Agency and Partnership

Question 1

What are the requirements to form an agency relationship?

Answer 1

(1) Consent by both the principal and the agent that the agent will act for the principal’s benefit
(2) The agent is subject to the principal’s control (this can be found simply by the principal specifying the task to be performed)
(3) The principal has contractual capacity (i.e. not minor, incompetent, or unincorporated organization)
(4) The agent has at least minimal mental capacity
(5) If required by the Statute of Frauds, a writing

Question 2

When is a principal bound on a contract entered into by an agent?

Answer 2

A principal is bound where there exists authority; this can be actual or apparent.

Question 3

What is actual authority?

Answer 3

Actual authority is authority that the agent reasonably believes they possess based on the principal’s dealings with them. It can be express or implied.

Question 4

What is express authority?

Answer 4

Authority which is actually contained within the agency agreement or conveyed by the principal in words. It is effective even if granted mistakenly or because of misrepresentation.

Question 5

What is implied authority?

Answer 5

Implied authority is authority that the agent reasonably believes they have as a result of the principal’s words or conduct. It includes authority. . .

• Incidental to express authority
• Arising out of custom known to the agent
• Arising out of a title or position granted to the agent
• Resulting from prior acquiescence by the principal
• To take emergency measures
• To delegate authority in cases of ministerial acts, where circumstances require, where performance is impossible without delegation, or where delegation is customary
• To pay for and accept delivery of goods where there is authority to purchase
• To give general warranties as to fitness and quality and grant customary covenants in land sales, collect payment, and deliver where there is authority to sell
• To manage investments in accordance with the “prudent investor” standard

Question 6

How can actual authority be terminated?

Answer 6

• The happening of an event specified in the agreement as terminating the agent’s authority
• Lapse of reasonable time
• A change in circumstances, such as destruction of the subject matter of the authority, insolvency of the agent and principal, and a change in the law or business conditions
• Agent’s breach of fiduciary duty
• Either party’s unilateral termination (although the termination may constitute a breach of contract)
• Operation of law (death upon notice, loss of capacity except where written authority that says it will not terminate on principal’s disability)

Question 7

What are the elements of apparent authority?

Answer 7

(1) The person dealing with the agent has a reasonable belief in the agent’s authority; and
(2) the belief must be generated by some act or neglect on the part of the principal.

Question 8

What are the types of situations in which apparent authority exists?

Answer 8

• Principal previously permitted agent to exceed authority and third party knows of it
• The title or position given to the agent by the principal implies certain customary responsibilities or abilities

Question 9

What is ratification?

Answer 9

When an agent did not have authority to enter into an agreement, the principal can ratify the acts (and become liable for them) by expressly or impliedly affirming or accepting the benefit of the acts, as long as the principal knew of the material facts, had capacity, and accepted the entire transaction. This is a unilateral act of the principal and does not require consideration.

Question 10

Under what circumstances is ratification not permitted?

Answer 10

• Performance was illegal at the time of ratification
• The third party has withdrawn
• There has been a material change in circumstances

Question 11

Are unilateral agent representations binding on the principal?

Answer 11

No. A principal will generally not be bound when they have done nothing to hold the agent out as having authority and the only statement of authority comes from a claim of the agent.

Question 12

When is the agent liable for a contract?

Answer 12

• There was no actual or apparent authority to enter the contract
• The third party is unaware that the agent is acting on behalf of the principal
• The third party does not know the identity of the principal

Question 13

When is a principal vicariously liable for an agent’s torts?

Answer 13

• When there is sufficient control to render the agent an employee, the owner is liable when. . .
  
  • In the case of negligence, the employee was acting (i) in the scope of employment, or (ii) made a minor deviation from employment
  • In the case of an intentional tort, when it was (i) for the principal’s benefit, (ii) authorized by the principal, or (iii) arose naturally due to the nature of employment.

Question 14

When is the principal directly liable?

Answer 14

• They negligently hired the agent
• They failed to fire the agent
• They failed to properly supervise the agent

Question 15

What duties does the agent have to the principal?

Answer 15

• Duty of care
• Duty of loyalty

Question 16

When is a partnership formed?

Answer 16

When two or more persons agree to carry on as co-owners a business for profit. Whether the persons intended to form a partnership does not matter.

Limited liability partnerships and limited partnerships must file a certificate with the state to be properly formed.

Question 17

What are the factors for deciding whether a partnership exists?

Answer 17

• Sharing of profits (raises rebuttable presumption of partnership)
• Title to property held in join tenancy or in common
• Parties designate their relationship as a partnership
• The venture undertaken by the parties require extensive activities
• Sharing of gross returns

Question 18

When does profit sharing not raise a presumption of partnership?

Answer 18

Profit sharing does not raise a presumption of partnership when received as. . .

• Payment of debt
• Wages or compensation
• Rent payment
• Annuity or other retirement benefit
• As interest on a loan
• For the sale of goodwill of a business

Question 19

Is a writing required to form a partnership?

Answer 19

No, unless required for the Statute of Frauds. Limited liability partnerships and limited partnerships must file a certificate with the state to be properly formed.

Question 20

When does a partnership by estoppel exist?

Answer 20

• When a person by words or conduct represents themselves as partner or consents to being represented by a partner (mere failure to deny will not create liability)
• When a person holds another out as his partner

Question 21

What are the rights of partners?

Answer 21

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

Question 22

What votes are required for disagreements?

Answer 22

• For ordinary matters, majority vote
• For extraordinary matters, unanimous vote

Question 23

Who is liable for partnership liabilities & debts?

Answer 23

Partners of a general partnership are jointly and severally liable for partnership debts. An incoming partner is not personally liable for prior debts of the partnership, but their contributions may be used to satisfy such debts. Outgoing partners are personally liable for debts incurred during their time at the partnership.

Question 24

What are the duties of partners?

Answer 24

• Duty of Care
• Duty of Loyalty
• Duty to Account

Question 25

When does a partnership end?

Answer 25

A partnership ends once winding up is complete. The termination of a partnership occurs in the following order:

(1) Dissociation: The dissolution of the partnership is the change in relation of the partners. A partner can withdraw from a partnership by giving notice at any time, which will trigger dissolution of the partnership.
(2) Winding up: Partnership assets are liquidated and creditors are paid. Partners remain liable for any liabilities which occur during this phase.
(3) Termination: The true end of the partnership, which occurs after winding up is completed.

Question 26

What notice of dissolution of a partnership are other parties owed?

Answer 26

• Creditors are entitled to personal notice of dissolution
• Others with knowledge of a partnership are entitled to newspaper notice of a dissolution

Question 27

Is the partnership bound if a partner acts with apparent authority, regardless of actual authority?

Answer 27

Yes.

Question 28

What is the liability for each of the three types of partnerships (general partnership, limited liability partnership, and limited partnership)?

Answer 28

General Partnership: Partners are jointly and severally liable, and creditors may go after individual partners for the liabilities of the partnership. However, creditors should try to collect from the partnership itself first, and must obtain a judgment against the partners personally to go after their assets.

Limited Liability Partnership: No partner is personally liable for the obligations of the partnership.

Limited Partnership: At least one general partner must be listed on the certificate filed with the state. Limited partners’ liability is limited to their capital contributions. General partners are liable for all partnership obligations and manage control of the partnership. If a general partnership converts to an LLP, then partners remain jointly and severally liable for actions before conversion.