Agency and Partnership

Question 1

Principal’s Vicarious Liability for Torts of Agent (elements)

Answer 1

A principal will be vicariously liable for torts committed by its agent if:

1) there is a principal-agent relationship and
2) the tort was committed by the agent within the scope of that relationship.

Question 2

Principal-Agent relationship (elements)

Answer 2

A principal-agent relationship requires 1) assent, 2) benefit, and 3) control.

Assent can be even an informal agreement, as long as the principal has the capacity to agree.

The agent’s conduct must be for the principal’s benefit.

The agent must be under the control of the principal, by having the power to supervise the manner of the agent’s performance.

3 Elements needed to form: (1) Consent (2) Capacity (3) Writing if required (by statute of frauds)

Only MINIMAL capacity required for agent (thus minor can be agent).

Question 3

Principal’s Vicarious Liability for Torts of Sub-agents and Borrowed agents

Answer 3

A principal will only be liable for a sub-agent’s tort if there is assent, benefit, and control between the principal and the sub-agent. There is rarely assent or control, so the principal usually is not liable.

A principal is usually not liable for the tort of a borrowed agent for the same reason - the principal does not control the borrowed agent.

Question 4

Principal’s Vicarious Liability for Torts of Independent Contractors

Answer 4

Typically, a principal is not liable for the torts of an independent contractor because the principal does not control the contractor.

HOWEVER, a principal will be liable for an independent contractor’s tort if:

1) the contractor is engaged in an inherently dangerous activity (for the principal, e.g. brake repair),
2) the principal holds out the contractor with the appearance of agency (estoppel),
3) the contractor commits the tort against an invitee of the principal on the principal’s premises

Question 5

Scope of the Principal-Agent Relationship for Tort Liability

Answer 5

The tort must be in the scope of the relationship for the principal to be liable. This includes:

• conduct that was “of the kind” the agent was hired to perform
• torts committed by the agent by which the agent intended to benefit the principal
• torts occurring “on the job”

If the agent took a new and independent journey, it is outside the scope of employment (frolic). If the agent merely departed from an assigned task but was fundamentally still on task, within the scope of employment (detour).

Question 6

Principal’s Vicarious Liability for Agent’s Intentional Torts

Answer 6

Normally, intentional torts are outside the scope of employment and thus the principal is not liable.
EXCEPTIONS:
1) The tort was authorized by the principal
2) The tort was natural from the nature of the employment (e.g. a bouncer)
3) The tort was motivated by a desire to serve the principal

Question 7

Principal’s Vicarious Liability for Contracts of Agent

Answer 7

A principal is liable for the contracts of its agent only if the agent had authority to enter the contract.

There are 4 types of authority:

1) Actual Express Authority
2) Actual Implied Authority
3) Apparent Authority
4) Ratification

Question 8

Actual Express Authority of Agent (for contracts)

Answer 8

Where the principal authorized the agent to form a contract with an express statement.

Generally the statement can be oral, even a whisper.
EXCEPTION: if the underlying contract must be in a signed writing (falls under the Statute of Frauds), then the authorization must also be in writing.

Express authority can be revoked by:

1) unilateral act of either the principal or the agent, or
2) death of the principal.

The scope of authority is narrowly limited to the words within it.

Question 9

Actual Implied Authority of Agent (for contracts)

Answer 9

Where the principal gives the agent authority through conduct or circumstance.
1) Necessity: there is actual implied authority to do all tasks that are necessary to do an expressly authorized task.
Ex: “Close the deal,” is an express grant of authority that implies many other authorized tasks.

2) Custom: There is an implied authority to do all tasks performed by people who have agents’ title or position.
Ex: a driver normally drives people around.

3) Prior dealings between the principal and the agent: there is an implied authority to do all tasks that the agent believes to be authorized from prior acquiescence by the principal.

Question 10

Apparent Authority of an Agent (for contracts)

Answer 10

An agent has apparent authority when 1) the principal “cloaked” the agent with the appearance of authority, and 2) a third party reasonably relies on the appearance of authority.

Death of P does not automatically revoke apparent authority.

This is to protect innocent third parties.

If 3rd party has notice authority has been revoked/is gone, no apparent authority.

Ex: Agents sells the antique clock while principal is out, against express orders - agent had apparent authority and principal is bound to the contract.

Question 11

Ratification (of Agent’s formation of contract)

Answer 11

Principal can grant authority after the contract has been entered if:
1) principal has knowledge of all material facts regarding the contract, and
2) principal accepts its benefits.
EXCEPTION: ratification cannot alter the terms of the contract.

Ex: A enters contract with C for 1000 boxes. P hears of the deal and tells A, “Good job, but I only need 500 boxes.” No ratification, as P seeks to alter the terms of the contract.

Question 12

Agent’s Liability on Contracts made on behalf of Principal

Answer 12

Generally, authorized agents are not liable on their authorized contracts - only the principal is.

EXCEPTION: if the principal is partially disclosed (only the identity of the principal is concealed) or undisclosed (existence of principal is concealed), the authorized agent may nonetheless be liable at the election of the third party.

Question 13

Agent’s Duties to Principal (and Principal’s Remedies if Agent Breaches)

Answer 13

Agents owe duties of care, obedience and loyalty to principals, in return for reasonable compensation and reimbursement of expenses.

If a duty is breached, the principal may recover losses caused by the breach and can disgorge profits made by breaching.

Question 14

Agent’s Duty of Care

Answer 14

Agent has a duty to take reasonable care when acting on behalf of the principal (i.e. not to be negligent).

Question 15

Agent’s Duty of Obedience

Answer 15

Agent has a duty to obey the instructions of a principal that are reasonable (e.g. nothing illegal, no lying).

Question 16

Agent’s Duty of Loyalty

Answer 16

The agent owes a duty of loyalty to the principal, such that the agent must not:

1) Self-deal (benefit at the expense of the principal)
2) Usurp the principal’s opportunity,
3) Make a secret profit at the principal’s expense

Question 17

General Partnership Formation

Answer 17

A general partnership is an association of two or more persons who are carrying on as co-owners of a business for profit.

There are no other formalities to becoming a general partnership.

Sharing profits is the crux of partnership - not salaries, wages, commissions, etc.

ALL types of partnerships have no corporate tax on profit.

Question 18

General Partnership’s Liability for Torts and Authorized Contracts of Partners

Answer 18

Partners are agents of the partnership for apparently carrying on normal partnership business.

Thus, the general partnership is liable for each partner’s torts in the scope of the business and each partner’s authorized contracts.

Question 19

Partner’s Liability for General Partnership’s Debts and Partner’s Torts

Answer 19

Each partner is personally liable for each co-partner’s torts committed in the scope of the business, and in general, for the partnership’s debts.

An incoming partner is generally NOT liable for prior debts, but any capital paid into the partnership by the incoming partner can be used by the partnership to pay the debt.

Dissociating (withdrawing, even dying) partners are liable on FUTURE debts UNTIL actual notice of their dissociation is given to ALL known creditors and publication notice is given to all potential creditors.

Question 20

General Partnership Liability by Estoppel

Answer 20

One who represents to a third party that a general partnership exists will be liable as if a general partnership exists.

Question 21

Duty Partners Owe to Each Other and the Partnership (and Remedy for Breach)

Answer 21

Partners are fiduciaries of each other and the general partnership. Duties of loyalty, obedience, care, and disclosure.

They owe a duty of loyalty, meaning they cannot engage in self-dealing, usurp an opportunity of the partnership, or make a secret profit at the partnership’s expense.

If a partner breaches this duty, the partnership can recover through an action for accounting. This recovers losses caused by the breach and disgorges profits from the breach.

Question 22

Partner’s Rights in Partnership Property and Liquidity

Answer 22

1) Specific partnership assets belong to the partnership, and cannot be transferred by individual partners without the authorization of the partnership.
2) A partner’s share of the partnership’s profits is personal property, and can thus be transferred by the individual partner to a third party.
3) General partners have the right to share in management, but DO NOT individually own their right to management. Their right to management cannot be unilaterally transferred.
4) Under the RUPA, titled real or personal property that is acquired in one partner’s name, does not mention the partnership in acquisition documents, and was not acquired with partnership funds, is separate property.

Question 23

Voting and Management of General Partnerships

Answer 23

Without an agreement to the contrary, each partner is entitled to EQUAL control of the partnership, including an equal share of the vote, regardless of their activity or capital contribution.

Majority votes govern ordinary affairs, unanimous votes are needed for fundamental affairs.

Question 24

Partner’s Share of Profits and Losses

Answer 24

1) Absent an agreement, profits are shared equally, and
2) Absent an agreement, losses are shared like profits.

Ex: “Profits are shared 60/40.” Profits and losses will both be shared 60/40.
Ex2: “Losses are shared 60/40.” Profits are shared equally, losses will be shared 60/40.

Question 25

Dissolution (definition)

Answer 25

A general partnership dissolves upon any material change in the partnership, including death or dissociation of any single general partner.

Dissolution can occur by act of the partners (by mutual assent, proper expulsion of a partner, or express will of any one partner); by operation of law (partner dies, bankruptcy of partner or partnership); or decree of equity court (for unprofitability, breach of the partnership agreement, misconduct of a partner, incompetence of a partner).

(It’s not a corporation - it doesn’t go on forever).

Dissolution is the process of ending the partnership; the final end of the partnership is called termination.

Question 26

Winding Up

Answer 26

The period between dissolution and termination is called winding up, in which remaining partners liquidate the partnership’s assets to satisfy the partnership’s creditors, and distribute profits and losses among the partners.

Partners are entitled to a salary/compensation for helping to wind up the business. It is the only time they are entitled to a salary by right.

Question 27

Partner and General Partnership Liability During Dissolution

Answer 27

1) Old business. The partnership and thus its individual partners retain liability on all transactions entered into to wind up old business (e.g. assigning claims, selling partnership assets, performing Ks made prior to dissolution, collecting debts due, etc.).
2) New business: an individual partner will be liable on any new contract he enters into during dissolution. Absent a contrary agreement, dissolution terminates the actual authority of a partner to enter into contracts on behalf of the partnership.
3) Terminating apparent authority. Upon dissolution, the partnership must provide actual notice to its existing creditors, and publication notice to other third parties, to prevent anyone from lending money to the partnership during dissolution. If a creditor does rely and lend money during dissolution, all partners are personally liable.

Question 28

Priority of Distribution during Dissolution

Answer 28

Each level of priority in distribution must be satisfied in full before beginning the next level. They are:

1) Outside Creditors must be paid
2) Inside Creditors (partners who loaned money to the partnership) must be paid
3) Capital Contributions and/or Losses of partners
4) Profits and surplus, if any

Question 29

Limited Partnership (definition and formation)

Answer 29

A limited partnership is one with at least one general partner and at least one limited partner. The limited partner makes a contribution but otherwise cannot manage and is not liable for obligations.

Must FILE with the state: (1) Certificate of limited partnership (2) names/addresses of all gen partners

(3) Name of partnership
(4) Names and addresses of agents for service of process

And keep taxes and partnership records on file with the state.

Question 30

Liability and Control of Limited Partnership

Answer 30

General partners: liable for all partnership obligations and have control of the partnership.

Limited partners: not liable for limited partnership’s obligations, and they CANNOT control or manage the bisuiness without giving up their limited liability status.

Question 31

Limited Liability Partnerships (LLP) (definition and formation)

Answer 31

A partnership that allows partners not to be personally liable for the obligations of the partnership (like a corporation). Can be a general OR limited partnership.

All existing partners must agree to form, Must also file with the state (1) Executed by at least 2 partners with (2) Name, address, statement that they intend to form LLP, and effective date

Question 32

Liability of LLP

Answer 32

No partner is liable for the debts and obligations of the partnership, even general partners.

Question 33

Limited Liability Companies (LLC) (definition and formation)

Answer 33

It is a hybrid between a corporation and partnership, in which the owners (called members) have the same rights and limited liabilities as shareholders in a corporation PLUS the benefit of partnership tax status.

Must file with the secretary of state: (1) a certificate of organization including: name of the LLC, address of the LLC’s registered office and its registered agent and (2) Must indicate it is an LLC in the name

Question 34

Duties and Control of an LLC

Answer 34

Owners may control an LLC, but can also delegate control to managers (act like a Board of Directors).

Members, managers and agents are not personally liable in an LLC.

Whoever is managing (managers or members/owners) owe a fiduciary duty.

A full membership interest may not be transferred without the consent of a majority of the membership interests, or as provided in the operating agreement. (However, the right to profits, etc. of a membership interest CAN be transferred unilaterally).

Members and managers are indemnified for debts incurred in the course of their activities on behalf of the company.

Question 35

Principal’s Remedies for Breach of Agency Duty

Answer 35

Principal has normal remedies depending on the issue (eg contract, equitable); also can terminate agency relationship at any time.

Question 36

Agent’s Remedies for Breach of Principal’s Duty

Answer 36

Agent has contract remedies (if there is one) and the right to an equitable lien for money due (eg agent makes K for P’s benefit, P accepts benefit but doesn’t reimburse A).

Question 37

Termination of Agency Authority

Answer 37

Agency relationship can be terminated by either party at any time, though that may be a K breach.

Can also be terminated by:

Question 38

Termination of Agency Authority

Answer 38

Agency relationship can be terminated by either party at any time, though that may be a K breach.

Can also be terminated by: (1) lapse of reasonable time (2) agreed upon event (3) death of P unless an “irrevocable” agency.

Question 39

Irrevocable Agency

Answer 39

If an agency relationship is formed with consideration and the agency power is given as a security to protect A or a 3rd party’s rights, it cannot be revoked unilaterally.

Question 40

Rights to Distribution Under Limited Partnership

Answer 40

Like a corporation – entity cannot make distributions if (1) it would be totally insolvent and unable to pay debts or (2) it would make the total liabilities greater than the total assets.

After that, partners receive distributions in proportion to their contribution.

Question 41

Piercing the Veil of an LLC

Answer 41

The veil can be pierced to reach the members’ and managers’ personal assets in basically the same situation as a corporation:

(1) Fraud/bad faith acts by owners/members
(2) LLC is a mere instrumentality of the owners/members and prejudice results
(3) Inadequate capitalization at time of formation

Question 42

Dissolution of LLC

Answer 42

The company dissolves upon majority vote of the membership interests, or as provided in the operating agreement.

Also can be dissolved if:

• 90 days pass with no LLC members
• Fraud/crime/LLC acted in a way that was oppressive toward one member and that member files action to dissolve LLC