Week 7: Chapters 15, 16, 17 Flashcards
Principle definition (of an agency relationship)
A person on whose behalf the agent acts
Agent Definition
A person appointed to act for another, usually in contract matters
What is the nature of the agency relationship?
Principal -> Agent -> 3rd party
Acts of the agent bind the principal
Agent acts for the principal in contractual relations with 3rd parties, creating a contract between the principal and the 3rd party
Does a real estate agent meet the definition of an agent?
No
When an agent is acting within their scope of authority it binds the principal and 3rd party
Real estate agents actions don’t do this
Agency by express agreement:
An agency agreement established by an express oral or written contract
Duties of the principal in an agency relationship
Act in good faith
Principal to pay agent fee fixed or reasonable amount
Principal obligated to indemnify (repay) agent for reasonable expenses
At common law, agents paid immediately on performance
Duties of the Agent in an agency relationship
Act in utmost good faith of principle
Obey all lawful instructions
Keep confidential information given by principal
Keep in contact with principal
If a professional, they must adhere to profession’s standards
- Breach of standard means the agent is liable to principal
if agent receives money on behalf of the principle they must keep it in a seperate trust account
What is Agency by conduct?
An agency relationship inferred from the actions of the principal
The impression allows the “agent” to contract with third party, principal cannot then deny contract
Agency by estoppel
When a person permits affairs to occur that result in an agent entering a contract with a 3rd party based on the representation that the person was actually acting as agent
can’t be later denied if the 3rd party relies on that representation
Agent has apparent authority
What happens when the principle fails to notify termination of agency to 3rd parties
If principal does not notify third parties regarding limits on authority or liability, breaches of authority will render agent liable for damages to principal
Agency by operation of law
Agency that may arise in certain circumstances out of necessity where it isn’t possible to obtain the authority of the principle to act
Cases of emergency - possible to obtain authority from principal
eg, ship-master - preservation of ship and cargo, where can’t contact owner
Ratification by the principal to 3rd party in agency
Where agent had no actual authority but now the principal may wish to ratify, to bind third party
Must ratify within a reasonable time
Can be express or implied
Failure to promptly repudiate where agent exceeded authority may imply acceptance and bind the principal
Ratification effective from the time agent enters agreement with third party
Disclosed Agency: (how agent signs contract, rights of agent in contract)
agent discloses acting for principal, binds principal and third party
Signs principal’s name and affix own name “as agent” of
Disclosure of agency means third party has no remedies against agent
An agent has no rights to benefit of principal contract
Liabilities of the Agent: Think about Authority
- When an agent does not have the authority claimed, either actual or apparent, sthey may be sued by the third party for breach of “warranty of authority”
- An agent who intentionally misleads the third party into believing that they have authority, when they do not, may be sued by the third party for the tort of deceit
- Agents who inadvertently exceed their authority can be sued for the tort of negligence
Liability of the Principal for the Agent in Tort
The principal is liable for tortious acts of agent if done when carrying out duties of agency agreement
Termination of the Agency Relationship (why/how does this happen)
Can be express or implied
Must have notice
If the agency agreement is for a particular act, agency automatically expires after act
Incapacity (death, bankruptcy, etc.) can terminate (except where minor is concerned)
Bankruptcy of the principle in an agency relationship
This terminates agency agreement
If the agent contracts after bankruptcy of its principal, liability of agent to 3rd party for breach of warranty of authority
For ongoing agency relationships, principal must inform 3rd parties of termination of agency agreement
Failure to inform creates liability on principal as 3rd party can rely on apparent authority of agent
Sole proprietorship
A business where the sole owner is responsible for the management, debts, and liabilities of the business
Easy to start
Partnership
A legal relationship between 2 or more people for the purpose of carrying out a profitable business
Easier to raise capital
Partnership vs Joint Ownership
Partnership is a contractual relationship
Partnerships as personal relationships, not freely alienable, whereas joint ownership can be
Partners are agent of other partners, co-owners are not
Partners share in assets can only be determined by liquidation (unless agreement provides otherwise)
Partnership by estoppel
When someone holds themselves out to be partner to third parties and the real partners don’t refute, the relationship cannot be denied
The person becomes “liable as a partner” under the Act
Liability of partners (3 types)
Liability through agency:
Every partner has authority to bind the firm (for activities in course of business)
Vicarious liability:
- whole firm is liable for tortious acts committed in regular business
Unlimited liability:
- personal and business assets are exposed in liability
Jointly and Severally liable
Under joint liability, all parties must be sued together; partners may face joint liability for debts of the firm
Under several liability, each partner can be sued separately
Rights and duties between partners as defined by the partnership act
If not otherwise stated in the partnership agreement:
all property brought into partnership by partners is partnership property, and must be used to the benefit of the partnership
Land brought into partnership is presumed to be in trust for benefit of partnership unless established otherwise
Can only expel partner by dissolution and formation of new partnership
Partners are in a contract of utmost good faith
The Partnerships Act sets out a number of other circumstances that, though they involve the sharing of income, by themselves will not establish a partnership:
- Owning property in common, even when it is rented out for profit
- When a debt is repaid by the creditor taking a share of the debtor’s profits
- When the payment of an employee is based on a share of sales or profits, such as commission selling or profit-sharing schemes
- When the beneficiary of a deceased partner receives the deceased partner’s share of the profits
- When a loan is made in relation to a business and payment of interest varies with the profit
- When a business is sold and the payment of the goodwill portion varies with the profitability of the business
For what reasons does the dissolution of a partnership occur?
- Usually a partnership is easy to dissolve, requiring only notice to that effect by one of the partners
- Subject to the partnership agreement, a partnership is dissolved by the death or insolvency of any partner
- A partnership that has been entered into for a fixed term is dissolved by the expiration of that term
- A partnership that is entered into for a single venture or undertaking is dissolved by the termination of that venture or undertaking
- A partnership is automatically dissolved if the business engaged in by the partnership becomes illegal
A partner can apply to the court to dissolve the partnership if any of the following factors are present:
- One of the partners has become mentally incompetent or otherwise incapable of performing partnership responsibilities
- The conduct of one partner is prejudicial to the partnership relationship, or the partner is otherwise in breach of the partnership agreement.
- It is clear that the partnership business can be carried on only at a loss.
- It is just and equitable that the partnership be dissolved.
Distribution of Assets and Liabilities upon partnership dissolution
- Subject to the partnership agreement, when dissolving a partnership, the debts must be paid first out of profits and, if they are insufficient, out of the capital the partners originally invested
- If there is still not enough money to pay the debts, the creditors can then turn to the partners themselves, who are liable in the proportion in which they were entitled to share profits
- All partners are liable to pay the creditors no matter what the partnership agreement says
- they must also inform the public of the dissolution
Limited Partnership
A partnership in which some partners are limited, in that their liability is only the amount of money they have invested
Every limited partnership needs one or more general partner who has unlimited liability
Limited Partner
Limited liability, can’t actively manage the business or be named in the company name
Information required to file for a limited partnership
Name of the firm, nature of the business, names of general and limited partners, capital contributed by limited partners, place of business, date of formation, term of partnership
Changes require re-filing to take effect
To provide creditors with enough info to decide if they want to do business with firm - provide enough information to enable creditors to sue
Limited Liability Partnership
- A creature of statute
- NOTE: Limited Partnership is different from a Limited Liability Partnership
A form of partnership in which only the partner responsible for the loss faces unlimited liability with regards to negligence only
Also, each partner still personally liable for debts of the firm
Characteristics of a corporation
- A separate legal entity from those who it’s made up of
- Has limited liability meaning shareholders are shielded from liability for the corporation’s debts; shareholders can only lose their initial investment
- legally must operate to make a profit
- Authorized agents of the corp. (directors) have authority to bind corp. to contracts
Shareholder in a corporation
A person who holds a share interest in a corp.
- part owner
Director of a corporation
Under corporate law, a person elected by the shareholder of the corp to manage its affairs
Officer of a corporation
A person elected or appointed by the corp.’s directors to fill a particular role
obliged to report info to shareholders
When major changes in the corp. occur they must hold a shareholder vote
Control of the corporation
directors manage, shareholders generally have no ability to manage or to bind the corporation, only officers delegated by directors can bind corporation in contract
Limited liability of shareholders of a corp.
Shareholder losses are limited to their investment in the corporation
Creditors can only seize the corp.’s assets
Transfer of interest in a corporation
Corporations are free to sell shares to the public
Identity of the shareholder doesn’t matter since they aren’t liable for debts
As long as payment is given for shares issued there is no other action that must be taken by the shareholder
Term of a corporation
Company can live forever
Or can be wound up or dissolved, does not depend on the health of shareholders.
Methods of Incorporation: Royal Charter
Historically the only way to incorporate
Permission granted by Crown to incorporate for specific purpose
no longer used
Methods of Incorporation: Letters Patent
A government document granted by a representative of the Crown that creates a corporation as a legal entity
The corporation may have limited abilities
No longer used
Methods of Incorporation: Special Act Corporations
A corporation created by an act of parliament for a specific legislative purpose
Expressly limited to the purpose they were created for
General Incorporation Status
A form of incorporation whereby a corporation may be created by filing specific information required by the statute
Must file a memorandum of association and articles of incorporation
These corporations must adhere to the powers set out in the statue and memorandum
Memorandum of association
The constitution of a corporation in a registration jurisdiction
Articles of Association
Internal regulations setting out the procedures for governing a corporation in a registration jurisdiction
Indoor Management Rule
A party dealing with a corporation may assume that the officers have the valid and express authority to bind the corporation
Protects 3rd parties who may not have info regarding the internal management of corp.
Corporate Securities: Common Shares
The usual form of shares
have voting rights
These are the shareholders who will elect directors of the corp.
Corporate securities: Preferred Shares
Shares with special rights attached to them like first dividend rights
Debt Securities: Fixed Charge
attaches to fixed assets of a corp as security for debt with a 3rd party
Debt Securities: Floating Charge
Various assets of the corp. like inventory or AR are pledged as security
The corp. is free to use these assets regularly, but if they default the debt crystallizes on the assets
Debt Securities: Debentures
May or may not have specific assets pledged
Lowest debt in priority
information about directors of a corporation (how many directors? dividends?)
- Every corp must have a minimum 1 director
- They have the exclusive right to declare dividends
- Shareholders elect the directors of the corp.
Director’s Fiduciary duty
The director must act in utmost good faith for the corporation, if they fail to do this they may be personally liable
They have the duty to exercise duties of office with care and skill of a reasonably prudent person in the circumstances
The director cannot use corp.’s reputation for personal profit, nor can they make profit at corp.’s expense
Actions of the director can’t be illegal, fraudulent, or oppressive to shareholders
Doctrine of Corporate Opportunity
A director is prohibited from using corporate information for personal benefit that will be detrimental to the corp.
Applies to things like property and insider trading
Director’s Personal Liability
Directors can be held liable for a corporate loss if they committed the corporation to an act of ultra vires (out of its scope)
Also personally liable if they sell shares at a discount
Director’s defense of Due diligence
If the director exercised the care and skill that a reasonable person would exercise in comparable circumstances they can raise a defense
Right of Minority Shareholders to take action
Minority has ability to take action against majority on behalf of corporation where:
- Act is ultra vires
- Affects rights of minority shareholders
- Corp failed to comply with procedural requirements of
approval
- Act constitutes fraud on minority shareholders
The Canada Business Corporations Act
Provides relief to shareholders who believe the corp. has been injured by the directors
May apply if:
- Reasonable notice given to directors of intention to go to
court + directors refused to act
- in best interest of corp to act
- Complainant acting in good faith
Court can allow the action, and can also require corp to pay the shareholder complainant’s legal fees
Dissolution of a corporation
- Dissolution can take place either voluntarily or involuntarily, and the procedure can be induced internally, by the directors or shareholders, or externally, by the courts or creditors
- Bankruptcy
- One of the most common ways for corporations, especially small, closely held corporations, to come to an end is for the principals simply to neglect to file the annual return
Case Example:
Salomon v. A. Salomon & Co. Ltd.
- The leading case on the corporation as a seperate entity
- Salomon was initially a sole proprietorship
- He then created a corporation called Salomon & Co. Ltd.
- He sold the sole proprietorship to the corporation, and personally loaned the corp. money as a priority creditor so that it could buy the business
- When his corporation failed, other creditors challenged his priority status as a creditor
- The courts held that he is not the company.
