #artnershi#- a #artner doesn*t +io$ate this setion so$e$y beause his ations further his own interests

"uties .hen Leaving a 'artnership- #artners owe eah other a duty of utmost good faith and $oya$ty- s a fiduiary, a #artner must onsider his9her #artners* we$fare and refrain from ating

for #ure$y #ri+ate gain- #artner has a duty to render on demand true and fu$$ information of a$$ things affeting

the #artnershi# to any #artnero 0eehan v! 1haughnessy#where two the *s deided to $ea+e their $aw firm and sue

for money the firm owes them" Then the o$d firm sues them for breah of theirfiduiary duties and the #artnershi# agreement by taking ases and $ients withthem and on+ining $ients to go to the new firm" In Qu$y, *s deide they aregoing to $ea+e the firm and start a new one in Deember" In Qu$y, they rent offie

s#ae and hire an arhitet" In Ot" !J, they meet with a big $ient a$$edU0U, who agrees to go to the new firm" They #re#are a new $etter on arker/ou$ter*s stationary to send to $ients te$$ing them what is going on and askingthem to ome to the new firm" umors start to iru$ate, and the #artners askthem three times if they are $ea+ing, and they deny it e+ery time" 8ina$$y, onDeember )


21/84

out of );


22/84

But there is a differene b9t thepower to dissolve itand the right to

dissolve it

o There is .udiia$ disso$ution of a #artnershi#

- wind upo it an take months or e+en years for a #artnershi# to om#$ete its windu#

o ontributions are #aid out &initia$ #ayments that eah #artner #ut in are #aid bakto them'

o #rofits are di+ided u# aording to eah #artner*s share in the #artnershi#

o it is during the =wind u#> #eriod where #artners are most $ike$y to breah their

duties to the other #artners- termination

o this refers to a om#$eted =wind u#>

NOTE: these an +ary by state, so you need to $ook at the s#eifis of eah state*s $aws

eneral Rule# a partner can move to dissolve a partnership if another partner+s conduct

undermines or breaches the partnership agreement

- #artner may mo+e for a disso$ution of the #artnershi# if another #artner*s ondut:o negati+e$y affets the business% or

o re#eated$y breahes the #artnershi# agreement

- /ourt wi$$ NOT disso$+e the #artnershi# for:o minor differenes or grie+ane whih in+o$+e no #ermanent mishief

- They wi$$ issue one where:o There are 1uarre$s and disagreements of suh a nature and to suh e6tent that a$$

onfidene and oo#eration b9t the #arties has been destroyed% oro where one of the #arties by his beha+ior materia$$y hinders a #ro#er ondut of

the #artnershi# business> e6" 8wen v! )ohen#o#erated a bow$ing a$$ey together, but they disagreed

on e+erything about running the business" One of the guys breahed the#artnershi# agreement by not doing his share of the work and taking moremoney from the business than his agreed amount" 2e made it so bad thatit was =not reasonab$y #ratiab$e to arry on the #artnershi# businesswith him"> Based on these ations, the ourt found he had disso$+ed the#artnershi#"

,0,6 o% the Ci3i$ Co)e


23/84

- a #artner does not ha+e a right to disso$+e the #artnershi# when his ownondut is theon$y ondut that is ad+erse$y affeting the business

- if the #arty trying to disso$+e the #artnershi# is the on$y #arty who is not abiding by the#artnershi# agreement, he annot disso$+e it

o e6" )ollins v! Lewis# and D had a afeteria business, where Lewis was

res#onsib$e for the finanes and /o$$ins was res#onsib$e for the management" Themgmt #artner did his .ob, but the other one didn*t and his ondut materia$$ydereased the earning of the business" The bad #artner sued, trying to disso$+e the#artnershi#, but the ourt said no, sine he was the ause of the #rob$ems"

"issolution .hen Time is 7ot 1pecified- un$ess s#eified, a #artnershi# may be disso$+ed at will by any partner, #ro+ided the

#artnershi# is e6erisinggood faitho a #artner may not disso$+e a #artnershi# to gain the benefits of the business for

himse$f, un$ess he fu$$y om#ensates his o-#artner for his share of the#ros#eti+e business o##ortunity

o if it is #ro+ed that the #artner wanting to disso$+e the #artnershi# was ating inbad faith and violating his fiduciary dutyby attem#ting to take the new #rofits forhimse$f, without ade1uate$y om#ensating his #artner, the disso$ution is wrongfu$and the #artner wou$d be liable for violation of the implied agreementnot toe6$ude his #artner wrongfu$$y from the #artnershi# business o##ortunity"

E6"'age v! 'age- where it was a$$eged that the brother was trying to

disso$+e the #artnershi# when the business started making a $ot of money,so that he ou$d hog a$$ of the #rofits and not gi+e them to his #artner"

- if there is no definite term s#eified, the #artnershi# an be disso$+ed a the e6#ress wi$$ ofany #artner

o e6"'age v! 'age#two brothers o#erate a $inen su##$y business and right when the

business gets #rofitab$e, one brother wants to end the #artnershi#" They had ne+erhad an understanding as to the term of the #artnershi# &and there was no im#$iedagreement'"

- Implied agreementso artners an impliedly agreeto end the #artnershi# as soon as $oans are #aid, or

unti$ a ertain amount of money is earned, et", but there must be e+idene of thisagreement

- NOTE: a #artner*s duty to act in good faitho+errides their freedom to disso$+e the#artnershi#

The )onsequence of "issolution

- fter a #arty has terminated the #artnershi# wrongfu$$y, he is entit$ed to the +a$ue of hisinterest in the #artnershi#, minus any damages caused to the partnership by thedissolution, but good wi$$ shou$d not be in$uded when a$u$ating it"

- #arty who aused the disso$ution of the #artnershi# is not entit$ed to o$$et for the+a$ue of good wi$$ at the time of disso$ution

o e*! 'ac 1aver v! 3asso- where a had the #atents and trademarks for the design

and marketing of the mahines and Aasso #ut in the finanes" The /ourt foundthat a terminated the #artnershi# wrongfu$$y, so Aasso was a$$owed to ontinue

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24/84

to run the #artnershi# according to the terms of the agreement &and to do this, useof the #atents and trademarks was neessary'"

The 1haring of Losses

- in the absene of any agreement to the ontrary, #artners #artii#ate e1ua$$y in the #rofits

and $osses of the business, regard$ess of any ine1ua$ity in the amounts eah ontributed tothe a#ita$ em#$oyed in the +enture, with the losses being shared by them in the sameproportions as they share profits

o This is different when eah ontribute one #art &money and work'5in that ase,

neither is $iab$e to the other for ontribution for any $oss sustained- when one #artner ontributes the money and one ontributes a#ita$ and other $abor, the

#artner ontributing the money annot ho$d the other #artner res#onsib$e for money $ost,.ust as the #artner res#onsib$e for ser+ies, annot ho$d the other #artner res#onsib$e forany $osses he suffered

o e6"4ovaci5 v! Reed#they were sharing #rofits e1ua$$y, but hadn*t said anything

about the $osses, so the /ourt he$d that they were eah $iab$e for their own $osses"

Therefore, the #artner with the money was not entit$ed reimbursement from theother #artner5this way they eah ontribute to the $osses- the $osses are shared by the #artners as they agree, or if there is no agreement, it wi$$ be

#ro#ortionate to their #rofits #erentage

&uyout Agreements- buyout/sellout agreement#an agreement that a$$ows a #artner to end his9her re$ationshi#

with the other #artners and reei+e a ash #ayment, or series of #ayments, or some assetsof the firm, in return for his9her interest in the firm

o agreement usua$$y in$udes:

what e+ents trigger the buyout

ob$igation to buy +" o#tion to buy

#rie

method of #ayment

#roedure for offering to buy or se$$

- unti$ a ourt has dereed a disso$ution, it has not taken #$ae and the #artners an sti$$ takead+antage of any buyout #ro+isions under the agreement &e+en if they ha+e #etitioned theourt for disso$ution'

o e6" 91 Investments v! &elman- where they had fi$ed for a disso$ution and a

buyout of the bad #artner*s shares, but it ne+er was offiia$, therefore they ou$dsti$$ use the buyout #ro+isions"

- U#on death, retirement, insanity or resignation of one of thegeneral partners, the

surviving or remaining general partnersmay ontinue the #artnershi# businesso If they deide to do so, the remaining #artners must #urhases the interest of the

retiring or resigning genera$ #artner- &uyout amountM amount of the resigning9retiring #artner*s capital account&a$u$ated

on a ost basis' S the a+erage of the #rior three years* #rofits and gains atua$$y #aid tothe genera$ #artner &or as agreed u#on the genera$ #artners'

o s $ong as this sum does not e6eed the a$u$ated sum in do$$ars

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25/84

Law 'artnership "issolutions

- in $aw #ratie #artnershi#s, in the absene of a ontrary agreement, the U re1uiresthat any fees #aid to the #artners for ases in #rogress during the disso$ution shou$d bea$$oated to the former #artners aording to their rights to fees during the #artnershi#s

- a disso$+ed #artnershi# ontinues unti$ the winding u# of unfinished #artnershi# business

- Two (iduciary "uties:o !" eah former #artner has a duty to wind u# and om#$ete their unfinished

business of the disso$+ed #artnershi# E6" a #artner an*t refuse to work on the ase and then get the benefits of

the other #artner*s hard worko (" no former #artner may take any ation with res#et to unfinished business

whih $eads to #ure$y #ersona$ gain- The former #artners wi$$ be entit$ed to reimbursement for reasonab$e o+erhead e6#enses

&e6$uding #artner*s sa$aries' attributab$e to the #rodution of #ostdisso$ution #artnershi#inome

Removing )ases- artners in $aw firms annot #artii#ate in an agreement that restrits the right of a $awyer

to #ratie $aw after the termination of a re$ationshi# reated by the agreemento The strong #ub$i interest in a$$owing $ients to retain ounse$ of their hoie

outweighs any #rofessiona$ benefits deri+ed from a restriti+e o+enanto E6"0eehan v! 1haughnessy- where the $awyers $eft the firm and took the $ients"

The /ourt said the firm was not a$$owed to restrit a de#arting #artner*s right toremo+e any $ients who free$y hoose to retain him or her as their $ega$ ounse$"

- ny ase an be remo+ed, regard$ess of whether the ase ame to the firm through the#ersona$ efforts of the de#arting #artner

"ividing the (irm+s Assets- )apital account#the #artner*s initia$ in+estment of ash or #ro#erty, inreased by any

$ater suh ontributions, inreased by #rofits o+er the years, dereased by $osses anddereased by amounts withdrawn"

- The statute a$$ows #artners to design their own methods of di+iding assets and, #ro+idedthe disso$ution is not #remature, e6#ress$y states that the #artners* methods ontro$s

- #artner must aount for any #rofits whih f$ow from a breah of fiduiary dutyo E6"0eehan v! 1haughnessy- where the $awyers breahed their fiduiary duty to

the $aw firm" If ertain $ients $eft the firm beause of this breah, then the former#artners must aount to the #artnershi# any #rofits they reei+e on these ases"The #artners at the origina$ firm are entit$ed to their #ortion of the fair harge on

eah of the unfair$y remo+ed ases and to the amount of #rofit they wou$d ha+een.oyed that the former #artners hand$ed the ase at the o$d firm"

E. "iite) &a'tne'shi(s

1tatutory (ramewor5- statutory $aws5you must say =we are forming a $imited #artnershi#>

o they are reated by fi$ing a forma$ doument with a state offiia$

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26/84

o there must be a written agreement among the #artners

- Not disso$+ed by the withdrawa$ or death of a $imited #artner

Liability- two kinds of #artners:

o !" genera$ #artners- eah $iab$e for allthe debts of the #artnershi#o (" $imited #artner- not$iab$e for the debts of the #artnershi# beyond the amount

that they ha+e ontributed to the #artnershi#- Limited #artners do not #artii#ate in the management of the partnership- a limited partnerwi$$ be he$d $iab$e as a general partnerif the $imited #artner ats to take

#art in the ontro$ of the business- e+en if you aren*t $isted as a genera$ #artner, your ations an make you $iab$e as a

genera$ #artnero If you do not want to be he$d $iab$e as a $imited #artner, you must not control the

partnership or any of its day to day activities5if you do, you wi$$ be he$d $iab$eo E6"2ol6man v! "eEscamilla# where the $imited #artners took #art in the ontro$

of the business, so they beame $iab$e as genera$ #artners to the reditors of the#artnershi#" They a$$ disussed whih ro#s to #$ant and a$$ agreed before it wasdone% they a$so ame to the farm to hek on it twie a week and signed thebusiness heks" The genera$ #artner had no #ower to withdraw money withoutthe signature of one of the $imited #artner"

- $imited #artner sha$$ not beome $iab$e as a genera$ #artner, un$ess in addition to thee6erise of his rights and #owers as a $imited #artner, he takes #art in ontro$ of thebusiness"

o This must be more than mere$y ad+ising the genera$ #artner on the business of the

$imited #artnershi#- R+&A -@-Bahanges this ru$e and says you an ha+e a $imited #artnershi#, and you are

not neessari$y $iab$e .ust by taking a #art in ontro$$ing the day to day ati+ities of the#artnershi#s5you will only be liable if you hold yourself out to third parties as being alimited partners

o 4ou wi$$ be $iab$e if a third #arty reasonab$y be$ie+es, based on the $imited

#artner*s ondut, that the $imited #artner is a genera$ #artner

III. Co'(o'ations

A. In Gene'a$

- two biggest ad+antages:o !" limited liability- shareho$ders are on$y $iab$e for the amounts they #ut into the

or#oration, so if the or#" runs u# $arge debts, they are not res#onsib$eo ("free transferability- ownershi# interests in the or#" are free$y transferab$e b9

they are re#resented by shares, whih an be bought and so$d easi$y"- they ha+e forma$ douments

o arti$es of inor#orations, by$aws and other agreements

- or#orations are #roduts of state $aws, and must abide by state $aws- the amount of your stake in the om#any deides how muh say you ha+e in the business

(


27/84

o distinguish partnership;# a fundamenta$ #resum#tion in #artnershi#s is that eah

#artner has an e1ua$ say in running the businesso where as a #artner an e6it a #artnershi# at any time by disso$+ing the #artnershi#,

an owner in a or#oration annot terminate his9her share at any time, un$esssomeone e$se is there to buy out his9her share

- entra$ized mgmto shareho$ders =own the or#oration> e$et the board of diretors

o board of diretors =manage> and a##oint offiers

o offiers ha+e the =day-to-day> ontro$

General Set Up

- shareho$ders:o they ha+e the #ower to e$et diretors by +oting for them one a year at the annua$

meetingo shareho$der*s do not ha+e the #ower to ondut business on beha$f of the

or#oration or to bind the or#oration by their ationso shareho$ders annot gi+e orders5they annot order the board to take s#eifi

ation but they an useshareholder resolutionsto influence the &oardby

reommending ertain ationso they an +ote to remo+e diretors

most states a$$ow the remo+a$ of diretors with or without cause

o they an a##ro+e or disa##ro+e ma.or ations ontem#$ated by the board that

wou$d $ead to fundamenta$ hanges mergers

sa$es of a$$ or substantia$$y a$$ assets of the or#oration*s assets

amendments to arti$es of inor#oration statutory share e6hanges &where a$$ shareho$ders are re1uired to e6hange

their shares for those in another or#oration' disso$ution of the or#oration

o they annot remo+e an officer

- diretorso ty#ia$$y they are u# for ree$etion e+ery year at the annua$ meeting

o their main funtion is to set the #o$iies of the or#oration

o authorize the making of im#ortant ontrats

o they de$are di+idends

o most diretors are now om#$ete outsiders&meaning they ha+e no ties with the

om#any5they are not offiers, em#$oyees, $awyers or aountants for the or#"'o they an appoint and removethe offiers &with or without ause'

o they annot remo+e a fe$$ow diretor e+en for ause, un$ess the by$aws say they

an- offiers

o they are a##ointed diret$y by the Board of diretors

o they ser+e at the wi$$ of the Board of diretors

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28/84

o arry out =day to day ati+ities>

o the o%%ice's a'e agents o% the co'(o'ation

to bind the or#oration, the offier must ha+e the authority &atua$, im#$ied

or a##arent' or the or#oration may be $iab$e by ratification e6" inherent agency#there is ommon know$edge that the /EO an sign

non#e*traordinary ontrats on beha$f of the or#oration &e6" for su##$ies'

!. The Co'(o'ate Entity an) "iite) "ia#i$ity

- or#orations eah ha+e an independent legal identity- shareho$ders are not indi+idua$$y $iab$e for ations and deaths of the other shareho$ders- the #ur#ose of a or#oration is to a$$ow its #ro#rietors to esa#e #ersona$ $iabi$ity

o but there are sti$$ $imits

'ublic 'olicy: Reasons for Limited Liability

- without LL, in+estors wou$d ha+e to $imit their in+estments to one or two that they ou$dwath +ery arefu$$y

- it enourages di+ersifiation in +arious kinds of enter#riseso if you ha+e un$imited $iabi$ity, then you wou$d ha+e to s#end many resoures

monitoring the ations of eah of your enter#rises to make sure you aren*tfinania$$y res#onsib$e for anything

- so-a$$ed =unso#histiated> ontrating #arties may not know that they are dea$ing withor#orations or may not know the onse1uenes of dea$ing with or#orations

- $imited $iabi$ity a$$ows om#anies to e*ternali6e costs- NOTE:Limited liability is very strong%and piercing the corporate veil is very difficult

1. &ie'cing the Co'(o'ate Dei$

- the /ourt wi$$ #iere the or#orate +ei$ whene+er neessary =to #re+ent fraud or to

ahie+e e1uity>- The ourt is more wi$$ing to #iere the +ei$ in tort ases

o b9 in ontrat ases, the entered into re$ations with the or#oration +o$untari$y

- an indi+idua$ an be he$d $iab$e for the ations of a or#oration through the dotrinerespondeat superiorif it an be shown that the indi+idua$ used his ontro$ of theor#oration for his #ersona$ gain &to further his own, rather than the or#oration*sbusiness'

o .al5ovs65y v! )arlton# was run o+er by D*s ab om#any, but instead of suing

the atua$ dri+er, he sued one of the stokho$ders of the or#oration indi+idua$$yiered the or#orate +ei$'" The /ourt he$d that if the stokho$der is arrying onbusiness in his individual capacity, then he is $iab$e for the ations of his agent &he

is the #rini#a$, the ta6iab is his agent'" 2ere, there was not enough e+idenethat the D was dong things to ser+e his own #ersona$ interest, so he is not $iab$eindi+idua$$y" The /ourt found that a$$owing to do this wou$d defeat the who$e#ur#ose of $imited $iabi$ity" The /ourt a$so said that if the insurane o+erage onabs, as re1uired by statute, is too $ow, then it is an issue for the $egis$ators, notthe ourts" It was the $egis$ature*s .ob to raise the minimum insurane o+erage"

3an "orn Test

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29/84

/or#orate Aei$ wi$$ be iered if #ro+es:- !" there is a unity of interestb9t the indi+idua$ and the or#oration &the se#arate

#ersona$ities of the or#oration and the indi+idua$ no $onger e6ist'% ND- (" to a$$ow the $imited $iabi$ity wou$d #romote an in$ustice or sanction a fraud

o Either one &in.ustie or fraud' wi$$ suffie to satisfy this e$ement

(our (actors used in "etermining the


30/84

- But $ike an indi+idua$ shareho$der, if a or#orate shareho$der is not arefu$, the reditorsof the subsidiary may be ab$e to #iere the or#orate +ei$ of the subsidiary and get to the#arent or#oration

- The #arent a$so must be arefu$ not to beome diret$y $iab$e by +irtue of its #artii#ationin the ati+ities of the subsidiary"

- #arent or#orations are not a$ways $iab$e for the ations of their subsidiaries

'arent )orporations Are 7ot Liable If:

- !" #ro#er or#orate forma$ities are obser+ed%- (" the #ub$i is not onfused about whether it is dea$ing with the #arent or the subsidiary- )" the subsidiary is o#erated in a fair manner with some ho#e of making a #rofit% ND- " there is no other manifest unfairness

&urden in Tort Actions

- the burden of #roof is $ower in tort aseso did not hoose to enter into re$ations with the D or#oration

- needs to show that the subsidiary or#oration is an instrumentof the arentor#oration' stokho$der, but there is no burden to prove fraudo 7hen determining whether a subsidiary is onsidered an =instrument of the #arent

or#oration,> a totality of the circumstances testis used to see if there is=substantia$ domination>

(actors


31/84

were diretors" There were no minutes of any meetings" The $awyers shou$d ha+e to$dthem to kee# a tighter shi#" They shou$d not esa#e $iabi$ity"

-. "iite) &a'tne'shi(s Co'(o'ation as So$e Gene'a$ &a'tne'

- $imited #artnershi# with a or#oration as the so$e genera$ #artner beame the new

+ariation on the basi $imited #artnershi#o 7ith this new form, no indi+idua$ was $iab$e for the debts of the #artnershi#

- Limited #artners do not inur genera$ $iabi$ity for the $imited #artnershi#*s ob$igationssim#$y b9 they are offiers, diretors, or shareho$ders of the or#orate genera$ #artner

- in $imited #artnershi#s,only the general partners are liable for the losses-and the $imited#artners are not

- a limited partnerwi$$ be he$d $iab$e if, for #ersona$ gain, he takes ontro$ of the businessover and above his normal rights as a limited partner

o e*! (rigidaire v!


32/84

- now shareho$ders an =ste# in the shoes of the or#oration> and seek a right to therestitution that they ou$dn*t get on their own

- But, the f$i# side, is what if the diretor is innoent and these fri+o$ous suits kee# omingin, then he wi$$ be s#ending a$$ of his time in ourt and no one is going to be running theor#oration, $ike he was hired to do

o

If we are going to a$$ow minority shareho$ders to sue for these transations, thiswou$d be 1uite an interferene with managing the main om#any These suits an be a great distration, so we gi+e them the o##ortunity to

dismiss these suits, by re1uiring a seurity regarding attorney*s fees

1ecurity Requirement

- s a resu$t of these suits, a who$e industry has de+e$o#ed of $awyers and $aw firms whodea$ with these suits

- sometimes states re1uire that #ro+ide a seurity for the D*s $itigation osts that the wi$$ ha+e to #ay the osts of $itigation if it turns out that these suits are without merit

o theses $aws on seurity +ary de#ending on the fats

Laws of "erivative 1uits- #rodut of state $aw- a shareho$der*s deri+ati+e suit wi$$ fo$$ow state substanti+e $aw &non-#roedura$' $aws

regarding the deri+ati+e suits when #ossib$e- state $aws wi$$ not be u#he$d if they are #roedura$ and #reem#t &onf$it' with federa$

$awso e6" )ohen v! &eneficial- where the ourt u#he$d a state $aw that said *s in a

deri+ati+e suit &who own $ess than ;G of the tota$ shares, or $ess than ;


33/84

- 1pecial In$ury; Test&N4 $aw'o a s#eia$ in.ury is one that isseparate and distinct from that suffered by other

shareholders-or a wrong in+o$+ing a ontratua$ right of a shareho$der, suh asthe right to +ote, or to assert ma.ority ontro$, whih e6ists inde#endent$y of anyright of the or#oration

- Two 'rong Test:&DE $aw'o !" 7ho suffered the a$$eged harm, the or#oration or the suing stokho$ders

indi+idua$$y3o (" 7ho wou$d reei+e the benefit of any reo+ery or other remedy5the

or#orations or the stokho$ders, indi+idua$$y3

'ublic 'olicy on 1ettlements and Attorney+s (ees

- if a derivative actionissettled before $udgment, the corporationan #ay the $ega$ fees ofthe and of the Ds

o the managers started to #ay off &sett$e' the suits, and they were ab$e to do so out of

the or#oration*s treasury

- If a .udgment for money damages is im#osed on the Ds, e6e#t to the e6tent that they areo+ered by insurane, they will be required to pay those damagesand may be re1uired tobear the ost of their defense as we$$

o if they are sued in ourt and $ose, they ha+e to #ay out of their own #okets

- The or#oration an #ay the D*s e6#enses on$y if the /ourt determines that =des#ite thead.udiation of $iabi$ity but in +iew of a$$ the irumstanes of the ase, the D is fair$yentit$ed to indemnity>

- the rea$ #arty in interest in a derivative suitis the attorney b9 the or#orate managers wi$$be re$ie+ed of $iabi$ity, if the or#oration #ays big attorney*s fees to get the to sett$e

o ttorneys wi$$ often ae#t the money for the sett$ement either to a+oid $itigation

or b9 they are being #aid so we$$

- The /ourt has to a##ro+e the sett$ement, but most busy .udges wi$$ not ha$$enge one- NOTE: 0ometimes the /ourt wi$$ #ay the indi+idua$$y, b9 if it a$$ows the or#oration

to reo+er the money, it wou$d be returning the funds to the ontro$ of the wrongdoer

5. Sha'eho$)e's 5i'ecto's an) O%%ice's

- The #ur#ose of a business or#oration is to make #rofits for its stokho$derso Diretors are hired for this #ur#ose

o Diretors shou$d use their disretion in hoosing how to attain this end

o They do not ha+e disretion o+er:

the atua$ goa$ itse$f

the redution of #rofits, O

the nondistribution of #rofits among shareho$ders in order to de+ote themto other #ur#oses

eneral Rule

- A #*siness co'(o'ation is o'ganie) ('ia'i$y %o' the stocho$)e'sHHHo diretors owe a fiduiary ob$igation to the shareho$ders

this $ooks a $itt$e different than the traditiona$ #rini#$e agent re$ationshi#

- shareho$ders ha+e an interest in the residua$ #rofits of the firm

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o these #rofits are #aid to them in di+idends

- NOTE: shareho$ders are the #rini#a$, and the diretors are working for them as agents

Two different 5inds of directors- outside

o ommittees and offiers inform them about what is going on with the om#anyo they set broad #o$iy

- insideo these diretors ha+e some re$ationshi# to the or#oration &em#$oyees, offiers,

$awyers, et"'- NOTE: it is better to ha+e outside diretors sitting on the board b9 they wi$$ ha+e a more

ob.eti+e +iew#oint

NOTE:

- reditors ha+e no ontratua$ re$ationshi#s with the or#oration- ustomers are re$ati+e$y #ower$ess in om#arison to the other #arts of the or#oration

E. The Ro$e an) &*'(oses o% a Co'(o'ation

- or#orate gift-gi+ing is an ae#tab$e method of inreasing goodwi$$, but the gift shou$dbe $ess than !G of a#ita$ and sur#$us and direted to an institution owning no more than!


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wi$$ not deide whether 8ord &D' is better off with $ower #ried ars b9 thosedeisions are o+ered under the&usiness ,udgment Rule!

- /ourt wi$$ not interfere with an honest business .udgment &issues of #o$iy andbusiness mgmt'absent a showing of fraud- illegality or conflict of interest

o E*! 1hlens5y v! .rigley# D owns a baseba$$ team, but the minority shareho$ders

don*t $ike how 7rig$ey is running the firm" 2e didn*t insta$$ $ights $ike a$$ otherma.or $eague #arks ha+e" D thinks that baseba$$ shou$d on$y be #$ayed during thedaytime b9 he is onerned about the neighborhood" The /ourt wi$$ not o+erturnD*s deision not to insta$$ $ights, b9 he has #resented some good reasons for notha+ing them" The ourt says it wi$$ not get in+o$+ed in how to run the firm5getting in+o$+ed in the om#any*s deisions is beyond its ro$e" The /ourt doesn*tare whether the deision is right or wrong5if it was a business .udgment, thenthey wi$$ defer to the or#oration"

- NOTE: If a shareho$der is unha##y with the way the board is running the business, whydoesn*t he .ust get out, and go in+est in some other business3 7hy is he bothering thediretors with his om#$aints if he has the o##ortunity to e6it3

o

The e6it is a $imited strategy for the shareho$derso The shares shou$d be worth more than they are, so he an*t e6it without taking a

$oss without taking a $oss that he shou$dn*t ha+e to take

'ublic 'olicy on "erivative 1uits v! )lass Actions

- there isn*t muh inenti+e for any shareho$der to bring a $aim against the diretor- now #eo#$e wi$$ on$y bring suit if they ha+e an im#ortant $aim- 'roblem5there is a war b9t shareho$ders and diretors and we are des#erate to find a

mehanism to end this waro The diretors ha+e an unfair ad+antage in this war b9 they are trained and

e6#eriened and they ha+e their hands on the $e+er5they ha+e the key to the safe

- The one solution is derivative suits- but this is not very effectiveo the ageny &monitoring' #rob$em is not so$+ed% it*s an ineffeti+e mehanism

- Lawyers:o the rea$ #arty in interest is the $awyer b9 doesn*t ha+e to share his #iee with

anyone, whi$e any resu$t from the $awsuit is s#read out among a$$ shareho$ders5the $awyer has the rea$ inenti+e

o now there are too many $awyers and too many $aw firms bringing suit

ID. The 5*ties o% O%%ice's 5i'ecto's an) Othe' Insi)e's

'ublic 'olicy: .ar &/t "irectors and 1hareholders

- batt$e on the one hand to ho$d diretors aountab$e to shareho$derso to make sure they are #utting the om#any*s best interest in front of their own best

interests- one wea#on that shareho$ders might ha+e is theshareholders derivative suit- but diretors ounter with the business $udgment rule- shareholders derivative suitsbeome 1uite weak om#ared to the business $udgment rule- before you bring a deri+ati+e $awsuit, you ha+e to raise your om#$aint with the board of

diretors first

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o under the statute, you ha+e to make that demand first before you bring suit

o if the diretor disagrees with the shareho$der, he an go on with the suit

- NOTE: the hurd$es are 1uite substantia$ that kee# the deri+ati+e $awsuit from beinge6amined on the merits

A. The O#$igation o% Cont'o$: 5*ty o% Ca'e

&usiness ,udgment Rule:- DE $aw5the business and affairs of a DE or#oration are managed by or under its board

of diretors- a ourt wi$$ not interfere with the deisions of a om#any*s diretors un$ess there is

e+idene offraud or dishonest practiceo mere errors in .udgment are not suffiient as grounds for e1uity interferene

- more than imprudence or mista5en $udgmentmust be shown for the ourt to interfereo 4amin v! American E*press#where D deided to use e6tra money to #ay out

di+idends instead of #aying off a#ita$ gains, whih wou$d ha+e sa+ed the

om#any J mi$$ion" said this was neg$igent deision-making" The ourt he$dthat this deision may ha+e been unwise, but it is not for the ourt to deide" Thedirectors get to decide how dividends are declared!

'ublic 'olicy:- the business $udgment rulerea$$y sares of shareho$ders b9 it ho$ds them to a muh

higher standard5now they ha+e to show that the om#any had a duty of are andbreahed it

- hindsight bias# when we know that an outome has ha##ened, we are muh more $ike$yto o+erestimate their #reditabi$ity &simi$ar to =hindsight is (


37/84

o But these ha+e to be substantia$ and re$e+ant to the issues before the board

o The diretor annot .ust b$ind$y re$y on the re#orts5they must e6erise good faith

- During a #ro#osed merger, a diretor has a duty, a$ong with his fe$$ow diretors to at inan informed and de$iberate manner in determining whether to a##ro+e an agreement ofmerger before submitting the #ro#osa$ to the stokho$ders"

o 1mith v! 3an or5om#where Aan Rorkom #resented his suggestion to the Boardbut did not te$$ him his methods of arri+ing at this deision" The ourt he$d thatthe &oard had a dutyto make an informed deision on im#ortant deisions, suhas whether or not to do a merger" 2ere the ourt found it was an uninformeddeision b9 the diretors didn*t e+en know the +a$ue of the om#any, anda##ro+ed the sa$e with two hours of onsideration with no notie of a risis or anemergeny" In addition, no one knew what the meeting was going to be about andthose who did had .ust found out" The Board re$ied so$e$y on Aan Rorkom*s ora$#resentation, no notes or written summaries were #ro+ided" s suh, the Boardbreahed their fiduiary duty to the shareho$ders by fai$ing to inform themse$+esof a$$ information reasonab$y a+ai$ab$e to them and re$e+ant to their deision to

reommend the merger and fai$ing to dis$ose a$$ materia$ information suh as areasonab$e stokho$der wou$d onsider im#ortant in deiding whether or not toa##ro+e the offer"

- now a Board of diretors annot make a deision $ike this without many, many ourtdouments to insu$ate them from the threat of $iabi$ity

- this case says there is still the business $udgment rule but you don+t get it with outearning it%going through lots of legal protections

o Aan Rorkom and the diretors were not entit$ed to the business .udgment ru$e

o b9 the BQ ru$e assumes that they were ating in good faith

- any =business .udgment> the Board makes must be informed and in good faitho the ourt #ro+ides no #rotetion for diretors that make an uninformed .udgment

that is not made in good faith

Insurance Against Liability for "irectors- art of the sett$ement from Aan Rorkom ame from the insurane o+ering the diretors- fter this +erdit, many or#orations ado#ted #ro+isions $imiting the $iabi$ity of its

diretors- De$aware or#orate $aw #ermits firms to insure diretors against $iabi$ity for neg$igene

5E Co'(o'ate "a 1@,B#B

- a$$ows any or#oration to in$ude in its ertifiate of inor#oration:o =a #ro+ision eliminating or limiting the personal liabilityof a diretor to the

or#oration or its stokho$ders for monetary damages for breah of fiduiary dutyas a diretor, #ro+ided that suh #ro+ision sha$$ not e$iminate or $imit the $iabi$ityof a diretor:

!" for any breach of the director+s duty of loyaltyto the or#oration or its

stokho$ders% (" for acts or omissions not in good faithor whih in+o$+e intentional

misconduct or a 5nowing violation of law

)" under !K of this tit$e &re$ating to #ayment of di+idends'

)K


38/84

" for any transation form whih the diretor deri+ed an im#ro#er

#ersona$ benefit

'ublic 'olicy on Insurance

- Diretors are $iab$e for breah of fiduiary duty

o now DE res#onds to the ho$ding in 3an or5omby saying that diretors an o#tout of this ru$e by ha+ing insurane against $iabi$ity

- Reasons against insurance:o 7hy wou$d firms deide not to take ad+antage of this o##ortunity and say, we

wi$$ go with the default rule3 b9 it ou$d deter investors5why wou$d you want to in+est in a firm that

has wai+ed $iabi$ity35you wou$dn*t shareho$ders wou$d be wa$king into a om#any that they know they ha+e

no $ega$ #rotetion againsto moral ha6ards problem- if diretors know they are insured, they wi$$ be are$ess

- Reasons for insurance:

o you wou$d want to insure the om#any so that the firm is #roteted b9 they ou$dha+e to #ay a $ot of money

o you aren*t going to get the big #eo#$e to be diretors un$ess they are insured

against $iabi$ity

5e$aa'e Co'(o'ate "a:

- or#oration an inor#orate in any state it wantso 2a$f of a$$ or#orations traded on the N4 stok e6hange are DE or#orations

- internal affairs doctrine#the interna$ affairs of the or#oration are go+erned by the statethey are inor#orated in, not the states in whih it does business

Two competing views of why "elaware has the most corporations:- >! race to the bottom

o Diretors are #owerfu$, shareho$ders are weak

o Diretors are smart and an take ad+antage of shareho$ders &one way they do this

is by hoosing $aw that is benefiia$ to them, hoosing $aw that a$$ows them to o#tout of neg$igene suits, et"'

Diretors an deide where to inor#orate5the states get some ad+antage

from ha+ing or#orations inor#orate in their state &there is a fee, et"'5sothere is a om#etition among states to get or#orations to inor#oratethere, and the way the states on+ine these or#orations is by making $awthat fa+ors diretors

o 0o there is a rae to the bottom to get the worst or#orate $aw #ossib$e

worst for the en+ironment, shareho$ders, and onsumers

but the best for the #eo#$e in harge: the diretors

De$aware suks and has nothing going on, so they ha+e the worst $aws, but

the $aws attrats diretors- ?! race to the top

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39/84

o This +iew saysshareholders have the moneyand get to choose where they invest-

they are on$y going to in+est in a firm that has $aws benefiia$ to themo They are going to in+est in om#anies with $aws that give them greater protection

o It says De$aware is the best and has #rodued the best $aws

the DE $aw $imiting neg$igene for diretors, attrats the best diretors that

wi$$ do the best for the om#any, so shareho$ders want to in+est in thesefirms

- nother +iew is that no one an understand why e+eryone inor#orates there, bute+eryone e$se is doing it, and it is .ust the thing to do

!. 5*ty o% "oya$ty

1. 5i'ecto's an) >anage's

- a diretor has afiduciary duty to support the interests of the corporationo+er his ownonf$iting interests

- genera$$y when a##$ying the BQ ru$e, ourts don*t $ook at substane, but if there is an

a$$eged onf$it of interest, then they wi$$

Enhanced &usiness ,udgment Rule- when there are om#eting interest, the BQ ru$e wi$$ sti$$ a##$y, but the /ourt wi$$ use

heightened srutinyo &ayer v! &eran#where the diretors deide to ad+ertise o+er the radio and one of

the diretor*s wi+es wou$d star in the ad &*s $aim it was to benefit her areer'"The ad ost a $ot more than their ad+ertising budget a$$ows" The /ourt found thisdoes not breah the duty of $oya$ty" The ourt found that the ad was to inreasetheir #rofits &not to benefit his wife' and had been researhed and arefu$$yonsidered &they used are and due di$igene in this deision'"

o NOTE:the ad+ertising of a om#any wou$d ne+er be e6amined under thebusiness .udgment ru$e, e6e#t for the fat that the diretor*s wife was the star

- ny transations by diretors to in+o$+ing the or#orations that may #rodue a onf$itbetween se$f-interest and fiduiary ob$igation, are e6amined with heightened srutiny

o Transation wi$$ be +oided if:

there is any e+idene of

agency other country

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