Agency partnership

Question 1

Does agency exist?

Answer 1

Key principle #1: When determining whether an agency relationship exists, see if consent and control are
present. However, remember that even if an agency relationship exists, it can terminate.

Question 2

Requirements for agency ?

Answer 2

Requirements for an agency relationship include (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. 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

Key principle 2

Answer 3

Key principle #2: The principal is bound on a contract entered into by an agent if the agent had authority
to enter into the contract. Note that actual and apparent authority are heavily tested in Agency and
Partnership questions. Remember that partners in a general partnership generally have actual and
apparent authority to bind the partnership in contracts entered into in the ordinary course of business.

Question 4

Actual Authority is ?

Answer 4

• Actual authority: 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 5

Apparent Authority is ?

Answer 5

• Apparent authority: 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 6

Ratification is ?

Answer 6

• Ratification: 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 7

Disclosure requirements ?

Answer 7

Key principle #3: 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. 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). The agent is bound to the principal for breach of contract if the agent
acts beyond his authority.

• Key principle #4: A principal can be vicariously or directly liable for the torts committed by his agent. The
  agent is always liable for his own torts.

Question 8

Vicarious Liability ?

Answer 8

• 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 9

Indemnification is ?

Answer 9

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

• Direct liability of principal: 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. (Feb

Question 10

Duty of Care ?

Answer 10

• Key principle #5: 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 11

Key principle #1: Formation of a general partnership does not require much. When an MEE question asks if a
general partnership is formed, the answer is usually yes! - Start essay by saying …?

Answer 11

Start your essay by stating the following:

“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 12

Profit sharing creates ?

Answer 12

Profit sharing = presumption: 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. Neither a writing nor a certificate needs to be filed for a
general partnership to be formed. 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 13

Key principle #2: partners are agents and comanagers of the partnership ?

Answer 13

Partners have equal rights to comanage with regard to ordinary affairs (e.g., signing a lease) (even if
profits are not shared equally). A majority vote wins if there is a disagreement.

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

Question 14

Key principle #3: in a general partnership, partners are jointly and severally liable for partnership debts. YES ?!

Answer 14

• 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 15

Key principle #4: partners have fiduciary duties.

Answer 15

Partners are in a fiduciary relationship with one another and must act honestly and 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 16

Key principle #5: dissolution does not end a partnership— it ends once winding up is complete. What are the steps to dissolution ?

Answer 16

• 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. Note that a partner can withdraw from a partnership
  by giving notice at any time. This will trigger dissolution in an at will partnership.
• Step two—winding up: This is where partnership assets are liquidated and creditors are paid. Note that
  partners are still liable for any liabilities that occur during the winding up phase.
• Step three—termination: this is the true end of the partnership!

Question 17

Key principle #6: 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!

Answer 17

Partners are jointly and severally liable for the obligations of the partnership. Even if a partner enters into a contract without actual authority to do so, the partnership and the 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 attempt to collect from the partnership
before seeking personal assets of the partners.

Question 18

Key principle #7: Partnerships other than general partnerships must file a certificate with the state to be
properly formed. Liability is limited.

Answer 18

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