Agency & Partnership Flashcards
Agency
A fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control and consent by the other so to act.
-Consent: need both principal and agent.
-Agent: thinking primarily of your principal’s interests.
-Degree of control need not be extensive/significant; sufficient if principal specifies tasks agent should perform.
Principal must have contractual capacity (e.g. be an adult) but agent doesn’t b/c they’re just a go-between.
No writing req but SOF can affect whether an agency relationship can be created.
-Equal Dignities Rule: agency agreements must be in writing when agent is to enter into certain contracts within SOF OR agency agreement itself would fall within SOF.
Agent’s duties to principal
-Fiduciary duties (even if agent is unpaid) - highest duty that the law can impose. Can only be thinking of the interests of the principal. Two main duties:
(i) duty of care - carry out agency with reasonable care.
(ii) duty of loyalty - agent owes undivided loyalty to principal; refrain from self-interest dealings; refrain from dealing with principal as an adverse party or from acting on behalf of an adverse party; may not compete w/ principal concerning the subject matter of the agency.
-Duty of obedience: agent must obey all reasonable directions of principal.
Breach of fiduciary duty is an equitable action - can get damages + equitable remedy such as disgorgement.
Principal’s duties to agent
NOT fiduciary in nature.
Common law obligations:
-Indemnify/reimburse agent’s losses in carrying out principal’s instructions.
-Compensate agent for services (unless indicated otherwise).
Types of authority
(1) Actual authority - authority that the agent reasonably thinks she possesses based on the principal’s dealings with her. May be expressed or implied. Must start with principal’s manifestation (words or action). Express = conveyed by principal in words. Implied = inferred from action/custom/acquiescence (i.e. principal has not objected to action agent has regularly performed) that agent reasonably believes exists.
Terminating actual authority:
-Will be revoked after a specific time or event, or reasonable time.
-Change of circumstances.
-Breach of fiduciary duty.
-Unilateral act.
-Death (if principal’s death, termination effective only when the agent receives notice).
(2) Apparent authority: exists when the principal holds out another as possessing authority and a third party is reasonably led to believe that agent has authority (3rd party asks whether decision was within the ordinary course of business for that partnership); point is to protect 3rd parties relying on assurances.
-Power of position: based on agent’s title or position. E.g. principal gives agent a title and agent thinks “I guess I’m authorized to do x task that somebody with this title typically can do.” Ditto for 3rd party inferring that.
-In a partnership, can have apparent authority even when the majority of the partners don’t support the decision (b/c that just means you lack ACTUAL authority).
Unilateral agent representations are insufficient to create actual or apparent authority. I.e. we need principal to manifest intent, not just the agent.
Lingering apparent authority [after actual authority ends]
-E.g. agent fired but third party doesn’t know. Principal will still be held to transactions conducted b/w agent and unnotified third party. Principal has to give notice to 3rd party to cut off authority.
(3) Ratification: after-the-fact authority; even if the agent had no authority at the time of entering into contract, the P will still be bound by the agent’s actions if the principal ratifies (“blesses”) the contract. Ratification effectively serves as a substitute for before the transaction authority.
-Can be expressed (oral or written affirmation) or implied (principal accepts benefits).
-Reqs for ratification: principal is given all material facts of contract; must accept entire transaction; ratification cannot be used to alter the rights of intervening parties.
Liability of the principal for the agent’s contracts
Who is bound on contract?
-Agent acted with actual authority, apparent authority, or ratification = principal bound; agent is not
-Undisclosed or partially disclosed principal (at the time of agent’s transaction, the 3rd party has no notice that the agent is acting for a principal) = agent also bound
-When a partner enters into a contract he had no authority to enter on behalf of the partnership, the partnership is NOT bound by the contract. Partner alone is liable.
Liability of the principal for the agent’s torts
Master: principal who employs an agent with right to control agent.
Servant: agent so employed by master.
-In general, if a person is subject to the control of another as to the means used to achieve a particular result, you’re a servant agent.
Independent contractor: person contractually obligated to do work, but not controlled in how the work is done.
-If a person is subject to the control of another as to the results only, he is an IC agent.
Factors for right to control (2d Restatement):
-Skill required
-Tools and facilities
-Period of employment
-Basis of comp
-Business purpose
-Distinct business
Vicarious liability: master liable for torts in scope of servant’s employment. Master and servant both jointly and severally liable. A principal is generally NOT liable for the torts committed by an independent contractor in connection w/ his work.
-Scope of employment: (i) was the conduct of the kind that the agent was hired to perform?; (ii) did the tort occur on the job, i.e. within the time and space limits of the employment?; (iii) was the conduct actuated at least in part to benefit the principal?
Intentional tort liability: employer generally not liable for employee’s intentional torts. Exception: conduct natural from nature of job, motivated to serve the employer, or specifically authorized or ratified by the employer.
Borrowed servant doctrine: employee of one employer doing services for another. If the employee committed a tort in the loaned role, which employer is liable is based on who has the primary right of control over the employee.
EXAM TIP: discuss both theories of master liability - direct and vicarious.
General partnership formation
Formed as soon as two or more persons associate to carry on as co-owners a business for profit. (Even without subjective intent to form a partnership.)
-Thus, no agreement is required to form a partnership. If there is none, statutory default rules apply.
Partnership formation factors (totality of circumstances):
-Profit sharing (number one factor). A person who receives a share of the profits is legally presumed to be a partner UNLESS you received those profits as payment of a debt, wages, rent, or interest.
-Gross returns i.e. revenues of a business: no presumption that you’re a partner.
-Right to participate in control of business - anything you would typically associate with ownership, i.e. control.
-Loss sharing: evidence suggesting that you’re a co-owner.
-SOF may require writing, but partnership law itself does not.
Partnership by estoppel: no partnership was formed in fact, parties may still be liable as if they were partners to protect reasonable reliance by 3rd parties.
Partnership
Once formed, it’s a separate legal entity distinct from its partners.
Voting default rule: unless otherwise agreed, one partner and one vote.
-Ordinary business decision = majority vote
-Extraordinary business decision (e.g. amending the partnership agreement) = unanimous vote
Default: no right to salary or other comp (b/c you’re sharing the profits) unless otherwise agreed. Of course in the real world, partners have a separate salaried income.
Financial rights in a partnership
Profit/loss sharing default rules: profits shared equally by number of partners (losses shared in same manner as profits).
Partnership liability
Partnership = principal under agency law. A partner is an agent of the partnership –> statutory apparent authority to go out in the world and bind the partnership to transactions within the ordinary course of business - even if that partner had no actual authority!
Tort: partnership is liable for loss or injury caused to a person as a result of the tortious conduct of a partner or an employee acting in the ordinary course of business of the partnership or with authority of the partnership.
Contracts: partnership is liable for contracts entered into on its behalf by partners with actual or apparent authority - direct tieback to agency law.
Statement of authority: document filed publicly limiting partners’ authority to transfer real property. A way to work around the ban on contracting away apparent authority.
-Any other transaction (i.e. non-real property) = you cannot cut off the partners’ apparent authority.
Liability of partners
Each partner is jointly and severally liable for partnership obligations. But entitled to indemnification. Can contract away your personal liability for losses but only w/r/t to the other partners - can’t limit 3rd parties right to come after you.
-But only as guarantors –> plaintiff will first have to try to come after the partnership assets. Only if those are unavailable (e.g. bankrupt) can they come after your personal assets.
Admitting new partners:
-Default rule - unanimous vote required.
-Newly admitted partner is not liable for partnership obligations that arose before his admission.
Fiduciary duties owed by partners
Partners owe duty of care and duty of loyalty to the partnership AND to the other partners individually.
-Loyalty: account to partnership for any benefit; no taking adverse positions to partnership; no competing with partnership.
-Care: no grossly negligent or reckless conduct by partners. So statute excuses garden-variety negligence!
Duty of disclosure: each partner and the partnership shall furnish to a partner w/o demand any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties & on demand any other info concerning the partnership’s business and affairs except to the extent the info demanded is unreasonable or otherwise improper.
-CAN eliminate duty of disclosure by contract b/c it’s not fiduciary; a partnership agreement that says it eliminates duties of loyalty and care is trying to trick you!
Partnership property
Partnership property if acquired in the partnership’s name or if it’s acquired in a partner’s name where it’s apparent from the doc that she is acting for the partnership
Presumed to be partnership property if partnership funds are used and it’s presumed to be a partner’s property if it’s acquired in her name w/o partnership funds and there is no sign that she’s acting for a partnership.
Partnership’s rights in partnership property:
-Totally unrestricted, i.e. partnership owns partnership property.
Partner’s rights in partnership property:
-Can only use the property for partnership purposes.
-So what does a partner own? Their partnership interest, comprised of two bundles of rights:
–(i) Management rights. Unless otherwise agreed, a partner cannot unilaterally transfer his management rights and thereby make the transferee a partner. Default rule is a unanimous vote.
–(ii) Financial rights. Unless otherwise agreed, a partner CAN unilaterally transfer his financial rights. The transferee merely has the right to receive profit distributions from the partnership - but doesn’t otherwise become a partner.
Dissociation
Partner’s withdrawal from partnership.
Dissociation by express will - partner voluntarily leaves.
But can arise under many circumstances: partner expelled; partner dies.
Wrongful dissociation: if dissociation is in breach of an express term of the partnership agreement. Also wrongful in a term partnership if the partner withdraws, is expelled, or becomes bankrupt before the end of the term (partner then liable for damages for the dissociation).
So what happens when partner dissociates? Either (i) the partnership dissolves or (ii) the partnership buys out the partner.
Generally, a dissociated partner remains liable for pre-dissociation partnership obligations. Can even be liable for post-dissociation partnership liabilities incurred within 2 years of the dissociation assuming that dissolution has not occurred. You can protect yourself from this by notifying creditors directly of your dissociation OR by filing a public statement of dissociation.
A dissociated partner has apparent authority to bind the partnership for a period of time not exceeding two years after dissociation.
At-will partnership: no agreement to remain partners (default).
Term partnership: agreement to remain partners for amount of time or until completion of project. But you can always dissociate from a partnership, at any time (though it may be considered wrongful).
-Wrongful dissociation –> liability for damages.
Dissolution
Partnership ends, business is wound up, assets are sold off (assets used to pay off partnership liabilities). If money left over, that’s profit. If not enough money to pay off creditors, partners pitch in personal funds.
-In general, when a partner dissociates by express will (in an at-will partnership), the partnership is dissolved. So dissociating partner can force partnership to dissolve.
-In a term partnership, dissolution post-dissociation only required if within 90 days after the dissociation one half of the remaining partners agree to wind up the partnership.
Distribution of partnership assets:
-First, to creditors (including partners who loaned money to the firm)
-Second, to reimburse partners for capital contributions
-Third, to partners based on profit sharing
