Agency and Partnership

Question 1

Agency

Answer 1

Fiduciary relationship that exists between agent and principal where agent acts on principal’s behalf and is subject to principal’s control

Question 2

Agency relationship is created when:

Answer 2

1) Parties voluntarily consent (express/implied) to enter agency relationship
AND
2) Agent is subject to principal’s control [supervision is sufficient; amt of ctrl may be ltd]

Question 3

Agency relationship terminates by the parties if:

Answer 3

1) Agent/princ manifests to other the desire to cease the agency relationship [termination effective upon notice]
2) Express terms of the agency expire
OR
3) Purpose of agency relationship is fulfilled

Question 4

Agency relationship terminates by operation of law if:

Answer 4

1) Agent/princ dies [some jx require notice]
2) agent/princ loses capacity [some jx require notice]
OR
3) Agent materially breaches a fiduciary duty owed to the principal

Question 5

Authority of agent to bind principal

Answer 5

An agent may bind a principal to a K if the agent is acting within his actual or apparent authority OR inherent agency power.

Once a principal is validly bound to a K by his agent, the principal is liable under the terms of the K

Question 6

An agent acts with actual authority when:

Answer 6

at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent to act

Question 7

Actual express authority

Answer 7

Principal directs agent to engage in the precise task in question

Question 8

Actual implied authority

Answer 8

agent believes, based on a reasonable interpretation of the principal’s words or conduct, that the principal wishes agent to act on principal’s behalf

Question 9

Incidental authority

Answer 9

Agent’s authority to conduct a transaction includes the authority to engage in actions that are incidental to it, usually accompany it, or are reasonably necessary to accomplish it

EX: P tells A “sell my car” – A has authority to take actions that are reasonably necessary to sell the car

Question 10

Apparent authority

Answer 10

1) Person dealing with agent has a reasonable belief in agent’s authority
AND
2) The belief was generated by some act or neglect on the part of the principal

Question 11

Apparent authority does NOT exist when:

Answer 11

third party has knowledge that agent does not have actual authority

Question 12

Inherent agency power

Answer 12

Allows courts to hold principal liable for damages to third parties even when the principal’s agent acted WITHOUT actual or apparent authority.

Applied when:
1) an agency relationship exists
AND
2) totality of the circumstances weighs against forcing the third party to absorb all of the damages

Question 13

Undisclosed principals

Answer 13

Agent is liable if principal is undisclosed - third party does not know agent is acting on someone else’s behalf)

NOTE: Agent for undisclosed principal CANNOT have apparent authority because the principal cannot hold the agent out as having authority to a third party if the third party is unaware of the principal

Question 14

Partially Disclosed Principal

Question 15

Respondeat Superior

Answer 15

An employer (principal) may be liable for torts committed by an employee (agent) if:
1) employer-employee relationship exists (NOT independent contractor)
AND
2) employee’s commission of the tort occurs within the scope of employment

Question 16

Employer-employee relationship

Answer 16

Determined by extent of control principal exercises over details of agent’s work

Question 17

Scope of employment

Answer 17

Activity is within scope of employment when employee’s conduct is of the same general nature as that authorized, or incidental to the conduct authorized by the employer.
FACTORS:
Whether employee’s conduct was:
1) function for which employee was hired to perform
2) within employer’s authorized time and space limits
3) conducted to serve the employer
AND
4) foreseeable to employer

Question 18

Detour vs Frolic

Answer 18

Employer remains liable during employee’s detour (minor deviation from scope of employment), even if detour is mainly for employee’s own personal reasons

Employer does NOT remain liable during employee’s frolic (major deviation from scope of employment)

Question 19

Intentional torts of employees

Answer 19

Generally, employers are NOT liable for intentional torts of employees UNLESS:
1) intentional tort was authorized by the employer
OR
2) force is within the scope of employment in the employee’s work (security guard)

Question 20

Independent contractor

Answer 20

A person who contracts with another to do something for him but who is not controlled by the other nor subject to the other’s right to control with respect to his physical conduct in the performance of the undertaking

Question 21

Factors to determine independent contractor vs employee

Answer 21

KEY FACTOR: Principal’s amount of control
Other relevant factors:
1) nature of the work
2) skill required in particular occupation
3) who supplies the equipment/tools to perform the work
4) method of payment
5) length of employment
6) how the parties characterize the transaction

Question 22

When may a principal be liable in tort for the unauthorized conduct of an independent contractor?

Answer 22

Generally not, but may be liable when independent contractor:
1) makes misrepresentations for the benefit of the principal
2) is engaged in abnormally dangerous activities
OR
3) acts with apparent authority

Question 23

Ratification

Answer 23

Principal can ratify agent’s unauthorized conduct, thereby making principal liable to third parties for contracts entered into by the agent if:
1) principal had knowledge of material facts (K terms)
2) agent purported to act on the principal’s behalf
AND
3) principal affirmed the agent’s conduct by manifesting an intent to treat the agent’s conduct as authorized (accepting the benefits of the agent’s originally unauthorized action)

Question 24

General Partnership

Answer 24

Type of partnership with NO limited personal liability [general partners remain personally, jointly, and severally liable for ALL debts of the partnership]

Question 25

General Partnership is formed when:

Answer 25

1) two or more persons
2) associate as co-owners
3) to carry on business for profit

Question 26

Factors for determining if general partnership exists

Answer 26

1) sharing of profits
[person who receives share of business profits is presumed to be partner unless party receives profits as payment of debt, rent, wages, or for services rendered]
2) joint ownership
[joint ownership of property tends to show that the parties associated as co-owners; does not necessarily establish a partnership in and of itself]
3) sharing of control
[sharing of control, capital investment, and labor tends to show that the parties associated as co-owners; does not necessarily establish a partnership in and of itself]

Question 27

Limited Partnership

Answer 27

Consists of one or more general partners and one or more limited partners.

• General partners: remain personally, jointly, and severally liable for ALL debts of ltd partnership
• Limited partners: personally liable for debts ONLY to the extent of their investment in the ltd partnership

Question 28

Roles of partners in Limited Partnership

Answer 28

• General partners: manage and control day-to-day operations of the business
• Limited partners: generally have no say in such matters - generally passive investors and only have voting rights in extraordinary situations [sale of partnership, amending partnership, etc]

Question 29

Formation of Limited Partnership

Answer 29

Formed when a written certificate of limited partnership is executed and filed with secretary of state.

Certificate must substantially comply with requirements:

1. signature of each general partner
2. name of ltd partnership AND
3. name, street, and mailing address of:
   a. each general partner
   b. initial designated office AND
   c. initial agent for service of process

NOTE: If parties intend to form ltd partnership but fail to substantially comply with requirements, they may have instead formed another business association (general partnership)

Question 30

Limited Liability Partnership

Answer 30

Limits a partner’s potential liability for professional malpractice that is committed by a another partner

Question 31

Partner in an LLP remains liable for professional malpractice if he:

Answer 31

1. committed the malpractice himself or was directly involved in the activity that resulted in the malpractice OR
2. supervised or directed the person who committed the malpractice

Question 32

Any partnership may become an LLP upon the:

Answer 32

1. approval of the partners by vote AND
2. filing a statement of qualification with the secretary of state

NOTE: Filing statement of qualification does not create a new partnership - the LLC continues to be the same entity that existed prior to the filing

Question 33

Statement of qualification for LLC must contain:

Answer 33

1. name and address of partnership and agent for service of process
2. statement that the partnership elects to be an LLP AND
3. deferred effective date, if any

Question 34

Annual reports

Answer 34

If LLP fails to file annual report with appropriate state office or fails to pay annual required filing fee, state may revoke statement of qualification. A partnership whose statement of qualification was revoked may apply to the state for reinstatement within 2 years after the effective date of revocation

Question 35

Tort liability of partnership

Answer 35

General partnership, ltd partnership, and LLC are liable for wrongful acts or omissions of ANY partner acting:

1. within the ordinary course of the partnership’s business OR
2. within the authority of all other partners

Question 36

Tort liability of general partners

Answer 36

jointly and severally liable for all obligations of the partnership arising from any wrongful act or omission of any partner acting:

1. within the ordinary course of the partnership’s business OR
2. within authority of all other partners

Question 37

Tort liability of limited partners

Answer 37

NOT personally liable for obligations of the limited partnership arising from the wrongful acts or omissions of other partners.

Always liable for their own misconduct

Question 38

K Liability of Partnership

Answer 38

Each partner is an agent of the partnership. The actions of every partner made within ordinary course of business to carry on partnership’s business bind the partnership unless the partner taking the action:

1. has no authority to act on behalf of the partnership and
2. the other side has knowledge or notice that the partner lacks authority

Actions by a partner that are outside the ordinary course of partnership’s business do NOT bind the partnership unless the other partners unanimously authorize the action with actual or apparent authority

Question 39

K liability of general partners

Answer 39

jointly and severally liable for all debts and obligations of the partnership

Question 40

K liability of limited partners

Answer 40

personally liable for debts of limited partnership only to the extent of their investment in the limited partnership.

limited partners are always liable for their own misconduct

Question 41

Can a partner transfer his interest in the partnership?

Answer 41

Absent an agreement to the contrary, a partner may transfer his interest in the profits and losses of the partnership (including right to receive distributions) to a third party.

Upon transfer of such interests, transferee does not automatically become a partner nor does the partnership terminate or dissolve

Question 42

Does a transferee become liable for the obligations of the partnership?

Answer 42

A transferee does not become liable for the obligations of the partnership incurred before or after the transfer, because he is not a partner.

Transferee may become a partner if the other partners unanimously consent.

If transferee becomes partner, he will be liable for the obligations of the partnership incurred after his admittance pursuant to the normal rules of agency and partnership.

Question 43

Does dissolution of a partnership immediately terminate it?

Answer 43

No - dissolution of a partnership does not immediately terminate the partnership.

The partnership enters a “winding up” phase, which continues until the winding up of the partnership’s affairs is completed.

Question 44

Authority of partners during winding up phase

Answer 44

During the winding up phase, a partner’s actual authority to bind the partnership is limited to actions that are necessary to wind up the partnership’s affairs.

A partner may still have apparent authority to bind the partnership so long as the other side does not have notice of the partnership’s dissolution.

Question 45

Equal rights to manage and control

Answer 45

Absent an agreement to the contrary, general partners have equal rights to manage and control the partnership’s business.

Limited partners generally have no say in such matters.

Disagreements relating to ordinary matters connected with the business of the partnership are decided by a majority of the partners.

Question 46

Use of partnership property

Answer 46

Absent an agreement to the contrary, a partner may only use partnership authority:

1. on behalf of the partnership or
2. to carry on the business of the partnership

Any personal use of the partnership property requires the consent of the other partners.

Question 47

Access to books and records

Answer 47

Absent an agreement to the contrary, every partner must have access to the partnership’s books and records during normal business hours. Upon reasonable demand, the partnership must render true and full information of all things regarding the affairs of the partnership that is just and reasonable under the circumstances.

NOTE: a partner’s right to inspect the partnership’s records is not conditioned on the partner’s purpose or motive. However, abuse of these rights may constitute a violation of the obligation of good faith and fair dealing.

Question 48

Equal sharing of profits and losses

Answer 48

Absent an agreement to the contrary, each partner is generally:

1. entitled to an equal share of partnership profits and
2. responsible for a share of the partnership losses in proportion to the partner’s share of the profits

Question 49

Duty of Care

Answer 49

Each partner owes a limited fiduciary duty of care to the partnership and other partners, which requires that each partner refrain from engaging in:

1. grossly negligent or reckless conduct
2. intentional misconduct or
3. knowing violations of the law

If a partner breaches the duty of care, he must be held personally liable for damages.

Question 50

Duty of Loyalty

Answer 50

Each partner owes a fiduciary duty of loyalty to the partnership and other partners, which requires that each partner:

1. act in good faith and fairly toward the other partners
2. account for any property, profit, or benefit derived by the partner from the partnership business or property and
3. refrain from:
   a. competing with the partnership within the scope of the business (even during dissolution) and
   b. usurping a business opportunity that properly belongs to the partnership

If a partner breaches the duty of loyalty, he may be held personally liable for damages.

Duty of loyalty may be eliminated in the partnership agreement if reasonable.

Question 51

3 main causes of dissolution

Answer 51

1. actions taken by partners (disassociation, partners agree to certain causes for dissolution, etc)
2. operation of law (become illegal to continue the business or partnership) or
3. court order (court may grant a judicial dissolution if it is no longer reasonably practicable to continue operation of the partnership business)

Question 52

Dissolution under UPA

Answer 52

[Uniform Partnership Act]

Any change in partner membership automatically triggers dissolution unless there is an agreement to the contrary.

Absent an agreement to the contrary, every partner generally has the power to dissolve the partnership at any time by withdrawing from the partnership.

If the dissolution is wrongful, the remaining partners may hold the dissolving partner liable for damages.

Question 53

Dissolution under RUPA

Answer 53

[Revised Uniform Partnership Act]

Provides a basis for continuing the partnership despite a partner’s withdrawal from the partnership where remaining partners may buy out the withdrawn partner’s interest instead of winding up the partnership business.

Absent an agreement to the contrary, the disassociation of a partner (partner ceases association with partnership business) does not automatically trigger dissolution unless either exception applies. [At-will partnerships; will of the parties]

Question 54

RUPA Dissolution exceptions

Answer 54

1. At-will partnerships: any member of an at-will partnership can disassociate at any time automatically triggering dissolution and liquidation
2. Will of the parties: a partnership will automatically dissolve upon the occurrence of an event that the partners specified would cause dissolution in the partnership agreement

Question 55

Term partnership

Answer 55

Partnership that exists for a specified duration of time or until a specified event occurs

Question 56

Early dissolution of term partnerships under RUPA

Answer 56

Under RUPA, a term partnership may be dissolved before its term expires if:

1. at least half of the partners express their will to wind up the business within 90 days after a partner’s disassociation by death, declaring bankruptcy, becoming incapacitated, or wrongful dissociation or
2. all of the partners agree to amend the partnership agreement by expressly agreeing to dissolve the partnership

Question 57

Partners as agents

Answer 57

Partners have equal rights to comanage ordinary affairs. Partners act as agents of the partnership.

Question 58

General Partnership - Partner Liability

Answer 58

Partners are jointly and severally liable for partnership debts.

Incoming partners are not personally liable for prior debts, although their capital contributions can be used to satisfy such debts.

Outgoing partners are personally liable for debts incurred during their time at the partnership.

Question 59

Partner fiduciary duties

Answer 59

Partners are in a fiduciary relationship with one another and must act in good faith. They are charged with the duty of loyalty (won’t usurp business opportunities for personal advantage, no self-dealing, no competing with partnership), the duty of care, and the duty to account for any profits.