Agency/Partnership

Question 1

Definition of an agent

Answer 1

Generally, an “agent” is a person who consents to act on behalf of and subject to the control of another person (the “principal”).

Question 2

Respondeat Superior

Answer 2

Under the doctrine of respondeat superior, employers are liable for the actions of an employee when the employee is acting within the scope of his employment.

Section 7.07 of the Restatement (Third) of Agency states that “[a]n employee acts within the scope of employment when performing work assigned by the employer or engaging in a course of conduct subject to the employer’s control. An employee’s act is not within the scope of employment when it occurs within an independent course of conduct not intended by the employee to serve any purpose of the employer.”

Question 3

Employer employee liability

Answer 3

Generally, an employer is subject to vicarious liability for torts committed by an employee “acting within the scope of employment.” Restatement (Third) of Agency §§ 2.04, 7.07(1)

Question 4

Agent Authority

Answer 4

A principal is not liable on a contract entered into by an agent unless the agent had actual or apparent authority.

Question 5

Apparent Authority Theory

Answer 5

A principal will sometimes be liable for torts committed by its agents even if the conditions of respondeat superior liability (i.e., an employer/employee relationship and conduct within the scope of employment) are not satisfied.For example, a principal can be liable if the principal was negligent or reckless in the selection of the agent.

A principal can also be liable for an agent’s torts if the principal has a special relationship with the injured person that imposed a special duty on the principal to take care to protect against the risk that the agent would harm the injured person.

A principal is liable for a tort committed by an agent when the agent “appears to deal or communicate on behalf of [the] principal and the agent’s appearance of authority enables the agent to commit [the] tort . . . .”

Question 6

Apparent Authority

Answer 6

Apparent authority is created with respect to a third person when “by written or spoken words or any other conduct” the principal causes the third person “to believe that the principal consents to have the act done on his behalf by the person purporting to act for him.” Restatement (Second) of Agency § 27. The Third Restatement is similar: “[a]pparent authority . . . is created by a person’s manifestation that another has authority to act with legal consequences for the person who makes the manifestation, when a third person reasonably believes the actor to be authorized and the belief is traceable to the manifestation.” Restatement (Third) of Agency § 3.03.

Question 7

Actual Authority

Answer 7

Actual authority exists when the principal by written or spoken words or other conduct “causes the agent to believe that the principal desires . . . [the agent] to act on the principal’s account.”

“An undisclosed principal is bound by contracts . . . made on his account by an agent acting within his authority.” Restatement (Second) of Agency § 186; accord, Restatement (Third) of Agency § 6.03.

An agent who purports to act on his own account, but in fact is making a contract on behalf of an undisclosed principal, is also a party to the contract. Restatement (Second) of Agency § 322; accord, Restatement (Third) of Agency § 6.03. The rationale for this rule is that the third party has every reason in the case of an undisclosed principal and agency to assume that the person with whom it contracts expects to be liable on the contract. Additionally, to the extent the third party was relying on the financial solvency of the person on the other side of the contract, the third party would have no basis to rely on anyone but the agent who signed the contract.

Question 8

Partially disclosed principal

Answer 8

When a third party contracts with a person that the third party knows is acting in an agency capacity for another but the third party is unaware of the identity of the principal, the principal for whom the agent acts is called a “partially disclosed principal.” Restatement (Second) of Agency § 4(2).

Question 9

Definition of a partnership

Answer 9

A partnership is defined as “an association of two or more persons to carry on as co-owners a business for profit . . . whether or not the persons intend to form a partnership.” Revised Uniform Partnership Act (RUPA, as amended 2013) § 202(a).

In addition, “[a] person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment . . . for services as an independent contractor or of wages or other compensation of an employee.”

Question 10

Partnership authority to act

Answer 10

Even if a partner lacks actual authority, a limited liability partnership can be bound by the acts of a partner, “including the execution of an instrument in the partnership name,” if the partner was “apparently carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership . . . .” RUPA § 301(1).

Question 11

Partnership liability for wrongful acts of another partner

Answer 11

Generally, a partnership is liable for loss or injury caused to a third party because of the wrongful act of a partner acting in the ordinary course of partnership business. RUPA § 305(a); UPA § 15.
UPA § 15(a) (joint and several liability for partnership liability arising from partner’s wrongful acts).

Partners are personally liable for the obligations of a general partnership.

Question 12

Partnership liability for own wrongful acts

Answer 12

Partners can become liable, however, for partnership obligations based on their own personal misconduct.

Question 13

Reimbursement of a partner

Answer 13

A partnership must reimburse a partner for any payment made by the partner in the course of the partner’s activities on behalf of the partnership. RUPA § 401(b) (provided the partner complied with his fiduciary duties in making the payment); UPA § 18(b) (requiring partnership to indemnify partner for payments in the ordinary and proper conduct of its business).

Generally, a partner is not entitled to separate remuneration for services on the theory that a partner’s compensation for his or her services is his or her share of profits. RUPA § 401(j); UPA § 18(f).

Question 14

Rights to management in a partnership

Answer 14

Section 401(h) of the Revised Uniform Partnership Act, as amended, provides that “each partner has equal rights in the management and conduct of the partnership’s business.”

This grant of authority to each partner is tempered by subsection 401(k), which provides: “A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be undertaken only with the affirmative vote or consent of all the partners.”

As the comments to Section 401(h) note, the scope of a partner’s authority is governed by agency law principles. If the partnership agreement is silent on the scope of the agent-partner’s authority, a partner has actual authority to commit the partnership “to usual and customary matters, unless the partner has reason to know that (i) other partners might disagree, or (ii) for some other reason consultation with fellow partners is appropriate.”

Question 15

Matters outside of the general course of the partnership business

Answer 15

As a general rule, matters outside the ordinary course of a partnership’s business must be unanimously approved by the partners. RUPA § 401(k).

Question 16

Formation of an LLP

Answer 16

A limited liability company is formed by the filing of a signed certificate of organization with the Secretary of State. Rev. Unif. Limited Liability Company Act § 201 (2006, as amended).

Question 17

Disassociation from the partnership

Answer 17

A partner is dissociated from a partnership when the partnership has notice of the partner’s will to withdraw as a partner. RUPA § 601(1) (1997, as amended). A partner can dissociate from the partnership at any time. The notice of the partner’s will to withdraw need not be in writing. See RUPA §103(b)(6) (partnership agreement may provide that notice of withdrawal be in writing). The dissociation is rightful—that is, the dissociating partner has no obligations to the other partners—when the partnership is at will and the dissociation breaches no express provision in the partnership agreement. See also RUPA § 102(13) (1997, as amended) (“‘partnership at will’ means a partnership in which the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking”); § 602(b) (1997, as amended) (specifying that a partner’s dissociation is wrongful in an at-will partnership “only if . . . it is in breach of an express provision of the partnership agreement”).

Normally, a partner’s dissociation in an at-will partnership results in its dissolution, and the business must be wound up. See RUPA § 801(1) (1997, as amended). But such dissolution can be rescinded by the affirmative vote or consent of all remaining partners. Id. § 803; accord, RUPA § 802(b) (1997, as amended) (permitting the partners to “waive the right to have the partnership’s business wound up and the partnership terminated”). Under RUPA, as amended, the dissociating partner is no longer considered a partner and does not participate in this decision to continue the partnership. See RUPA § 102(10) (1997, as amended) (the term “partner” does not include a partner who dissociated under Section 601).

When a partnership is continued and not dissolved, the dissociating partner is entitled to have her interest purchased for a buyout price equal to that partner’s interest in the value of the partnership, based on the greater of its liquidation or going-concern value (plus interest from the date of dissociation). RUPA § 701 (1997, as amended). Further, if the withdrawing partner makes a written demand for payment and no agreement is reached within 120 days after the demand, the partnership must pay in cash the amount it estimates to be the buyout price, including accrued interest. Id. § 701(e).

During the winding-up process, partners who participate in the winding up of partnership business continue to have a fiduciary relationship to the partnership and the other partners. In addition, the partner must perform his duties during the winding up of the partnership business “consistently with the contractual obligation of good faith and fair dealing.”

Question 18

Duties in a partnership

Answer 18

Under RUPA, a partner owes to the partnership and the other partners the duties of loyalty and care.

Partners are liable for damages to the partnership and co-partners for breach of these duties. Claims for breach of duties by partners in a limited liability partnership are not subject to the rule of limited liability applicable to claims by outside parties.

The fiduciary duty of loyalty includes the obligation to refrain from appropriating partnership assets for personal use.

The duty of care, which is remediable in damages, includes a duty not to engage in intentional misconduct and knowing violations of law.

The duties of loyalty and care run to both “the partnership and the other partners.”