I. Types of Business Associations

Tufo, Camion, Niziblian

Summer 2010

I.  TYPES OF BUSINESS ASSOCIATIONS

a.)  Sole Proprietorship

o  Single entity investor

o  Unlimited liability

o  Governance – mostly unrestricted

o  No perpetual existence

Investment, Equity, Debt, and Trade Creditor

o  Investors in a business are persons who provide funds that are used to acquire assets that will be used in the business

o  Equity investor - right to receive a “residual” amount.

o  Creditors – i.e. Bank and trade creditors (persons who supplied goods or services on credit)

-  Entitled to receive fixed payments

-  Investments can be made in exchange for a virtually infinite variety of possible benefits

Agency – Two Concepts

o  Legal Relationship

-  An agent is a person who affects the legal relations of another person, the “principal”

-  Can affect the legal relations by contract and by tort

o  Agency costs

-  A law and economics term referring to the costs that arise when the interests of the investor and the interests of the agent do not align

b.)  Partnership

o  Kramer has been operating the business for some time now. Many people come to the store and it is a success. Kramer wants to expand the business but all of his funds are tied up.

o  His buddy Newman has an excess amount of funds and is interested in partaking in Bro’s Buys. But he wants a say in how the business is run, so Kramer agrees to let Newman make decisions jointly with him.

o  The arrangement between Kramer and Newman is a partnership

o  Partnership involves more than one equity investor, each equity investor being referred to as a partner

Default Rules

o  Rules in partnership are detailed in statutes but they represent default rules

o  Default rules are rules that the parties would have agreed to had they put their mind to the issue at hand

o  Statutory default rules thus minimize transaction costs by eliminating the need for parties to bargain for them

o  Parties are free, therefore, to contract out of the default rules

o  But where gaps exist in private contracts, default rules fill those gaps

Types of Partnerships

o  Limited partnership – comprised of one or more partners whose liability is limited to the amount of their investment and one or more “general partners” whose liability is not so limited

o  Limited liability partnership - partners are not liable for the acts of their fellow partners or employees unless they were directly supervising the activity that caused the loss

o  Undeclared partnership – the de facto partnership where parties fail to register for a general or limited partnership; available in Quebec only

c.)  Corporations

Key Features:

-  Separate existence

-  Limited liability

·  Allows for limited liability and management of business unlike limited partnership

-  Perpetual existence

·  i.e. If Kramer and Newman were partners and sold their partnership interests to Elaine and Jerry, the Kramer/Newman partnership in the business would come to an end even if the business itself might be carried on by Elaine and Jerry in exactly the same way; wouln’t happen in a corporation

Investors in a Corporation

o  Shareholders

- Equity investors

- Entitled to residuals; do not own assets of corporation

- Entitled to certain rights such as shares in distribution of profits, distribution of the net proceeds of liquidation/dissolution, right to vote on important matters

o  Do Shareholders “own” the corporation?

Management of a Corporation

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d.) Other Business Associations

o  Limited liability companies (US)

o  Cooperative associations

o  Joint ventures

o  Franchises

o  Non-profit/societies

o  Unincorporated Associations

II. AGENCY AND MANDATE

Agency is the relationship that exists between two persons when one, called the agent, is considered in law to represent the other, called the principal, in such a way as to be able to affect the legal position of the principal

Agency relationships are present in numerous transactions. It is hard to go through a day without encountering an agency relationship.

CCQ 2130.Mandate is a contract by which a person, the mandator, empowers another person, the mandatary, to represent him in the performance of a juridical act with a third person, and the mandatary, by his acceptance, binds himself to exercise the power.
The power and, where applicable, the writing evidencing it are called the power of attorney.

Features of Agency

1.)  The agent must be under the control of the principal

-  The greater the power of control over the agent, the greater the likelihood that the principles of agency are applicable

2.)  Requires consent of principal and agent to the relationship

-  The parties can be held to have consented to an agency relationship "if they have agreed to what in law amounts to such a relationship, even if they do not recognize it themselves and even if they have professed to disclaim it."

-  Consent can be either express or by implication

CCQ 2132.Acceptance of a mandate may be express or tacit. Tacit acceptance may be inferred from the acts and even from the silence of the mandatory.
CCQ 2143.A mandatary who agrees to represent, in the same act, persons whose interests conflict or could conflict shall so inform each of the mandators, unless he is exempted by usage or the fact that each of the mandators is aware of the double mandate; he shall act impartially towards each of them.
Where a mandator was not in a position to know of the double mandate, he may have the act of the mandatary declared null if he suffers injury as a result.

3.)  Authority is given by the principal to the agent

-  Authority consists of what an agent can and cannot do, and how he can affect the legal position of the principal.

Note: It is not necessary to use the term “agent” to describe the relationship. Likewise, a contract of agency is not needed to define the relationship

Agency v. Employment

o  Agents have the right to enter into contractual relations on behalf of the employer.

o  An agent and an employee may not owe the same fiduciary duties to the employer.

o  A person who is an employee may also be an agent of the employer.

o  A person can be an agent without being an employee.

Creation of Agency

-  Expressly by contract or mandate

-  Implicitly by conduct

-  Without a special contract

-  Without a contract in writing

-  Without anything having been expressly agreed as to terms of employment, remuneration, etc.

-  By estoppel

Note: Estoppel is based upon detrimental reliance. A person who by words or conduct has allowed another to appear to the outside world to be his or her agent, with the result that third parties deal with that other as the first person's agent, cannot afterwards repudiate this apparent agency, if to do so would cause injury or loss to such third parties.

Authority is the extent to which an agent can affect the legal relations of the principal. There are two types:

1)  Actual

2)  Apparent

1. Actual Authority

The authority which in fact the agent has been given by the principal under the agreement or contract which has been made between them, or by virtue of subsequent ratification.

-  Can be express or implied

-  Does not require consideration

-  Two types: express actual authority and implied actual authority

Express Actual Authority

-  The principal has stated either orally or in writing what the agent’s authority is

-  Authority that can be inferred from the written or oral words expressing the scope of the agent’s authority

Implied Actual Authority

-  The authority that the principal and agent would have expected the agent to have in the circumstances

-  This is part of an agent's actual authority, which the principal has consented, by implication, that the agent should have

-  Every agent has implied authority to do everything necessary for, and ordinarily incidental to, carrying out his express authority according to the usual way in which such authority is executed

CCQ 2136.The powers of a mandatory extend not only to what is expressed in the mandate, but also to anything that may be inferred therefrom. The mandatory may carry out all acts which are incidental to such powers and which are necessary for the performance of the mandate.

-  Can be discerned from usual or customary authority

-  The usual authority of an agent is determined by looking at what the agent has been allowed to do in the past

-  If the agent has done certain things in the past that are outside the express authority of the agent, but the principal has allowed the agent to do those things, then the agent may be said to have usual authority to do those things

Implied Actual Authority (Custom)

-  Determined by looking at the kind of authority agents of that type normally have

-  An agent can argue if there is an accusation that he/she did not have authority that agents of his kind customarily have the authority on which the agent acted

CCQ 2137.Powers granted to persons to perform an act which is an ordinary part of their profession or calling or which may be inferred from the nature of such profession or calling, need not be mentioned expressly.

-  The custom must be:

§  Known to the principal, or be so notorious that the principal cannot say that he has no knowledge of it

§  Reasonable and lawful

2. Apparent Authority

In Freeman and Lockyer v. Buckhurst Park Properties (Mangal) Ltd., Diplock L.J. explained that an "apparent" or "ostensible" authority was a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the "apparent" authority, so as to render the principal liable to perform any obligations imposed on him by such contract.

Establishing Apparent Authority

1.)  The alleged principal must have made a representation, or permitted a representation, that the alleged agent had authority to act on behalf of the alleged principal

2.)  A third party reasonably relies on the representation to her or his detriment.

Note: The representation by the alleged principal can be express or implied from words, conduct or the circumstances.

Consequences Once Authority is Established

CCQ 2157.Where a mandatary binds himself, within the limits of his mandate, in the name and on behalf of the mandator, he is not personally liable to the third person with whom he contracts.
The mandatary is liable to the third person if he acts in his own name, subject to any rights the third person may have against the mandator.
CCQ 2158.Where a mandatary exceeds his powers, he is personally liable to the third person with whom he contracts, unless the third person was sufficiently aware of the mandate, or unless the mandator has ratified the acts performed by the mandatary.

Obligations of the Mandator Towards Third Persons

CCQ 2160.A mandator is liable to third persons for the acts performed by the mandatary in the performance and within the limits of his mandate unless, under the agreement or by virtue of usage, the mandatary alone is liable.
The mandator is also liable for any acts which exceed the limits of the mandate, if he has ratified them.
CCQ 2163.A person who has allowed it to be believed that a person was his mandatary is liable, as if he were his mandatary, to the third person who has contracted in good faith with the latter, unless, in circumstances in which the error was foreseeable, he has taken appropriate measures to prevent it.
CCQ 2164.A mandator is liable for any injury caused by the fault of the mandatary in the performance of his mandate unless he proves, where the mandatary was not his servant, that he could not have prevented the injury.

Ratification

Where the agent acts beyond his or her authority the principal may nonetheless choose to accept what the agent has done by “ratifying” the act of the agent. Ratification means that the principal agrees with the performance of the action undertaken by the previously unauthorized agent. When this occurs, the ratification relates back, and the previously unappointed agent is treated as having been authorized at the time the act in question was performed.

Circumstances in Which Ratification Can Occur

A person can ratify a contract entered into by another person on their behalf if:

a.  The other person purported to act on behalf of the person who seeks to ratify

b.  The person who seeks to ratify was in existence and was ascertainable at the time the agent acted

c.  The person who seeks to ratify must have had the legal capacity to do the act both at the time the agent acted and at the time of the ratification.

Requirements for Ratification

o  Ratification can be express, by conduct, or by acquiescence

-  An express ratification can be oral or in writing, by the conduct of the principal (any performance or part performance) or by acquiescence

o  Ratification must be based on a knowledge of all the relevant facts

Consequences of Ratification

o  The ratification relates back to the time of the offer and acceptance between the agent and the third party.

o  The principal can sue the third party and can be sued by the third party.

o  The agent is no longer liable for a breach of warranty of authority.

o  The agent is no longer liable to the principal for exceeding his authority.

o  The principal will be liable to the agent for reasonable remuneration and to indemnify the agent for expenses reasonably incurred by the agent in effecting the contract.

Duties of Principal to Agent

o  Pay remuneration

§  But generally requires an express agreement (since an agency relationship can be gratuitous) or circumstances in which the agent would not have been inclined to act gratuitously