Agency and Partnership

Question 1

Requirements for an agency relationship

Answer 1

1) consent by both the principal and the agent that the agent will act for the principal’s benefit and

(2) that the agent is subject to the principal’s control.

Question 2

How can authority terminate?

Answer 2

Authority to act for the principal can terminate in several ways, including the principal manifesting a desire to the agent to discontinue the relationship.

Question 3

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

Answer 3

The principal is bound on a contract entered into by an agent if the agent had authority to enter into the contract.

Question 4

What authority do partners in a general partnership and LLC have?

Answer 4

Remember that partners in a general partnership and LLC generally have actual and apparent authority to bind the partnership in contracts entered into in the ordinary course of business.

Question 5

How does actual authority work?

Answer 5

Actual authority can be express, where the agent is expressly given authority to act for the principal.

It can also be implied. Implied authority is present when the principal’s conduct leads the agent to believe it has authority.

This authority can be implied by custom, past course of conduct by the principal, necessity, or an emergency circumstance.

This authority terminates after a reasonable time or following a change in circumstances, death, or incapacity of the principal, etc.

Question 6

What are the elements of apparent authority?

Answer 6

the elements of apparent authority are as follows: (1) the person dealing with the agent must do so with 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 7

What is ratification?

Answer 7

Even if the agent did not have authority to enter into a transaction, the principal can ratify the acts (and thus become liable) by expressly or impliedly affirming or accepting the benefit of the acts, so long as the principal knew the material facts and had capacity.

Question 8

When is the agent bound on a contract?

Answer 8

1. The agent is bound to a third party on a contract he enters into with the third party if the agent had no actual or apparent authority to enter into the contract.
2. The agent is also liable if the principal is undisclosed (i.e., the third party does not know the agent is acting on another’s behalf) or if the principal is “partially disclosed” (i.e., the third party knows the agent is acting on behalf of another but does not know the identity of the principal).
3. The agent is bound to the principal for breach of contract if the agent acts beyond his authority.

Question 9

Is a princial liable for the torts committed by his agent?

Answer 9

A principal can be vicariously or directly liable for the torts committed by his agent.

Question 10

When is an agent liable for his own torts?

Answer 10

The agent is always liable for his own torts.

Question 11

When does vicarious liability arise for a principal?

Answer 11

Vicarious liability of employer (respondeat superior):

The employer is liable in tort for the acts of an agent or employee if the agent or employee (mnemonic=SMI)

▪ was acting in the scope of employment;
made a minor deviation (a detour) from employment (rather than a frolic) OR
▪ committed an intentional tort only if it was (mnemonic=BAN) for the principal’s benefit,
because the principal authorized it, or one that arose naturally due to the nature of employment.

The agent is liable too under a theory of joint and several liability.

Question 12

Whan can the principal idemnify the agent?

Answer 12

the principal can recover against the agent for indemnification if the agent acts beyond his authority

Question 13

When is the principal directly liable?

Answer 13

the principal is directly liable for his own negligence if he negligently hired the agent, failed to fire the agent, or failed to properly supervise the agent.

Question 14

What duties does the agent owe the principal?

Answer 14

The agent owes a duty of care and a duty of loyalty (not to engage in self-dealing, not to profit without disclosure, and a duty to follow instructions).

The principal may recover losses from and profits made by the breaching agent.

Question 15

What is a general partnership?

Answer 15

“A partnership is ‘the association of two or more persons to carry on as co- owners, a business for profit . . . whether or not the persons intended to form the partnership.’”

Question 16

What is the partnership profit sharing presumption?

Answer 16

Profit sharing creates a presumption that a person is a partner unless the profits were received in payment of a debt, rent to a landlord, wages, etc.

Other indicia of a partnership include capital contributions and mutual agency.

Question 17

Is a writing required to form a general partnership?

Answer 17

Neither a writing nor a certificate needs to be filed for a general partnership to be formed.

Question 18

What is the default form of partnership?

Answer 18

Note that a general partnership is the default form; sometimes a general partnership is formed because a limited partnership was improperly formed (e.g., the paperwork was not filed correctly)

Question 19

What are partners?

Answer 19

partners are agents and comanagers of the partnership.

Question 20

What powers do partners have?

Answer 20

Partners have equal rights to comanage ordinary affairs (e.g., signing a lease) (even if profits are not
shared equally).

A majority vote wins if there’s disagreement.

Extraordinary matters require a unanimous vote (e.g., admitting a new partner or selling land).

Question 21

What is the liablity for general partnership?

Answer 21

in a general partnership, partners are jointly and severally liable for partnership debts.

Question 22

Liability of incoming and outgoing partners of a general partnership:

Answer 22

An incoming partner is not personally liable for prior debts of the partnership (although his capital contributions can be used to satisfy such debts).

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

Question 23

What fiduciary duties do partners have?

Answer 23

Partners are in a fiduciary relationship with one another and must act in good faith.

They are charged with the duty of loyalty (i.e., they may not usurp corporate opportunities for a personal advantage, engage in self-dealing, or compete with the partnership), the duty of care, and the duty to account (they must account for any profits).

Question 24

What ends a partnership?

Answer 24

dissolution does not end a partnership—it ends once winding up is complete.

Question 25

What is the first step of ending a partnership?

Answer 25

Step one—dissociation: The dissolution of a partnership is the change in the relation of the partners.

Prior creditors are entitled to personal notice of the dissolution of the partnership.

Others who knew of
the partnership are entitled to newspaper notice.

Question 26

Can a partner withdraw from a partnership?

Answer 26

Note that a partner can withdraw from a partnership by giving notice at any time. This will trigger dissolution in an at will partnership.

Question 27

What is the second step of ending a partnership?

Answer 27

Step two—winding up: This is where partnership assets are liquidated and creditors are paid. Note thatpartners are still liable for any liabilities that occur during the winding up phase.

Question 28

What is the third step of ending a partnership?

Answer 28

Step three—termination: this is the true end of the partnership!

Question 29

What rights does a creditor have against a partnership?

Answer 29

If a creditor has a claim against a partner, the creditor can obtain an interest in the partnership.

This includes profits but not management or voting rights.

If a creditor has a claim against the partnership, the creditor can try to collect from the individual partners. These principles are heavily tested!

Question 30

How are partners liable for the obligations of the partnership?

Answer 30

Partners are jointly and severally liable for the obligations of the partnership.

Even if a partner enters a contract without actual authority to do so, the partnership and partners are bound (so long as the partner had apparent authority).

The creditor must obtain a judgment against the partners personally to go after each partner’s personal assets.

The creditor should try to collect from the partnership before seeking partners’ personal assets.

Question 31

Who must file a certificate with the state to be formed?

Answer 31

Partnerships other than general partnerships must file a certificate with the state to be properly formed. Liability is limited.

Question 32

What is an LLP?

Answer 32

Limited liability partnership (LLP): no partner is personally liable for the obligations of the partnership (but partners are liable for their personal torts).

Question 33

What is an LP?

Answer 33

Limited partnership (LP):
At least one general partner must be listed on the certificate filed with the state. Limited partners have limited liability (limited to their capital contributions).

General partners are liable for all partnership obligations and manage control of the business. If a general partnership converts into an LLP, then partners remain jointly and severally liable for actions that took place before the conversion.