Closely Held Businesses Fall 2018, Law 6062, Section 1 Don Weidner



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Closely Held Businesses Fall 2018, Law 6062, Section 1 Don Weidner

  • Required Text: Shawn J. Bayern, Closely Held Organizations (2014)
  • The text covers agency, partnerships, limited liability partnerships, limited partnerships, limited liability companies, closely-held corporations and nonprofit organizations.
  • I shall include some supplemental materials in the slides and through separate distribution.
  • The Syllabus references optional background reading.
  • Six sets of slides are posted on Canvas and on my web page under Course Materials. They may be modified throughout the semester.
  • The Exam will be three hours and closed-book.
    • And mostly essay, with at least 45 minutes of multiple-choice questions
    • Last spring’s essay questions are on reserve in the library.

Why Use Agents?

  • Assume I am leaving for vacation on a bareboat charter of a sailboat in a part of the world with no internet access. May I authorize someone to sell my home for me in my absence?
    • What parameters might that authorization have?
    • What formalities might be required?
  • When I (as a “principal”) retain someone to act on my behalf and subject to my control (an “agent”), two kinds of questions can arise:
  • The extent to which a third party and I become obligated to one another because of the agent’s conduct; and
  • The extent to which the agent and I become obligated to one another.
  • Donald J. Weidner

Restatement Definition of Agency

  • Restatement Third, Agency § 1.01:
    • “Agency is the fiduciary relationship that arises when [1] one person (a ‘principal’) manifests assent to another person (an ‘agent’) that the agent [2] shall act on the principal’s behalf and [3] subject to the principal’s control, and [4] the agent manifests assent or otherwise consents so to act.”
  • One an agency relation is found to exist, the law of agency provides rules to determine
    • The extent to which the agent can bind the principal to third parties and bind those third parties to the principal; and
    • The extent of the duties that the principal and the agent have to one another.
  • Donald J. Weidner

Authority—Binding Principals and Third Parties

  • An agent has “authority” when an agent has the power to bind the principal and a third party to a contract.
    • Leaving both the principal and the third party liable to each other for any breach of the contract.
  • Most basically, an agent can bind the principal and a third party by “actual authority” or “apparent authority.”
    • There is also the related doctrine that a third party may hold a “principal” liable on the theory of “agency by estoppel”
  • Donald J. Weidner

Actual Authority

  • Restatement (Third), Agency, § 2.01; Actual Authority
    • “An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent so to act.”
      • To emphasize: actual authority is determined by the agent’s reasonable belief
  • Assume when I set off on my sail I authorize my friend Jay to buy a 23 foot Mako if he can purchase one just a few years old in excellent condition for under $50,000. Assume he finds one but the seller won’t sell without also selling the boat trailer he has been using with it.
  • Restatement (Third), agency, § 2.02(1): Scope of Actual Authority
    • “An agent has actual authority to take action designated or implied in the principal’s manifestations to the agent and acts necessary or incidental to achieving the principal’s objectives, as the agent reasonably understands the principal’s manifestations and objectives when the agent determines how to act.”
  • Donald J. Weidner

Actual Authority (cont’d)

  • The agent has actual authority to do exactly what the principal has clearly and unequivocally instructed.
  • In addition, the agent also has actual authority when, at the time of taking action that has consequences for the principal, the agent reasonably believes, “in accordance with the principal’s manifestations to the agent, that the principal wishes the agent so to act.”
    • An agent’s “actual” authority also includes cases in which the principal does not subjectively intend to give the agent authority, but the agent reasonably thinks the principal did so intend.
      • Reasonable belief of the agent is key
    • “That is, if P issues confusing instructions to A, whether A has actual authority or not is decided from the perspective of a reasonable person in A’s position.
  • Donald J. Weidner

Actual Authority (cont’d)

  • The reasonableness of the agent’s interpretation of the agent’s authority is judged at the moment “when the agent determines how to act.”
    • If the agent subsequently learns something new about the principal’s intentions, it can immediately impact the agent’s actual authority.
    • The purpose of the rule is to protect principals by making sure that agents cannot unreasonably act for them in light of newly acquired information.
      • For example, an agent’s express authority to do something on behalf of the principal may end if the agent learns that the principal no longer needs it done.
  • Note: An agent can be liable to the principal for damages the agent causes to the principal by exceeding the agent’s actual authority.
    • If the agent’s interpretation is reasonable at the time the agent acts, the agent is not subject to liability to the principal even if, after the fact, the principal can demonstrate that the agent’s interpretation was erroneous.” Text at 14.
      • Is there a “know (or control) your agent” rule?
  • Donald J. Weidner
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