• Agency: a relationship that exists when one party represents another party in the formation of legal relations Pg.
298 • Agent: a person who is authorized to act on behalf of another • Principle: a person who has permitted another to act on her behalf • Agency is a common relationship as is shown in the following examples: o A sports agent negotiates a multimillion-dollar deal on behalf of a hockey player o An insurance agent sells fire and theft insurance on behalf of several insurance companies o A travel agent sells tickets, cruises, and vacation packages on behalf of carriers and hotels o A booking agent negotiates fees and dates on behalf of entertainers ?
In each case, the agent is acting for someone else (the principle) and is doing business on that persons behalf. ? This kind of relationship is essential to the success of the principal, who may not necessarily have the expertise to handle the given matter Agency Defined: o The fact that parties use agents instead of dealing with each other face to face can result in complications and questions. o There are two key relationships at play in an agency situation o The first is the relationship between the agent and the principal.
o This aspect of agency raises numerous questions, such as the following: ? How does A become an agent? When is one person considered to be an agent for another? ? What is the authority of A? What types of transactions can A enter on behalf of P? ? What are A’s Duties? ? What are P’s obligations? o The second relationship in agency is between the principal and the party with whom the agent does business. o Such business are known as outsiders because they are “outside” the agency relationship between principal and agent.
The outsider is also sometimes called the third party. o Outsider: the party with whom the agent does business on behalf of the principal This relationship raises questions, including: o When is the principal liable to the outsider? o When is the agent himself liable to the outsider? The complications resulting from these relationships have neccessiated rules of law to regulate and resolve them. These rules are known as the law of agency, which is derived form tort and contract law.
Law of Agency: the law governing the relationship where one party the agent, acts on behalf of another, the principal. Creation of Agency: Agency by Agreement: o An agency relationship created by contract normally involves the principal authorizing an agent to act on her behalf and the agent agreeing to do so in return for some fee or other remuneration Pg. 300 o This often occurs through a contract created expressly and only for that single purpose For example: o A retired public figure may engage an agent to contact organizations, negotiate fees, and book engagements on his behalf.
In return, the public figure will pay the agent a certain sum, perhaps a percentage of his fee. In other situations, the agency relationship may arise as part of another, broader contract: o An employment contract may provide for a person to be paid a salary in return for carrying out certain duties including entering into contracts on behalf of the employer. For example, a sales clerk, besides greeting and assisting customers and stocking shelves, would have the authority to enter into sales transactions at least at the sticker price on behalf of his employer.
o Not all employees are agents, a clerk is typically not an agent, but if asked to purchase a gift for a departing employee, the clerk is the agent for the employer. The Concept of Authority: The principal will be obligated by the contract when the agent as actual authority or apparaent authority Actual Authority: The power of the agent that derives from either express or implied agreement o Express authority is the written or oral authority granted by the principal to the agent and is an authority that the agent actually has o Implied authority is also an authority that the agent actually has, but is present by implication only.
An agent will have implied authority when that authority o Is inferred from the position in the agent occupies o Is reasonably necessary to carry out or otherwise implement the agent’s express authority o Arises by virtue of a well-recognized custom in a particular trade, industry or profession. o Not any less “real” then express terms. They just exist in another, less tangible form. o The nature of authority given to the agent is inherently flexible and easily customized. For example it can be, ? Very broad or very narrow ? For only one transaction or several ?
For a short, long o indefinite period of time ? Very formal, as in the case of a power of attorney, or very informal, in that it is included in the job description of an employee or merely consists of oral instructions Power of Attorney: A power of attorney is a written document in which one person gives authority to another person to act on their behalf. The person receiving the power is most reffered to as the “attorney” “agent” and the person giving power is the “principal” or “donor” Typically, there are three kinds available:
o General Power of Attorney: the agent has full authority to excevices all the principals rights in relation to her property and financial affairs o Specific power of authority: the agent has the authority to act for the principal only in relation to certain matters or in certain specific circumstances o Personal care power of attorney: the agent has authority to act for the principal in relation to personal matters such as housing or health
Apparent Authority (ostensible): the power that an agent appears to have to an outsider because of conduct or statements of the principal. So long as an agent is acting within his apparent authority, the pricipal will be bound by the transaction unless the third party knew or ought reasonably have known of the limitation on the agent’s authority. Agency by Estoppel: an agency relationship created when the principal acts such that third parties reasonable conclude that an agency relationship exists.
o Dong acted outside his actual authority but the company will be bound because dong had the apparent authority to enter into contracts over that monetary limit o A less common situation in which an agency relationship can be created by estoppel involves one in which the pricipal indicates that another is his agent when in fact on agency relaionship exists. o The law sides with the customer through estoppel. In theory, the owner can sue for misrepresenting himself as an agent, but this can be a little value if terrance has few assets.
o A third situation in which agency by estoppel may operate to bind a principal is that in which an agency relatonship has been termiatned or an agents authority has been curailed. In both situations, the agents had at one time the actual authority to bind the pricipal but now the autority has been taken away or reduced Agency by Ratification: an agency relationship created when one party adopts a contract entered into on his behalf by another who at the time acted without authority.
Occurs when a person represents himself as another’s agent even though he is not, and when the supposed principal adopts the act of the agent. Agency by estoppel forces the principal to be bound by the unauthorized contract because the principal has represented someone as his agent and must live with the consequences. Agency of ratification: the agency is equally out of line not due to any fault of or misrepresentation by the principal.
For this reason the law does not force the principal to adopt the contract, but rather permits him to make the decision for himself, according to his own best interest. Ex. Friend acting on behalf of friend for a property. A principal can only ratify a contract if, o He does so within reasonable time o The principal had the capacity to create the contract at the time the agent entered into it and at the time of ratification, and o The agent identified the principal at the time of entering the contract Summary of Creation of Agency and Agent’s Authority.
Duties of the Agent: o If an agent fails to perform these duties, he is in breach of the contract. Pg. 307 o Normally, it is expected that the agent will personally perform their obligations o However, there may be an express or implied provision for delegation – that is, the agent ma be permitted to download responsibility onto someone else. For example, it may be that sonny and dong have an understanding that Dong can have members of his extended family contact fabric suppliers in remote regions of China An agent owes a fiduciary duty to the principal.
This duty requires the agent to show what the law describes as “utmost good faith to the principal. ” Fiduciary Duty: a duty imposed on a person who has a special relationship of trust with another This duty is often expressed as a “profit rule”- a fiduciary must not personally profit by virtue of her position- and a conflict rule- a fiduciary must not place herself in a position where her own interests conflict with the interest of the principal. Fiduciary: a person who has a duty of good faith toward another because of their relationship
As a result of Fine’s Flowers, an agent who has been instructed to obtain “full coverage” has onerous standards to meet to fufill her duty of care. At a minimum, the agent must o Identify all of the client’s foreseeable risks o Take all reasonable steps to determine if the market provides coverage for the risks identified o Provide information to the client about the coeverage available o Procure the coverage if it is available o Advise the client if the coverage is unavailable so that thte client can take other measures to reduce the risk
The content of fiduciary duty will vary with the circumstance. However, as a general rule, an agent has the duty to: o Make full disclosure of all material information that may affect the principals position (dong must disclose to sonny any good deals or bargains on fabrics) o Avoid any conflict of interest that affects the interests of the principal (Dong must not go on a buying trip for Sonny and acquire clothes for a store that he is secretly running) o Avod acting for two principals at the same time
o Avoid using the principals property, money or information to secure personal gain (dong must avoid using contacts that he has gained through acting as sonny’s agent to set up his own business, and he must not sell or use Sonny’s customer lists and records for personal gain) o Avoid accepting or making a secret commission or profit (dong must avoid taking payments from fabric suppliers for doing business with them) There is NOT an absolute prohibition against conflicts such as acting for two principals or using the principal’s property.
NOT unique to a principal and agent Duties of the Principal: o Normally set out in the contract creating the agency relationship Pg. 311 o Such contracts usually obligate the principal to: o Pay the agent a specified fee or percentage for services rendered unless the parties have agreed that the agent would work for free o Assist the agent in the manner described in the contract o Reimburse the agent for reasonable expenses associated with carrying out his agency duties o Indemnify against losses incurred in carrying out the agency business ?
Example: Sonny would reimburse Dong for travel expenses Liability of the Agent to the Outsider: An agent who acts without authority and contracts with an outsider is liable to the third party for breach of warranty of authority. There is no contract between either the principal and the outsider or the agent and the outsider. o Example: Sonny would not be bound by a contract Dong enters into on his behalf to purchase a private jet. Liability of the undisclosed principal:
Undisclosed principal: a principal whose identity is unknown to a third party, who has no knowledge that the agent is acting in an agency capacity When the agent is acting for an undisclosed principal, the general rule is that the principal is still liable on the contract son long as the agent is acting within his authority. The agent has no liability however. If dong pretends to be the principal, representing to the outsider that he is actually the owner and does not disclose the existence of sonny, then Dong runs the risk of being personally liable on the contract that is concluded.
Unnamed principal: if dong tells the seller that he is acting for a principal but doesn’t say the name, sonny will be liable on any contract that he enteres with the seller, but dong has no liability beause the outsider was fully aware of his status. Liability of the Agent to the Principal: Pg. 313 When an agent exceeds his authority the principal can sue the agent for breach of their contract Electronic Commerce Act: a contract may be formed by the interaction of an electronic agent and an individual or by the interaction of electronic agents.
A principal is vicarious liable for an agents actions as long as the agent is acting within express, imploed, or apparent authority. Termination of the agreement Pg. 316 o The parties may agree to bring their relationship to an end o One party may give notice of termination to the other o An agency relationship can cease by opeation of the law. This Is most commonly due to death, dissolution, insanity, bankruptcy CHAPTER 14- Business Forms and Arrangements Forms of Business Organizations: • Choosing how to own a business is a critical decision because it determines in large part who: o Is financially liable for the business.
o Shares in business profits and other assets o Makes and is accountable for management decisions The Sole Proprietorship: • An unincorporated business organization that has only one owner • Oldest form • Most often used by small business • Simplest form, no legislation pertaining to the sole proprietorship Financial liability: • Any obligation of th ebusniess is your personal obligation o The bank loan: if he gets a bank loan it is his promise to repay the loan, not his business o The breach of contract: if he supplies defective computers, he not the company is liable in breach of contract.
Unlimited Liability: unrestricted legal responsibility for obligations • Regardless of what the owner has invested in his business, his personal assets and not just the business assets may be seized to pay the outstanding debts of his business. Profit sharing: • ADVANTAGE: all the profits after taxes accrue to the sole proprietor alone. If It is very successful, he gets all the money Decision Making: • Having no board of directors to report to, can make business decisions very quickly and independently.
• If the owner dies, the business is terminated- in other words, the proriportship has a limited lifespan • DISADVANTAGE: incharge of everything, absence through illness can affect the business so much because it revolves around one person. • Although they may hire employees, they have limited opportunity for advancement because it is a one man show. Sources of Capital: • DISADVANTAGE: limited access to capital. He is limited to his own assets and to whatever credit he can draw on to finance his operation. Taxation: • There are no formal or specialized tax rules governing it.
Profits and losses are simply reported on the owners personal income tax return. This may be ADVAN or DISADVANT depending on the taxpayers circumstances, including whether the owners marginal tax rate is higher or lower than the applicable corporate tax rate Transferability: • A sole cannot be transferred or sold to another because it has no legal status. There is nothing to transfer Regulations: • One simply commences business activity. Simple and inexpensive. They are subject to the same regulation as any other business. The Partnership:
• Carried on by two or more persons with the intentions of making profit Financial Liability: • Each person has unlimited liability for partnership debts and other obligations Joint Liability: • Liability shared by two or more parties where each is personally liable for the full amount of the obligation Breach of Contract: • If the partners supply defective computers, each is liable for the entire amount of damages. The contract is between the customer, and all the partners. Profit Sharing: • Something they are free in any way to see fit. One person may have more percent in the company than the others.
Decision making: • is an advantage if one person is sick • Downside is that managing the business will require consultation among the partners and they may not always achieve consensus. Disagreement Sources of capital: more capital than the one person. Taxation: • the partnership is not a separate legal entity, and therefore any income from the partnership is allocated to the partners on the basis of their interest in the partnership and they must in turn include it on their individual tax returns Transfer: does not provide for the ready transfer of interest from one owner to another.
Agency and the Partnership act: Partnership Act: The legislation in place in the common law provides rules with respect to When a partnership exists What the relationship of partners is to outsiders Optional Rules: The relationship of partners to one another How and why a partnership ends When a Partnership Exists: • According to the partnership act, a partnership exists when one or more people carry on business in common with a view towards a profit. • The partnership act also sets out a number of circumstances that point toward there being a partnership but not conclusively so.
o For example if two or more people own property together, this does not itself make them partners. The Relationship of partners to one another: • If you become partners with someone, you also become another’s agents as well as the agents of the firm in matters relating to the partnership’s business. • The partners owe fiduciary duties to one another, which require a partner to put the interest of her partners above her own interests • The law does not allow a partner to make personal profit from the partnership property • Should have a partnership agreement
• If no agreement, the partnership act will dictate that you will split the profits equally. • Pg. 330 partnership agreement checklist • If one partner were to buy blackberries without the others knowing, all partners are bound because the law protects the wireless communication company • If she enters into a contact after they made the agreement that she would advise the other partners before but still does it, she is acting within her aparrant authority and the partners are still bound. Joint and several liability: individual and collective liability for a debt.
Each liable party is individually responsible for the entire debt as well as being collectively liable for the entire debt. How and why a partnership ends: • If entered into for a fixed term, by the expiration of the term • If entered into for a single venture or undertaking, by the termination of that venture or undertaking • By any partner giving notice to the others of her intention to dissolve the partnership • Following the death, insanity or bankruptcy of a partner Regulations: • No legal requirements for the establishment and conduct of a partnership.
The partner’s just begin their business activity. PROS AND CONS- PAGE 334 Two types of Partnerships: 1. Limited Partnership: • A partnership in which the liability of some partners is limited to their capital contribution • Used mostly as an investment device • Limited partners put money into a business in such sectors as health care or real estate in return for tax benefits and profits. • Must be in written form • Have substantially the same rights and powers as partners in ordinary partnerships, limited partners have more narrowly defined rights.
They have the right to share in profits and the right to have their contribution returned on dissolution but they cannot take part in the management of the partnership. 2. Limited Liability partnership: • A partnership in which the partners have unlimited liability for their own malpractice but limited liability for other partners malpractice The Corporation: • Most important form of business organization today Financial liability: • Distinct legal entity in law and is therefore capable of assuming its own obligations. A group of people can participate in the profits of the corporation as shareholders and manage its operations as directors.
o Shareholders: a person who has the ownership interest in a corporation o Director: a person elected by shareholders to manage a corporation o The corporation, not the shareholders are the debtor. This means if they were to go bankrupt, the bank could take all the assets of the corporation, not the shareholders. o If they go into a personal agreement with the bank, then their personal assets will be at risk o Breach of contract: if they supply defective computers, it is the corporation not the shareholders that are in breach of contract.
o The KEY characteristic of a corporation is that it provides limited liability to its shareholders. ? Limited liability: responsibility for obligations restricted to the amount of investment. Example: if the corp takes a bad turn, the shareholders loss is limited to what they paid to purchase shares in the corporation Profit sharing: • Profits of the corporation are paid through dividends. • That is, shareholders are paid a return on their investment in the corporation, but only if there is profit, and only if the directors declare a dividend o Dividend: a division of profits payable to shareholders.
Decision Making: • The corporation is managed by a board of directors, which in turn is elected by the shareholders. • Layers of decision making Sources of Capital: • It can borrow, or its directors can issue shares Taxation: • Corp pays its own taxes Transferability: • The fact that the corporation has a separate legal entity often allows for easy transference of an ownership interest represented by shares • Always more expensive to organize a corporation than a sole prop or partnership because there are legal bills and additional filing fees to pay.
PROS AND CONS PAGE 341 Business Arrangements: The Franchise: • An agreement whereby an owner of a trademark or trade name permits another to sell a product or service under that trademark or name. • It is a contractual arrangement between a manufacturer, wholesaler, or service organization and an independent business who buys the right to own and operate one or more nits of the franchise system. • Involves a contact between the franchiser and the franchisee. The Franchise Relationship: • The relationship a franchisor and a franchisee is one of contract.
It is governed by the general principals of the contract • Imposes on the parties a duty of good faith and fair dealing in the performance and enforcement of the franchise agreement. • PEI became the third, following the lead of Alberta and Ontario to enact franchise legislation Joint Venture: • A grouping of two or more business to undertake a particular project • Usually limited to a specific project or a specific period of time • Example: a steel fabricator may combine with a construction company to refurbish a nuclear plant.
• A joint venture can take many forms. o It can be a partnership in which case all legal consequences associated with a partnership apply o It can also be an equity joint venture- this is when the parties incorporate a separate corporation for the project and each holds share in the corporation Strategic Alliance: • An arrangement whereby two or more business agree to cooperate for some purpose • A cooperative arrangement among businesses. It is an arrangement that may involve joint research, technology sharing, or joint use of production.
• A Japanese electronics company has a strategic alliance with many companies to develop new products such as mobile telecommunication equipment and computer chips. Distributorship or Dealership: Distributorship: a contractual relationship where one business agrees to sell another’s product. • A product or service distributorship is very much like a franchise. • A contract is entered into where a manufacturer agrees to provide products and the distributor or dealer agrees to carry products or perform services by the manufacturer.
• Computer industries- instead of selling products yourself you can get a distributor or dealership to sell them for you. Sales Agency: • An agreement in which a manufacturer or distributor allows another to sell products on his behalf o Travel and insurance industries Product Liscencing: • An arrangement whereby the owner of a trademark or other proprietary right grants to another the right to manufacture or distribute products associated with the trademark or other proprietary right. CHAPTER 15- THE CORPORATE FORM: ORGANIZATIONAL MATTERS.
Corporation Defined: • Predominant business vehicle in commerce because it is a separate legal entity. • For this reason, it is able to remedy many of the shortcomings associated with the other business forms • The corporation alone is responsible for its debts and other liabilities Salomon Case: • Since Salomon the separate legal existence of the corporation has not been seriously challenged Stakeholders in the Corporation: • The corporation is an artificial entity whose activities are controlled entirely by human beings.
• These individuals or groups are often referred to as internal stakeholders of the corporation o Stakeholder: one who has an interest in the corporation o Have either a direct or indirect role in governing the corporation and determining its mission and how it will be achieved Shareholders on the other hand are those who invested in the corp by buying shares in return for a potential share of the companies’ profits and other benefits. They do not have the direct authority to manage the corp.
However they do have the power to elect the board of directors and therefore can have a strong influence on the direction of the corporation Pre-Incorporation Issues: • Whether to incorporate federally or provincially • What type of shares will be available and to whom • What to name the corporation Provincial and Federal Incorporation: • Federally incorporated companies have the right to carry on business in each province, where provincially incorporated corporations have the right to carry on business only in the province in which they are incorporated.
• For corporations that intend to operate in more than two provinces, federal incorporation may result in lower costs • For corporations that intend to operate in only one or two provinces, provincial incorporation would result in lower costs Shares and Shareholders: • You must decide on a share structure o Share Structure: the shares that a corporation is permitted to issue by its constitution o This entails deciding on the class or classes of shares that the corporation will be authorized to issue, what right and privileges attach to each class, and the number of each authorized for issuance.
• Classes of shares: only gives the owner those rights that specifically attach to the share, doesn’t give them right to any assets, or the right to control or mange its corp. • A corporation may simply have one type of share with all basic share holders rights attached to it. The share must include the right to: o Vote for the election of directors o Receive dividends declared by the directors o Share in the proceeds on dissolution of the corporation after the creditors have been paid Availability of Shares: o A corp may issues shares to the general public. This type of corp is usually referred to as a widely held or public corp.
o Widely Held Corporaiton: a corp whose shares are normally traded on a stock exchange o A corp that does this must be pursuant to the relevant securities legislation in those provinces in which the securities are issued or traded. o Securities’ Legislation: laws designed to regulate transactions involving shares and bonds of a corporation o Closely held legislation: a corporation that does not sell its shares to public o In Ontario, the Securities Act provides that a corporation qualifies as a private corporation if it has the following provisions in its documents: ?
A rest ruction of the transfer of shares ? A limit (with certain exceptions) on the number of shareholders in the corporation to no more than 50 ? A prohibition on any invitation to the public to subscribe for the corporation’s shares The Income Tax Act provides that a Canadian controlled private corporation is entitled to a lower tax rate on its first 400,000 of business income earned in Canada in its fiscal year. In Conviction of Lord Black Case- Pg. 360 Who May Own Shares:
o Shares are almost freely transferable, otherwise the shares will not be accepted for listing on a stock exchange o In closely held corporations where shares are generally issued to family and friends, the shareholders have a strong interest in having control over who the other shareholders are. o Therefore, it is common to have a provision in the incorporating documents that shares cannot be transferred without the agreement of the directors or a majority of the shareholders of the corporation.
o A right of first refusal- when this is in place, it means that the shareholder wishing to sell must first offer shares to the directors at the same price she has negotiated with the outsider. This gives the insider the last chance to acquire the shares for themselves instead of having to welcome an new investor to the company A Corporate Name: o The selection and use of a corporate name is subject to regulation by trademark law, tort law, and corporation law o The basic requirements are as follows:
o It must be distinctive different from other existing names in the same field o It must no cause confusion with any existing name or trademark o It must include a legal element- ex. Limited or LTD, the purpose of this word is to distinguish a corporation from a partnership and a sole prop and to signal to the public the fact of limited liability o It must not include any unacceptable terms (ex. It must not suggest a connection that does not exist, falsely describe the business or be obscene or scandalous) Must be careful because you can be sued for trademark infringement and the tort of passing off.
Must propose his name to the federal corporate registry for approval. NUANS Report: a document that shows the result of a search for business names Shelf Company: a company that does not engage in active business. It simply sits on the shelf until a firm’s client needs it. The Process of Incor