Chapter 9 – Third Parties/Secured Transactions

Businesses as Parties

• Sole Proprietorship: no distinction between business and owner.
• Partnership: partner may or may not have authority.
• Limited Partnership: limited partners lack authority.
• Corporation: an “entity,” check authority.
• LLC: check authority
• Check authority through Secretary of State

Agency

• Agency involves three parties:  the principal, the agent, and the outside party.
• The agent is the mechanism, but the contract forms between the principal and the outsider.

Authority

• The principal gives the agent authority to act in one of several ways:
  • Express authority:  authority given by words or conduct
  • Implied authority: authority not expressed in writing or spoken words; arises from special circumstances
  • Operation of Law:  rights and obligations are implied by law, for example, and emergency situation
  • Ratification:  acceptance of acts by agent after they occur
  • Apparent authority:  principal’s dealings with third parties have given them reason to believe that an agent has authority

Principal’s Duties to the Agent

• To cooperate
• To indemnify (reimburse)
• To communicate
• To comply

Agent’s Duties to the Principal

• To obey lawful directions
• To be able to account for the principal’s money in the agent’s care
• To exercise reasonable care
• To keep the principal fully informed
• Loyalty

Third-Party Beneficiary

• Not a party to a contract, but benefits from contract

Assignment and Delegation

• Assignment is a transfer of property or rights
• Delegation is assignment of obligations

Mortgage, Collateral, and Lien

• Mortgage:  security interest in real estate
• Collateral:  assets pledged by a borrower to secure a loan or other credit, and subject to seizure in the event of default
• Lien: an encumbrance against property, typically to secure payment of a debt

Novation

• Novation is when a new party takes over rights and duties, creating a new contract.

Joint and Several Liability

• Co-obligors can be sued together or any one can be liable for the entire obligation.

Attachment

• Attachment is the creation of an enforceable security interests
• Attachment occurs when the parties make a security agreement, if:
  • The lender (the secured party) has given something of value, and
  • The debtor has some legal rights in the property serving as collateral, and
  • The debtor authenticates a document describing the collateral or the lender takes possession of the property

Review Materials for Chapter 9

• Outsiders/people outside of the contract – may have rights.
  • They can serve as agents; beneficiaries; assignment; outsider may guarantee the performance
• Who are parties to the contract: am I signing in my individual capacity or as president of the company
• Business entity – an artificial person
• Determine the type of legal entity to determine whether the party is the business or the individual
• Sole prop – one-owner business; not a true entity
• Employee of a sole prop business may not bind the sole prop
• Partnership – has not been traditionally regarded as an entity with liability and rights apart form its owners; each partner is considered as an agent for the promotion of partnership business. 
• In some states, statement of authority is filed to determine the contract authority of the partners. If there is none, require all partners to sign.
• Limited Partnership – consist of partners with limited authority to make decisions or bind the business and a general partner with authority to bind the business consistent with the terms of the limited partnership.  General partners may be ca corporation.
• Corporation – regarded as an entity. Owned by shareholders but do not take control of the business; shareholders elect board of directors -focused on big pictures not daily activities. Corporate officers has the authority to enter into contracts
• Limited liability company – maybe managed directly by the members or through a board of managers
• Agency – requires consent of the principal and agent.  Not necessarily to be in writing; when covered by statute of frauds. 
• Agent – not always an employee. Need not be compensated; main characteristic is control exercised by the principal over the agent.
• Agency by operation of law – in case a store clerk orders repair of a store when it was hit by a car
• Ratification – when principal starts to use a machine bought by an agent with no authority to buy
• Apparent authority – when agent repeatedly orders and principle pays repeatedly never questioning it for several times
• Agent may be held directly liable if third parties are not aware of such authority. However the principle can still be held liable by the agent.
• Principal’s duties to agent: to cooperate; to indemnify; to communicate and comply with the contract entered into by the agent
• Agents’ duties ;  to obey; account for the principal’s money; to keep the principal fully informed ; to exercise reasonable care;
• Termination of agency – passage of the agreed time; completion of the purpose; inability of one of the parties to perform; wrongful end like termination but subject to liability
• Agency coupled with an interest – principle may not terminate the agency.  Agent has financial stake
• Implied Authority – Authority not expressed in writing or spoken words; arises from circumstances
• Collateral – Assets pledged by a borrower to secure a loan or other credit, and subject to seizure in the event of default
• Springing Power of Attorney – Comes into effect at a later date
• Donee Beneficiary – A third-party beneficiary, intended to benefit from contract performance, as a gift
• Being a party to the contract – Privity
• Foreclose – Take property to satisfy debt
• Gratuitous – Done without compensation; a gift
• Equal Dignity Rule – Requirement that agency contract be written, if contract to be established by agent must be written
• Agent – One who is authorized to act for or in place of another; representative
• Instruments – Formal written documents
• Purchase Money Security Interest – Lien against property to secure a loan used to acquire that property
• Apparent Authority – Principal’s dealings with third parties have given third parties reason to believe that an agent has authority
• Indemnification clause – One party agrees to compensate the other for losses arising from the contract; see Hold Harmless Clause
• Assignor – One who transfers rights to another
• Good Faith Buyer in the Course of Ordinary Business – A buyer who acts honestly, gives value, and has no notice of other claims
• Chattel – Moveable items, also called Personal Property
• Perfect – To register or record an instrument so that the public is on notice of its terms
• Bulk Sale – Sale of major part of inventory, not in ordinary course of business
• Attachment – Creation of an enforceable security interest
• Express Authority – Authority given by words or conduct
• Inventory – Goods held for sale or lease
• Creditor Beneficiary – A third-party beneficiary, to whom a contract party is indebted, and who is intended to benefit from the performance of a contract
• Joint Several Liability – Co-obligors can be sued together or any one can be liable for the entire obligation
• Securities – Evidence of investment in a common scheme
• Assignment – Transfer of interest in property or some right (contractual entitlement) to another
• Novation – New contract, involving new parties; cancels earlier contract
• Principal – Party for whom agent acts
• Consumer Goods – Items used primarily for personal, family, or household purposes
• Mortgage – Security interest in real estate
• Partially Disclosed Principal – Existence of agency is known, identity of principal is not known
• Durable Power of Attorney – Creates an agency relationship that remains in effect during the grantor’s incompetency
• Lien – An encumbrance against property, typically to secure payment of a debt
• Estop – To bar assertion of a claim or right that contradicts what has been said or done before
• Power of attorney – Document creating an agency
• Operation of Law – Events, including death, insanity, destruction of subject matter, and illegality, may terminate an offer
• Ratification – Acceptance of acts by agent after they occur
• Agency Coupled with an Interest – Agent has a financial stake in the transaction
• Third Party Beneficiary  – Not a party to a contract, but benefits from contract
• Assignee – One to whom rights are transferred by another
• Incidental Beneficiary – A third-party beneficiary, not intended to benefit from contract, does not acquire rights under contract
• Real Estate – Also called real property or realty, consists of land and buildings
• Fiduciary Relationship – Relationship in which one person is under a duty to act for the benefit of the other on matters within the scope of the relationship
• Delegation – Pass contractual obligations to another