Agency and Partnership

Question 1

What is the two part test for whether a principal will be liable for torts committed by his agent?

Answer 1

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

Question 2

What does the principal/agent relationship require?

Answer 2

The principal/agent relationship requires:

1) Assent – an informal agreement between the principal (who has capacity) and the agent
2) Benefit – the agent’s conduct must be for the principal’s benefit
3) Control – the principal must have the right to control the agent by having the power to supervise the manner of the agent’s performance

Question 3

What is the key distinction between an agent and an independent contractor?

Answer 3

There is no right to control an independent contractor because there is no power to supervise the manner of its performance. There can be no vicarious liability for independent contractor’s torts because no control (3d element of relationship fails).

Question 4

What are the exceptions to the rule that says no vicarious liability for torts of independent contractors?

Answer 4

Inherently Dangerous Activity Exception – if your independent contractor commits a tort while engaged in an IDA, there will be vicarious liability.

Estoppel – if you hold out your independent contractor with the appearance of agency, you will be estopped from denying liability on that ground as well.

Question 5

Scope of principal/agent relationship factors

Answer 5

(a) Was conduct “of the kind” agent was hired to perform? If within job description, likely inside the scope.
(b) Did the tort occur on the job? Frolic vs. Detour
(c) Did the agent intend to benefit the principal? If the agent even in part intended to benefit the principal by its conduct, this is enough to be inside the scope.

Question 6

What is the difference between a frolic and a detour?

Answer 6

A frolic is a new, independent journey, therefore outside the scope of the agent/principal relationship. A detour is a mere departure form assigned task, and therefore within the scope of the agency.

Question 7

When is a principal liable for the intentional torts of the agent (i.e. what are the exceptions to the general rule of no liability)?

Answer 7

Intentional torts are within the scope if the conduct was:

(1) Authorized by the principal;
(2) Natural from the nature of the employment; or
(3) Motivated by a desire to serve the principal

Question 8

When is a principal liable for the contracts entered by its agent?

Answer 8

ONLY if the principal authorized the agent to enter the contract

Question 9

Four types of authority

Answer 9

Actual express authority, actual implied authority, apparent authority, and ratification

Question 10

Actual Express Authority

Answer 10

Principal used words to express authority to agent. Can be oral, even private.

Exception: If the contract itself must be in writing, then the express authority must be in writing as well. Look out for Statute of Frauds issues, especially contracts for sale of land.

Question 11

What will revoke actual express authority?

Answer 11

Unilateral act of either the principal or the agent, or the death or incapacity of the principal.

Exception: The principal may give the agent a durable power of attorney. Power of attorney is a written expression of authority to enter a transaction. Durable means clear survival language.

Question 12

Actual Implied Authority

Answer 12

Authority which the principal gives the agent through conduct or circumstance:

(1) Necessity – there is implied authority to do all tasks necessary to accomplish an expressly authorized task
(2) Custom – there is implied authority to do all tasks which, by custom, are performed by persons with the agent’s title or position
(3) Prior acquiescence by the principal – there is implied authority to do all tasks which the agent believes to be authorized from prior acquiescence by the principal

Question 13

Apparent Authority

Answer 13

Two part test: (1) Principal CLOAKED agent with the appearance of authority, and (2) third party reasonably relies on the appearance of authority.

Question 14

Ratification

Answer 14

Authority can be granted 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

Question 15

The Rules of Liability on the Contract for Agents and Principles

Answer 15

General Rule: The principal is liable on its authorized contracts, and therefore as a rule authorized agents are generally not liable on their authorized contracts. Exception: the undisclosed principal – if principal is partially disclosed (only the identity of the principal concealed) or undisclosed (fact of principal concealed), authorized agents may nonetheless be liable at the election of the third party.

Question 16

What are the duties owed by an agent to a principal in tern for reasonable compensation and reimbursement of expenses?

Answer 16

Duty of care
Duty to obey instructions that are reasonable
Duty of loyalty

Question 17

What does the duty of loyalty entail in the agent/principal relationship?

Answer 17

The agent may never do any of the following:

• Self dealing (agent cannot receive a benefit to the detriment of the principal
• Usurping the principal’s opportunity, or
• Secret profits: making a profit at the principal’s expense without disclosure

Question 18

What remedies does a principal have when an agent breaches a duty?

Answer 18

Principal may recover losses that are caused by the breach, and also may disgorge profits made by the breaching agent as well.

Question 19

What is the definition of a general partnership?

Answer 19

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

Sharing of profits is key – contribution of money or services in return for a share of profits creates a presumption that a general partnership exists.

Question 20

What is the consequence of agency principles applying to the partnership?

Answer 20

Partners are agents of the partnership for apparently carrying on usual partnership business. Therefore the general partnership is liable for each partner’s torts in the scope of the partnership business and for each partner’s authorized contracts.

Question 21

General partner liability to third parties

Answer 21

Each general partner is personally liable for all debts of the partnership and for each co-partner’s torts.

Question 22

When are incoming partners liable for pre-existing debts of the partnership?

Answer 22

Incoming partners are generally not liable for prior debts. But, any money paid in to the partnership by that incoming partner can be used by the partnership to satisfy the partnership’s prior debts.

Question 23

When is a dissociating partner liable for the partnership’s subsequent debts?

Answer 23

Dissociating partners retain liability on future debts until notice of their dissociation is given to creditors or until 90 days after filing notice of dissociation with the state.

Question 24

General partnership liability by estoppel

Answer 24

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

Question 25

What duty does a general partner owe to partnership?

Answer 25

General partners are fiduciaries of each other and the partnership. Therefore, general partners owe to each other and the partnership the duty of loyalty (no self-dealing, usurping partnership opportunities, or take a secret profit at partnership’s expense).

Action for accounting – partnership may recover losses that are caused by the breach and also may disgorge profits made by the breaching partner as well.

Question 26

Partners’ Rights in Partnership Property and Liquidity

Answer 26

1. Specific partnership assets
2. Share of profits – personal property owned by individual partners, transferrable to third parties
3. Share in management – asset owned by partnership, may not be transferred by individual partners to third parties

Question 27

Test for determining whether property is partnership property or personal property

Answer 27

The test is whose money was used to buy the property – if partnership $ was used, then partnership property. If individual partner’s $, then personal property.

Question 28

Absent an agreement, how is a general partnership managed?

Answer 28

Absent an agreement, each partner is entitled to equal control (vote).

Question 29

Absent an agreement, what are the salaries of general partners?

Answer 29

Absent an agreement, general partners get no salary. Exception: Partners do receive compensation for helping to wind up the business.

Question 30

Partner’s share of profits and losses

Answer 30

Absent an agreement, profits are shared equally. Absent an agreement, losses are share like profits.

Question 31

Definition of dissolution of general partnership

Answer 31

In the absence of an agreement that sets forth events of dissolution, a general partnership dissolves upon notice of the express will of any one general partner to dissociate. The real end of the partnership is called termination.

Question 32

What is “winding up?”

Answer 32

The period between dissolution and termination in which the remaining partners liquidate the partnership’s assets to satisfy the partnership’s creditors.

Question 33

Priority of distribution

Answer 33

Each level must be fully satisfied before beginning the next level. Order of priority:
First, the partnership must pay all creditors. Creditors include all outside non-partner trade creditors plus all partners who have loaned money to the partnership and have become creditors thereby. Second, the partnership must repay all contributions paid into the partnership by partners. This is money paid in for share of profits. The partnership is now liable to its own partners for the full repayment of their capital contributions. Third, profits, if any are shared equally among partners without an agreement.