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Management and Organizational Studies
Management and Organizational Studies 2275A/B

BUSINESS LAW 2275 EXAM #3: CHAPTERS 11-13 Chapter 11: Agency and Partnership Agency  Agency represents and acts on behalf of a principle  Agency law=law of partnership  A service performed by an employee, an independent agent (eg. travel agency) or gratuitously  Company is vicariously liable for its employees (agent) actions – even if they are fraudulent –company must pay compensation to the client dealing with the agent The Agency Relationship  Agency relationship usually created through a contract  agency agreement o Between agent and principle o NOT the contracts that agents enter into on behalf of principle  Contract covers: o Authority o Duties o Nature of payment  Principle: Grants actual and implied authority  Agent: Agrees to act on behalf of principle  Power of attorney: agency agreement under seal and writing  Agency contract does NOT have to be in writing or seal (unless agent be required to seal) , unless required by statute of frauds o Under bill of rights- granting of authority must be in writing  Basic rules of contract apply to agency contracts (consensus, consideration etc.)  Gratuitously= contract is binding (on principle and agent)  Consent= only essential requirement of agency Authority of Agents  Most disputes arise from the extent of the agents authority in dealing with third parties  Actual authority: can be implied or expressly stated a) Principle is liable for actions caused by agent  Apparent authority: when a principle does something by conduct/ words to lead a third party to believe that an agent has authority, the principle is bound by agents actions regardless of whether actual authority exists a) Estoppel: applied when principle indicates that agent has authority b) Example: Principle says to third party “George has authority to act for me” , but if later tries to deny it and escape liability from Georges actions= PRINCIPLE IS ESTOPPED –can’t get out of it  Equitable estoppel: promise or commitment to do something in the future made by principle  -then principle is bound, even if he tells agent not to do something (that is within reasonable limits) and the agent still does it  Principle is bound by agents actions if: a) If a principle puts his agent in a position that would make a reasonable third party believe that the agent has authority  Example: Pedersen employs M as sales manager at car dealership. It is reasonable for customers to believe M has authority of a normal manager to sell cars/trade-ins. After receiving instructions from P to not accept trade-ins over 2000, but M does (5000). P is still bound. Agent acted within his apparent authority – if agent had sold customer entire lot=principle is NOT bound(not reasonable) b) If principle has sanctioned similar actions in the past  Reasonable person test: used to determine existence of authority (on whether third party should have been misled and on agent)  “Was the agent acting within the actual authority given by principle?” o If YES=CONTRACT o If NO= “Did the principle do anything to lead the third party to believe that the agent had the authority to act?”  If YES=CONTRACT (between third party and principle)  If NO=NO CONTRACT Ratification  Approve or ratify  principle can ratify contract IF the agent has acted beyond both actual and apparent authority – binding. If the principle chooses to ratify, third party is bound and can do nothing to change it  Qualifications: 1. Third party has the right to set a reasonable time limit which ratification must take place –after, third party can reject 2. Agent cannot enter into contract and then find a principle to ratify it-must be a specific principle 3. Principle must be capable of entering into contract at time agent was acting on behalf– eg. principle who did not have capacity to enter into contract because of drunkenness or insanity does not have power to ratify when sober 4. Parties must be able to perform the object of the contract at time of ratification  Ratification can take place inadvertently – ratify by conduct o i.e principle tests drives the car that the agent agreed upon=ratification principle MUST purchase car now Agency by necessity  rarely used today  an agent might HAVE to sell deteriorating goods to preserve vale for principle-without principles authority  exception: family relationships o common for one spouse to have actual authority or apparent authority to act on behalf of other –dealing with necessities from merchants o apparent authority continues for merchants even when divorce –and even if spouse specifically prohibits other form making purchases –merchant still believes spouse is allowed to make purchase  To summarize, a principle is bound by contract with actual or apparent authority and ratification The Agents Duties  When an agent acts beyond all authority-he or she can be sued for breach of warranty of authority)  Agent owes a duty of care to the principle – agent can be liable for mistake  Agent must follow principle’s specific instructions  Duty to act in best interests of their principle  Cannot delegate responsibility to another party unless there is consent  Must turn over any money to principle  Must account for funds  Fiduciary duty- person must eliminate personal interests in favour of principles interests o Utmost good faith:  Act in best interest/ not self-interest  Trust-strict confidence  Disclose ALL information o Forbes Case- Mrs. Forbes (real estate agent) paid part of her commission from sale of Building from principle (A and M) to Mr. H (purchaser-third party) to preserve deal – if she hadn’t done this, she could have lost the entire sale (and got nothing)- acting in own self-interest (not principle’s)  Agents owe principle full disclosure  Agent cannot act for BOTH third party and principle without consent from both o Eg. agents accepting gifts, tickets from third party o Real estate- agent acts for seller (purchasers usually do not realize this)  Agent must not profit at principal’s expense o Agent buys for himself what he been hired to sell to others and vice verse or sells property that he owns to principle  Agent must not compete with principle The Principals Duties  Primary: honour terms of contract and pay reasonable amount for services (if payment was not discussed)  Principle must reimburse agents expenses  Ambiguous authority will be interpreted broadly. i.e Jones givs B authority to enter into all sales related to the business- court will interpret it to sell large blocks of product but not entire business – except when power to borrow money is in question Undisclosed Principals  Principles, sometimes, try to conceal their image from third parties =undisclosed principal relationship  Used to discourage people from holding out for higher prices once they find out who is really buying the property  Where an agent makes it clear that she is representing an undisclosed principal, the third party cannot sue or be sued by the agent  Where agent acts as if she were the principal only the agent can sue or be sued by third party  Where agent acted ambiguously -so that it is not clear whether he was agent or principal – the third party can choose to sue either agent OR principal (when identity is known)- bound once choice is made  When is undisclosed principle LIABLE? o ONLY when agent the agent has acted within his actual authority; NOT apparent authority  CANT RATIFY  Cannot be enforced where identity of parties is important factor to third party  Contract made under seal=undisclosed principle cannot be sued  “per” indicates agent (on a contract when signed) The Third Party  Third party can sue for unauthorized acts performed by agent  OR if agent misleads third party to believe he/she actually does have authority for (tort of deceit)  Agents who exceed authority-sued for negligence Liability for Agents Tortious Conduct  When an agent is an employee of principal the principal is vicariously liable for any tortious acts committed by agent o Employer and independent contractor does not count  Exceptions for when agent is acting independent: o Principal is responsible for theft or fraudulent misrepresentation by agent, even when NO employment exists  Principal can be found directly liable for his own deceit/fraud o Eg. tells agent to make a defamatory statement  Vicariously liable= BOTH parties are liable Termination of Agency  When agent is notified of withdrawal of principals consent  When the period or specific event ends  Simple notification to agent on principals behalf is sufficient to end contract  Frustration or requests to perform illegal contracts  Death, insanity or bankruptcy  Mutual agreement  Unless the principal notifies third party of termination, the actions of the agent may still be binding on the principal Enduring Powers of Attorney  Authority to act under power of attorney is terminated when principal loses capacity  Legislation: to allow people to execute enduring powers of attorney – entrusting powers (finance and health) given to someone to act as one’s attorney to handle personal financial affairs  Eg. attorney can pull the plug on person (if spouse doesn’t want to)  Powers are exercisable after the principal loses mental capacity Specialized Agency Relationships  Travel agents, real estate agents, lawyers, accountants etc,  Agents CAN delegate  Employees of the firm will act on behalf of the client, not the firm itself  General principals apply  Specialized agencies are governed by special statutes  Agencies give advice, customers are vulnerable to being advantage of Types of Business Organization  Sole proprietorship o Independent business –one person  Partnership o Two or more people o Shared responsibilities o Each partner acts as agent for other partner  Both may employ others and act through agents  Corporation o Separate legal entity o Contracts are with corporation itself-not person  Holding corporation: hold shares in other corporations  Joint venture: involves several diff. corporations that band together to accomplish one project Sole Proprietorship  One person bears all losses and gains, obligations and costs-complete control over business activity  No distinction b/w personal assets of business and business  Need a license to operate, satisfy bylaws  Subject to fewer gov regulations than partnerships and corporations  Can’t sell shares  Unlimited liability: if there is significant loss, everything falls on the owner –responsible for any tort committed by employee  Very risky but can be offset by insurance  Any profit is subject to personal income tax  Worse off to be a sole proprietorship than a partnership or corporation Partnership  Based on contract  Possible for the owners to enter into a legal relationship –allows partnership to function as a single business unit  Partnership Act-adopted in common law, still used today o States a partnership is created when two or more people carry on business in common with a view toward profits  Sharing of net proceeds after expenses=partnership NOT sharing of gross returns  Created by formal agreement or inadvertently  There must be a fiduciary duty b/w the two partners to act in the best interest of each other  Partnership act circumstances that WILL NOT establish partnership themselves 1. Owning property in common 2. Taking share of the debtors profits 3. Commission selling or profit-sharing schemes 4. Beneficiary of deceased partner receives the deceased partners share of profits 5. Loan is made in relation to business  SO, what constitutes partnership? 1. Joint contribution of capital to establish business 2. Intention to share profits, expenses, or losses 3. Joint participation in management  Business must be continuous  Partnership can be created by CONDUCT o Oral agreement  When parties own property together, they run the risk of being identified as “partners”  Partnership created by CONTRACT o Writing o Terms not always conclusive of relationship o OR court may find a partnership exists even if they clearly state in agreement that they are not partners  Partnership agreements should include: 1) The duties of each partner 2) What type of work each is expected to contribute 3) Time 4) Sharing of profits 5) Limitations on powers of authority 6) Methods of resolving disputes 7) Termination of partnership  Partnership can be imposed by estoppel o If a third party believes that someone is a partner (even if they are not) because the other partner said so-partnership typically exists -partner is liable Partner as an Agent  every partner is the agent of the other partners –has power to bind them in contract  contract will be binding even if authority is limited- because third party is unaware of limitations Vicariously Liable  All partners are vicariously liable in tort for careless and intentional conduct of their partners –in business related activities o Eg. If A and P were partners selling firewood together and A negligently dropped a load of wood on a passing pedestrian, both A and P would be liable to pay compensation for injury o Includes: intentional wrong  Also held responsible for breach of trust of their partners o Misuse of client’s money  Liable for wrongful acts of employees Unlimited Liability  Partners share losses equally or proportionally by agreement  Third party can collect money from any partner regardless of agreement o Injured partner typically looks to partner with a lot of assets  Jointly liable: for debts and obligations  Jointly and Severally liable: if someone were to seek remedy, the partners must be included in original action (eg. if injured person later wants to sue a different partner- (because their more wealthy-cant because they weren’t in original action)  All personal assets at risk  Retiring partner remains responsible (new partner filling in can agree to take over obligations)  Registration is usually required for partnership o Failure=fine Rights and Obligations of Parties  Fiduciary duty exists b/w partners o To act in best interests o Partners must account for any profits or use of business property for personal use-without consent o Partners cannot compete with partnership  Required to pay over any profits made to partnership and not reimbursed for losses o Information must be disclosed  Partnership act 1) Partners will share profits and any losses 2) Partners entitled to any reimbursement for expenses they incur during business process 3) All partners can take part in management 4) No salaries paid to partners –only profits 5) Common agreement needed for major changes  No new partner can be brought into P –without consent 6) Assignment requires consent 7) Partners have access to each others records Advantages of Partnership  Insurance coverage o To overcome unlimited liability  Unanimous consent protection o Gives individuals protection  Partnership is less costly to form and operate  No gov. regulatory bodies that require records Dissolution of Partnership  Easy to dissolve-ONLY NOTICE o Implied  eg. L, one of the two partners driving a shared taxi cab, stopped driving  Dis. To others-sale of assets and distribution of proceeds  Death  Bankruptcy  Insolvency  Partnership established for a specific time will end at expiry date  Can be dissolved by request to the court o Partner=mentally incompetent o Conduct of one partner =preducial  Public notice may prevent liability – to all customers of business –failure to do so may render each partner liable for acts of the other partners after dissolution Distribution of Assets/Liabilities  When dissolving, debts must be paid first out of profits, then capital, then personal assets of partners  Any assets still remaining after paid debt first go to the partners who gave personal assets, then capital and then the rest distributed amongst partners Limited Partnership  Adv: allows partners to invest money in partnership but avoid unlimited liability  Only loss=original investment  Easy to loose “limited partner” status o Eg. if L allowed himself to be represented as a partner in business, take part in control, allow his name to be used etc. =general partner with unlimited liability  Registration required Limited Liability Partnerships  LLP must be in their name, must be professionals authorized by statute, minimum insurance coverage  Adv: potential liability is limited o NOT liable for liability of partnership arising from negligence –does not apply to partners own negligence  Partnerships assest at risk with respect to acts caused by ee’s, partners, agents–victim may not pursue individual assets  These provisions apply ONLY TO NEGELGENCE –not breach of contract/trust, tort Chapter 12: Corporations The Process of Incorporation  Purpose: finance large projects without limitations associated with sole prop and partnerships  Separate legal entity  Shareholders change while company remains intact  Eg. Royal charters created early corporations and Hudson’s Bay  If venture were important to parliament they became incorporated –“special-act companies”  Deeds of settlement- contract for ordinary citizens who couldn’t incorporate (back in day)  Three methods of incorporation in Canada: 1) Registration (from British) 2) Letters patent 3) Filing of articles of incorporation (from U.S)  Can incorporate at: 1) Federal level (chain of restaurants/internet- can incorporate in any business) 2) Provincial (local restaurant- if wants to incorporate in other provinces must register in each province )  Registration o Only Nova scotia uses it o Accomplished by filing memorandum and articles o Memorandum is like constitution –sets out name of company, objectives, share capital o Articles – operational rules (internal)  Eg. how shares should be issued, voting procedures, regulations o Less flexibility in changing internal procedures after registration  Letters Patent o Declining o Based on monarch granting royal charter o Ordinary rules are included in separate bylaw o Quebec and P.E.I  Articles of incorporation o Features letters to patent and registration o Incorporation is accomplished through granting certificate of incorporation  Societies are also incorporated – (universities, non-profit bodies) can sue or be sued  Corporation= legal fiction  Two legal persons: the shareholder and an unincorporated company  “a one- man company” can incorporate- no responsibility for debts  Shareholders do NOT own assets of business (corporation does)- but they have right to share liquidation of assets o Sears Canada is separate from its stores or shareholders (shareholders don’t own the stores)  If fraud is main purpose to incorporate courts will ignore the “separate entity fact”  Company is vicariously liable  Limited liability=advantage  Capacity o Corporations have capacity of a normal person  Corporations must act through AGENTS Funding  Acquire capital through issuance of shares  Authorized share capital=# of shares that can be sold  Common to issue no-par –value shares (no value on shares- market place determines value)  Common shareholder—have right to vote and control over corporation  Preferred shares collects dividends before common shareholders o Can be cumulative o Right to vote only when company fails to provide dividends o Must include these restrictions when shares are issued  Special shares used in estate planning  BORROWING o Borrowing funds=accumulation of debt o Can borrow from a single creditor (bank) OR issuing of bonds/debentures (secured or unsecured) o Failure to pay debt=breach of corporations legal obligation- creditor can seize assets o Bond: secured o Debenture: unsecured o Bond holders have no right to vote and no part in managerial decisions o Bondholder has right to demand payment o Risk vs return= shares v. bonds o Secured- in a better position to get money back when company is in financial trouble  Closely held and broadly held corporations o A.k.a public and private companies o Closely held= few shareholders (managers), usually small corporations o Broadly held= more closely government regulated  Distributing corporations  more than 15 shareholders and distribute shares to public o Comply to most stringent legislative requirements  To conclude: o shareholders BUY shares (preferred vs. common)  Corporations NOT obligated to declare dividends  Control corporation  Share liquidation of assets o Creditors LEND money (secured vs. unsecured)  Corporations obligated repay loans  Paid before shareholders  No control Corporate Directors, Officers and Shareholders Directors (managers): Within the Corporation  Shareholders choose directors  Director cannot be bankrupt or have been convicted of crime/fraud  Director duty to corporation to be careful (to creditors as well)- must act as a “reasonable person” when exercising powers and duties  Fiduciary duty to corporation, NOT shareholders o Only corporation can sue director (decision made by directors)  Can not take personal advantage of opportunities that arise because of their positions of directors  Cannot compete  Any gains must be paid to corporation  Any losses are borne by director alone  Very HIGH STANDARDS to be a director  Derivative or representative action: since only corporations can sue directors, this jurisdiction gives shareholders the right to bring this action against them  Can face personal liability o Eg. allow shares to be sold for less than the fair value o Or make transactions that business will not be able to afford (pay liabilities)  “insiders” – cannot disclose info to outside sources  Legally responsible for management External obligations  Directors statutory duty imposes personal liability in three areas: 1) Wages  If corporation fails, they still owe workers unpaid wages 2) Taxes  Unpaid taxes 3) Environment  Contamination of property, pollution in air, cost of cleanup  Imprisonment/ fines  Defenses: 1) Acted with Due diligence did everything they could to prevent the damage(s) 2) Statutes- competition act  Criminal Code: imposes duty to take reasonable steps to prevent bodily harm in workplace ….criminal liability Officers and Senior Executives  Appointed by directors  Day to day operations  CEO  Fiduciary relationship to company  Same duties as directors – held liable to an even higher standard  Personally liable for human rights and consumer complaints Promoters  Promoter= participates in the initial setting up of the corporation –helps in IPO o Owe duties o DISCLOSES INFO  Securities commission= established to prevent fraud and to encourage free and efficient market –disclosure of shares  Prospectus= disclose all info to investors about corporation and operations  Fiduciary duty o To disclose personal info  Promoters will often purchase property on behalf of corporation BEFORE it has been incorporated - have corporation ratify agreement after incorporation Shareholders  Few obligations  No fiduciary duty  “insiders”= have enough shares to have some obligations within corporation  Shareholders have RIGHT to: 1) To see records and reports 2) Copies of annual financial statements 3) Annual general meeting- shareholders given right to vote for directors 4) Can pass their right to vote to someone else –in the form of a proxy  Proxy who fails to act in interest of shareholders can be fined for $5000  Common shareholders=1 vote  Preferred= cannot vote (unless promised dividend has not been paid) 5) Pre-emptive rights entitle shareholder to be offered any new shares first 6) Not to have their shares diluted by sale of more shares
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