A DISCUSSION OF LEGAL ISSUES AFFECTING BIG CHAPTERS PREPARED FOR THE OFFICER LEADERSHIP TRAINING MATERIALS

Submitted by Aditya S. McDuffy, LL.M., Esq. Chair, National Legal Review Committee February 2001

TABLE OF CONTENTS

CHAPTER INTRODUCTION: SOURCES OF LAW HOW TO ANALYZE A LEGAL ISSUE CONTRACT LAW AGENCY LAW: DUTIES IMPOSED ON MEMBERS ACTING ON BEHALF OF THE CHAPTER AGENCY LAW: ACTUAL AND APPARENT AUTHORITY CONCLUSION ENDNOTES

PAGE 3 4 6

9 11 13 13

INTRODUCTION: SOURCES OF LAW One legal dictionary defines law as the legislative pronouncement of the rules which should guide ones actions in society; the aggregate of those rules and principles of conduct promulgated by the legislative authority [court decisions], or established by local custom.1 The law stems from a number of sources including the U.S. Constitution, federal statutes, state constitutions, state statutes, local ordinances, state and federal court decisions, and rulings of federal, state and local agencies. Laws vary from state to state and at times, from community to community.

Because BIG chapters throughout the country are very active and participate in unlimited community, professional and cultural activities, it is impossible to define all of the laws that could potentially affect BIG members. For this reason, this document provides general background information that BIG members can use in conducting the day-to-day business of their chapters. This document does not replace the need for legal counsel, and does not contain enough information to make someone an expert in any legal matter.

This document provides a general framework for analyzing legal issues. It then sets forth basic principles of contract and agency law that are applicable in most states.

HOW TO ANALYZE A LEGAL ISSUE

In order to analyze a legal issue one must identify facts underlying the issue, determine the potential questions of law raised by those facts, identify the applicable rules of law, analyze the application of the law to the facts, and formulate a conclusion as to how the law will be applied. This process is referred to as FIRAC Facts, Issues, Rules, Analysis and Conclusion.

Whenever a legal issue arises, one must first gather all of the relevant facts pertaining to the situation. BIG members should investigate and document where, when, how and why a situation occurred, in addition to examining who was involved and exactly what happened.

After the facts are gathered, one can identify potential questions of law raised by the facts. Depending upon the situation, this phase can be very difficult. Attorneys or persons with specialized knowledge can often identify potential problems that are not readily apparent to others.

Research must be conducted to locate applicable laws. This phase may involve researching ordinances, regulations or statutes. It may also involve studying case law and/or the history underlying rules and regulations.

Sometimes the law in a state doesnt address a specific issue. In this instance, the law of other states may be consulted. Secondary research materials and legal abstracts can be used as persuasive evidence that the law should be interpreted in a particular manner. Also, arguments can be made that current law should be changed.

When analyzing legal issues, one should examine how courts have applied the law to other cases with similar facts. Different courts sometimes apply the same law in different ways. The outcome of cases varies based on the facts of each case. It is important to remember that reasonable minds can drastically differ on any given situation. In a legal matter it is the analysis of the judge or jury analyzing a case that is most important.

Analyzing legal issues is a complex process. Laws change from state to state. The process for adjudicating legal issues varies from state to state. However, FIRAC is a method for analyzing legal issues that can be universally applied.

CONTRACT LAW

A contract is a promise, or set of promises, for breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.2 It is a mutually binding agreement. In order to form a contract there must be mutual assent such as a valid offer and acceptance between parties. The parties must have the legal capacity to enter a contract, and adequate consideration must exist. Furthermore, the subject matter of the contract must be legal.

The general rule is that minors and insane persons cannot enter contracts. There are also occasions when intoxicated persons do not have the legal capacity to enter contracts.

Consideration is defined as follows: [T]he inducement to a contract, something of value given in return for a performance or a promise of performance by another, for the purpose of forming a contract; one element of a contract that is generally required to make a promise binding and to make the agreement of the parties enforceable as a contract. To find consideration there must be a performance or return promise which has been bargained for by the parties Consideration represents the element of bargaining to indicate that each party agrees to surrender something in return for what it is to receive. It is consideration which distinguishes a contract from a mere gift.3

Moral obligations and agreements to perform duties for which one has a preexisting duty to perform do not constitute consideration.

A contract may be unenforceable as a result of mistake, fraud, duress, unconscionability or undue influence. Mutual mistake on the part of all parties may invalidate a contract when it involves a material or major aspect of the contract. Mistake regarding a trivial or insignificant matter, or mistake by one of the parties, will not invalidate a contract. Fraud occurs when one of the parties intentionally misrepresents a material fact with intent to defraud, and the other party justifiably relies on that misrepresentation. Duress occurs when someone is coerced into entering a contract. When one party has an advantage over the other party and gross unfairness is used to get the other party to enter the contract, unconscionability occurs. Undue influence occurs when a person in a close or trust relationship with another takes advantage of the other person.

Most states have enacted a Statute of Frauds. The Statute of Frauds requires written evidence of certain types of contracts. Usually the Statute of Frauds will apply to contracts for the sale of land or interests in land, contracts that will not be performed in one year, a contract for the sale of goods for $500 or more, a promise to pay the debt of another person, a promise made in consideration of marriage, and a promise by the executor or administrator of an estate to pay a debt of the estate out of his own funds. BIG members should try to be aware of state statutes that impose requirements for contracts.

BIG members should also be aware of the Parole Evidence Rule. The Parole Evidence Rule provides that once an agreement has been reduced to

writing, outside evidence of the parties intent generated prior to or contemporaneously with the agreement, cannot be used to contradict the written agreement. For this reason, BIG members should make sure that written contracts include all terms and conditions.

Remember the slogan, RIF, Reading Is Fundamental? When it comes to contracts reading is fundamental. Contracts should be read carefully more than once by more than one person if possible. Members should understand every term and condition included in a contract before signing. Furthermore, all material or significant terms and conditions should be included in the contract.

Contract law varies from state to state. This document does not begin to touch upon the many detailed aspects of contract law. It is designed only to provide a beginning framework for understanding contract law issues.

AGENCY LAW DUTIES IMPOSED ON MEMBERS ACTING ON BEHALF OF THE CHAPTER

An agency is a legal relationship whereby one person acts for another.4 The person that acts for another is the agent, and the person from whom the agent gets authority is the principal.5 Agency can be created by contract (express or implied, oral or written), by ratification (assent is given either to an act done by someone who had no previous authority to act or to an act that exceeded the authority granted to an agent), by estoppel (a person allows another to act for him/her to such an extent that a third party reasonably believes that an agency relationship exists), or necessity (a person acts for another in an emergency situation without express authority to do so).6 As a member of BIG there will probably be situations where you act as an agent for your chapter, region or the National Organization.

When a chapter member acts on behalf of the chapter, he is acting as an agent with the chapter as the principal. For example, if a chapter plans a luncheon and assigns a member to acquire a location for the luncheon, the member assigned to acquiring the location is acting as an agent for the chapter when he contacts hotels and restaurants during his search for a location.

Unless modified by contract, agents generally owe the following duties to their principals:

Duty to obey instructions provided by the principal; Duty to act with skill; Duty of loyalty; Duty to protect confidential information; Duty to notify and give information; and Duty to account for monies spent.

As a fiduciary respecting matters within the scope of the agency the agent owes a duty of good faith and candor in affairs connected with the undertaking, including the duty to disclose to the principal all matters coming to [the agents] notice or knowledge concerning the subject of the agency which it is material for the principal to know for his protection or guidance.7 [D]uty to give information arises when agent has notice of facts which, in view of his relations with the principal, he should know may affect the desires of his principal as to his own conduct or the conduct of the principal.8

The duty of loyalty requires the agent to act in the best interest of the principal. If the agents acts on behalf of the principal affect the agents interests, the agent must disclose those conflicts of interest to the principal. Furthermore, the agent cannot take advantage of opportunities directed to the principal, without first disclosing those opportunities to the principal, and awaiting the principals rejection of those opportunities.

Agency law varies from state to state. This document does not begin to touch upon the many detailed aspects of agency law. It is designed only to provide a beginning framework for understanding agency law issues.

10

AGENCY LAW ACTUAL AND APPARENT AUTHORITY

An agents breach of his fiduciary duties can result in liability to the principal.9 A BIG member acting on behalf of his chapter can be held liable to that chapter for breaching his duties as an agent of the chapter.

Persons that act as agents for BIG chapters should be aware of the potential to create third liability for which they may be responsible. This concept is important in that if a BIG chapter becomes liable to a third party because of the improper acts of its agent, the BIG chapter may bring action against the agent.

Actual authority can be express or implied.10 Express authority is explicitly authorized by chapter consensus or provisions in the chapter by-laws. Implied authority refers to authority that naturally arises from express authority. For example, if a chapter president receives express authority to write a letter on behalf of the BIG chapter, the presidents access to the chapter letterhead would be based on implied authority. Although there wasnt express authority to access the letterhead, access to the letterhead is needed in order to take the action for which express authority was given.

Apparent authority is defined as follows: The D.C. Court of Appeals [footnote omitted] has held that apparent authority arises when a principal places an agent in a

11

position which causes a third person to reasonably believe that the principal consented to the exercise of authority the agent purports to hold [t]his falls short of an overt, affirmative representation by a principal. [A]pparent authority exists only to the extent that it is reasonable for the third person dealing with the agent to believe that the agent is authorized and to believe the agent to be authorized. To determine the existence of apparent authority, consideration should be given to the actual authority of the agent, the usual or normal conduct of the agent in the performance of his or her duties, previous dealings between the agent and the party asserting apparent authority, any declarations or representations allegedly made by the agent, and lastly the customary practice of other agents similar situated. A third party, however, cannot avail itself [of apparent authority] if it actually knew that the agent purporting to represent the principal lacked actual authority. (citations omitted)11

A third party may be able to hold a chapter liable for the unauthorized acts of a member, if that member had apparent authority to act for the chapter. The chapter will be held responsible for the unauthorized acts, although the chapter then has its own cause of action against the member.

A chapter can excuse a member acting as an agent for overstepping his authority by ratifying or approving his acts. In order for an unauthorized act to be ratified, the principle must have knowledge of the act. There must be a clear intent on the part of the principle to ratify the unauthorized act.

12

CONCLUSION Chapters are likely to encounter contract and agency law issues. Although this document does not begin to explore the vast complexities of the law as it varies throughout various jurisdictions, this document will hopefully assist members in establishing a basic framework for understanding these types of issues.

1 2

Gifis, Steven, Law Dictionary 4th ed. 1996. Gifis, Steven, Law Dictionary 4th ed. 1996. 3 Gifis, Steven, Law Dictionary 4th ed. 1996. 4 Emerson, Robert W. and Hardwicke, John W., Business Law, p. 247 (1997). 5 See id. 6 Emerson at 251-252. 7 Aronoff v. Lenkin Co., 618 A.2d 669, 687 (D.C. App. 1992). 8 Id. 9 Id. 10 See id. 11 Columbia Hosp. For Women Found at 7-8.

13