Agency & Partnership

Question 1

Agency Problems

Answer 1

(1) Liability of principal to third parties for torts of an agent
(2) Liability of principal to third parties for contracts entered into by an agent
(3) Duties which agents own to principals

Question 2

Principal-Agent Relationship: Requirements

Answer 2

(1) Assent: an informed 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

Principal Liability for Agent’s Torts: Test

Answer 3

Two-part test: Principal with be 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 4

Principal Liability for Agent’s Torts: Subagent

Answer 4

Principal will be vicariously liable for the subagent ONLY IF there is assent, benefit, and control between the principal and the sub-agent

Typically, the principal does not assent to the sub-agent’s help and does not have the right to control the sub-agent (therefore usually no vicarious liability)

Question 5

Principal Liability for Agent’s Torts: Borrowed Agents

Answer 5

Will a principal who borrows another principal’s agent be vicariously liable for the borrowed agent’s tort?

The borrowing principal will be liable for the borrowed agent’s tort only if there is assent, benefit and control between the borrowing principal and the borrowed agent

Typically, although the borrowing principal may assent to and benefit from the borrowed agent, the borrowing principal does not assume any right to control the borrowed agent (so usually no vicarious liability)

Question 6

Agents v. Independent Contractors

Answer 6

Key distinction between agents and independent contractors: no right to control independent contractor because no power to supervise the manner of IC’s performance

Question 7

Principal Liability for Agent’s Torts: Independent Contractors

Answer 7

A principal has no vicarious liability for independent contractor’s torts

Exceptions:

(1) Inherently dangerous activities: if independent contractor commits a tort while engaged in this type of activity, there will be vicarious liability
(2) Estoppel: If you hold out an independent contractor with the appearance of agency, you will be estopped/prevented from denying liability on that ground

Question 8

Principal Liability for Agent’s Torts: Scope of P-A Relationship Factors

Answer 8

(1) Was the conduct “of the kind” agent was hired to perform? (e.g., in the job description)

(2) Did the tort occur “on the job”?
- Frolic: new and independent journey – outside the scope
- Detour: mere departure from an assigned task – within the scope

(3) Did the agent intend to benefit the principal? Even if only partially intended to benefit principal it will be within the scope

Question 9

Principal Liability for Agent’s Torts: Intentional Torts

Answer 9

Intentional torts are generally outside the scope of vicarious liability

Exceptions: Intentional torts are within the scope if the conduct was

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

Question 10

Principal Liability for Contracts Entered by Agent: Test

Answer 10

Test: Principal is liable for contracts entered into by its agent ONLY IF the principal authorized the agent to enter the contract

Question 11

Principal Liability for Contracts Entered by Agent: Types of Authority

Answer 11

(1) Actual express authority
(2) Actual implied authority
(3) Apparent authority
(4) Ratification

Question 12

Principal Liability for Contracts Entered by Agent: Types of Authority - Actual Express Authority

Answer 12

Principal used words to express authority to the agent
(a) Can be oral, and even in private

Exception: If the contract itself must be in writing (e.g., statute of frauds, real estate), express authority must be in writing as well

Revocation: Express authority will be revoked by

(1) Unilateral act of either the principal or the agent or
(2) Death or incapacity of the principal
(a) unless, P gives A a durable power of attorney (written authority to enter transaction + clear survival language)

Question 13

Principal Liability for Contracts Entered by Agent: Types of Authority - Actual Implied Authority

Answer 13

Authority which the principal gives the agent through conduct or circumstance

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

Question 14

Principal Liability for Contracts Entered by Agent: Types of Authority - Apparent Authority

Answer 14

Two-part test:

(1) Principal “cloaked” agent with the appearance of authority and
(2) Third party reasonably relies on appearance of authority

Question 15

Principal Liability for Contracts Entered by Agent: Types of Authority - Ratification

Answer 15

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 16

Principal Liability for Contracts Entered by Agent: Rules of Liability and Undisclosed Principal

Answer 16

General rule: Principal is liable on it authorized contracts, and, therefore, an authorized agent is not liable on her authorized contract

Exception: Undisclosed principal - If principal is partially disclosed (only identity is concealed) or disclosed (fact of principal concealed), authorized agent may nonetheless be liable at the election of the third party (but third party must choose one)

Question 17

Duties Agents Owe to Principal

Answer 17

(1) Duty of care
(2) Duty to obey Instructions that are reasonable

(3) Duty of loyalty
Agent may never:
(a) Self-dealing: agent cannot receive a benefit to the detriment of the principal
(b) Usurping principal’s opportunity or
(c) Secret profits: making a profit at the principal’s expense without disclosure

If an agent BREACHES a duty, principal may

(a) Seek indemnity from agent and receive losses that are caused by the breach
(b) Disgorge (take away) profits made by breaching agent

Question 18

General Partnership Formation

Answer 18

No formalities to becoming a general partnership (mere conduct alone satisfies)

Sharing of profits is a key factor: contribution of money, property or services in return for a share of profits creates a presumption that a general partnership exists
(a) Repaying a loan through profits does not may someone a partner

Lack of agreement to share losses can create a presumption that general partnership does not exist

Extent of parties’ activity in enterprise is evidence supporting a partnership

Question 19

General Partnership Definition

Answer 19

A general partnership is an association of 2 or more persons who are carrying on as co-owners of a business for profit

Question 20

Liabilities of General Partners to Third Parties

Answer 20

(1) Agency principles apply: partners are agents of the partnership for apparently carrying on usual partnership business. So, general partnership is liable for torts and authorized contracts of other partners (within scope)
(a) Apply actual authority, apparent authority, implied authority, and ratification

(2) Each general partner is personally liable for all debts and obligations of the partnership and for each co-partner’s torts
(a) Each partner is jointly and severally liable for partnership obligations – to recover, must secure judgment against partnership and individual partners, then go after partnership assets first
(b) Incoming partner: generally not liable for prior debts, BUT capital/money incoming partner pays into the partnership can be used to satisfy prior debts
(c) Dissociating partner: retain liability for future debts until actual notice of their dissociating is given to creditors or until 90 days after filing notice of dissociation with the state

(3) General partnership liability by estoppel: one who present to a third party that a general partnership exists will be liable as if a general partnership exists

Question 21

Rights and Liabilities Between General Partners: Duties

Answer 21

General partners are fiduciaries of each other and the partnership

(a) They owe each other and the partnership the duty of loyalty (no self-dealing, no usurpation of partnership opportunities, and no secret profits)
(b) Remedy for breach: action for accounting - partnership may recover losses caused by the breach and disgorge profits

Question 22

Rights and Liabilities Between General Partners: Partnership Property and Liquidity

Answer 22

Test for partnership v. personal property: Whose money was used to buy the property?

(1) Specific partnership assets (e.g. land, leases, equipment) which are owned by the partnership itself may not be transferred by individual partners without partnership authority
(2) Share of profits: personal property owned by individual partners, which may therefore be transferred by individual partners to third parties
(3) Share in management: general partners have a right to share in management, but share in management is an asset owned only by the partnership itself and may not be transferred by individual partners to third parties

Question 23

Rights and Liabilities Between General Partners: Management

Answer 23

(1) Absent an agreement, each partner is entitled to EQUAL control (vote)
(2) Majority vote governs ordinary matters
(3) Unanimous vote required for fundamental partnership matters

Question 24

Rights and Liabilities Between General Partners: Salary

Answer 24

Absent an agreement, partners get NO SALARY

Exception: partners do receive compensation for helping to wind up the business

Question 25

Rights and Liabilities Between General Partners: Partner’s Share in Profits and Losses

Answer 25

(1) Absent an agreement, profits are shared equally

(2) Absent an agreement, losses are shared like profits

Question 26

General Partnership Dissolution: Definitions

Answer 26

(1) Dissolution: in the absence of an agreement that sets forth events of a dissolution, a GP dissolves upon notice of the express will of any general partner to dissociate (i.e. leave)
(2) Termination: the real end of the partnership
(3) Winding up: the period between dissolution and termination in which the remaining partners liquidate the assets to satisfy the partnership’s creditors

Question 27

General Partnership Dissolution: Partnership’s Liabilities

Answer 27

(1) Old business: partnership (and individual partners) retain liability on all transactions entered into to win dup the old business by satisfying creditors who existed before winding up began
(2) New business: partnership (and individual partners) retain liability on brand new transactions during winding up (a) until actual notice of dissolution is given to creditors or (b) until 90 days after filing statement of dissolution with the state

Question 28

General Partnership Dissolution: Priority of Distribution

Answer 28

Each level of priority must be fully satisfied before beginning the next level

First, partnership must pay all creditors, which include: outside non-partner trade creditors, all partners who loaned money to the partnership

Second, partnership must repay all capital contributions paid into the partnership by partners

Third, profits (if any) are shared equally among partners without agreement

Rule: each partner must be repaid her loans and capital contributions, plus her share in profits, minus her share of losses

Question 29

Limited Partnerships

Answer 29

Definition: a limited partnership is a partnership with at least one general partner and at least one limited partner

Formation: must file with state a limited partnership certificate that includes the names of all general partners

Liability and Control:

(a) General partners: (i) personally liable for all limited partnership obligations and (ii) have right to control/manage
(b) Limited partners: (i) limited liability, so not liable for partnership obligations and (ii) ULPA allows limited partners to manage, but most states do not

Question 30

Registered Limited Liability Partnership (RLLP)

Answer 30

Formation: must register with state by filing statement of qualification and annual reports

Liabilities: No partner is liable for obligations of this partnership, including general partners

Question 31

Limited Liability Companies (LLC)

Answer 31

Definition: A hybrid of a corporation and a partnership in which the owners (members) have the same rights and limited liabilities as stockholders in a corporation PLUS benefits of partnership tax treatment

Formation: Must file articles of organization with the state, may adopt an operating agreement

Control: (a) owners (members) may manage the business or (b) owners may delegate to a team of managers

Limited liquidity: a full membership interest may not be transferred without unanimous consent of members, or as otherwise provided in the operating agreement

Limited life: company will dissolve upon unanimous consent of members or as provided otherwise in the operating agreement

LLC = limited liability + limited liquidity + limited life + limited tax