Agency & Partnerships Flashcards
Consent
Liability in Contract and Actual Authority
Consent of both the principal and the agent is necessary to form an agency relationship. Consent may be established expressly (through written or oral statements) or by implication from the parties’ conduct.
On Behalf of
Liability in Contract and Actual Authority
This requirement is generally understood to mean that the agent must be acting primarily for the benefit of the principal, rather than for the benefit of the agent or some other party.
Capacity
Liability in Contract - Creation of Agency Relaitionship
Principal Must Have Contractual Capacity
A principal must have contractual capacity (because the contract that results is between the principal and the third party). Thus, a minor’s appointment of an agent is voidable.
Agent Needs Only Minimal Capacity
While a principal needs contractual capacity, an agent doesn’t (the agent is just an intermediary). So a person may be an agent even though they have no contractual capacity.
Disqualification of Agents
An agent may be disqualified for representing both parties or failing to have a required license.
Formalities
Liability in Contract - Creation of Agency Relaitionship
Consent
Remember, consent of both parties is required.
Writing
Generally, agency law doesn’t require the appointment of an agent to be in writing. However, the Statute of Frauds may require one. In Georgia, if the Statute of Frauds requires a contract to be in writing, the agent’s authority to enter into the contract must also be in writing. This is called an equal dignities rule. Note that a contract to find a buyer (that is, a typical agreement with a real estate agent) does not fall within this rule.
Consideration Not Required
No consideration is necessary for the creation of an agency relationship (that is, one may agree to serve as an agent gratuitously and be saddled with the duties of an agent).
Modes of Creating Agency Relationship
Liability in Contract - Creation of Agency Relaitionship
The agency relationship may be created by an act of the parties or by operation of law.
By Act of Parties
Parties may create an agency by agreement between the principal and agent (that is, actual authority). Parties may also be bound in an agency relationship through holding out by the principal (that is, apparent authority), or ratification.
By Operation of Law—Statute
Statutes creating agencies are usually designed to accomplish a limited purpose (for example, statute appointing secretary of state as out-of-state motorist’s agent for service of process for damages arising from driving in-state).
Contract Liability - Actual Authority
Liability in Contract and Actual Authority
An agent has the power to bind a principal to a contract the agent enters on the principal’s behalf only if the agent acted with authority. There are 3 types of authority: actual, apparent, and ratified. When deciding whether a principal will be bound on an agent’s contract, it should first be determined whether the agent had actual authority. If they did not, look to see whether apparent authority was present. Ratified authority comes into play only if the principal grants authority after the contract is made.
Creation of Actual Authority
Liability in Contract and Actual Authority
Actual authority is authority that the agent reasonably believes they possess based on the principal’s dealings with them. Put differently, if the principal’s words or conduct would lead a reasonable person in the agent’s position to believe that the agent has authority to act on the principal’s behalf, the agent has actual authority to bind the principal. Actual authority may be express or implied.
Express
Express authority is that which is actually contained within the four corners of the agency agreement. So it’s authority that’s conveyed by the principal in words (oral or written). For example, this might look like a principal expressly telling an agent to act on the principal’s behalf. This authority is effective even if it was granted mistakenly or because of misrepresentation.
- All or Nothing: When determining whether an agent acted with authority in entering a contract for a principal, note that this is an all or nothing issue—they had authority or not.
Implied
Implied authority is authority the agent reasonably believes they have as a result of the principal’s words or actions. It’s when the principal’s conduct leads the agent to believe the agent has authority. It includes authority:
- Incidental to express authority
- Arising out of custom known to the agent
- Resulting from prior acquiescence by the principal
- To take emergency measures
- To delegate authority in cases of ministerial acts, where circumstances require, where performance is impossible without delegation, or where delegation is customary
- To pay for and accept delivery of goods where there is authority to purchase
- To give general warranties as to fitness and quality and grant customary covenants in land sales, collect payment, and deliver where there is authority to sell AND
- To manage investments in accordance with the “prudent investor” standard
Note: The notion that title or position conveys authority can also be used to establish actual authority to the extent that the agent reasonably believes that they have authority to act based on the title or position given to them by the principal.
Termination of Actual Authority
Liability in Contract and Actual Authority
If you have determined that a principal granted an agent express or implied authority to enter a contract for the principal, before finalizing your conclusion that the principal will be bound, you need to ensure that the authority was not terminated before the contract was made.
How Termination May Occur
Termination or revocation of actual authority occurs by:
- The happening of an event specified in the agent’s and principal’s agreement as something that will terminate the agent’s authority
- Lapse of a reasonable time if a time for termination is not specified in the agreement
- A change in circumstances, including destruction of the subject matter of the authority, insolvency of the agent or principal, and a change in the law or business conditions
- Agent’s breach of fiduciary duty (for example, an agent acquires an adverse interest such as by joining a competitor)
- Either party’s unilateral termination (both parties have the power to terminate an agency unilaterally, although such termination may constitute a breach of contract) OR
- Operation of law (for example, death or loss of capacity of either party except where a durable power of attorney—written authority that says it will not terminate on the principal’s disability—is present)
Irrevocable Agencies
Neither an agency coupled with an interest nor a power given as security may be unilaterally terminated by the principal if the agency was given to protect the agent’s (or a third party’s) rights and it is supported by consideration. Neither will such agencies be terminated by operation of law.
Delegation
Liability in Contract and Actual Authority
Delegation of authority is possible if the principal consents. Consent may be express or implied from the circumstances.
Apparent Authority
Contract Liability - Substitutes for Actual Authority
Basic Theory
Apparent authority exists when the principal “holds out” another as possessing authority and based on this holding out, a third party is reasonably led to believe that authority exists (even though as between the agent and the principal, no such authority has been granted). Put differently, if the principal’s words or conduct would lead a reasonable person in the third party’s position to believe that the agent has authority to act on the principal’s behalf, the agent has apparent authority to bind the principal. This is based on estoppel principles.
- Compare–Actual vs. Apparent Authority: Actual authority is based on the principal’s manifestations (words or conduct) and how they affect the reasonable agent. Apparent authority is based on the principal’s manifestations (words or conduct) and how they affect the reasonable third party. So the reasonable belief must be created by the principal, not by the agent alone. Remember, apparent authority can exist even when actual authority does not!
Types of Apparent Authority
- When Agent Exceeds Actual Authority: There are situations where the agent exceeds their authority, yet the principal is still bound.
- —Prior Act: If the principal previously permitted the agent to exceed their express or implied authority and knows that the third party is aware of this, the principal is bound through apparent authority.
- —Power of Position: Apparent authority may be established through an agent’s title or position. Indeed, it is somewhat common for a third party to argue that an agent’s title or position, which was given to them by the principal, created a reasonable belief in the third party that the agent was authorized to act for the principal in ways that are typical of someone who holds that title or position. So, when the agent is in a position that customarily carries with it certain responsibilities, the principal is liable for the agent’s acts that come within these customary responsibilities.
- When Agent Has No Actual Authority: Generally, if an agent did not have any actual authority when they entered a contract for a principal, the principal will not be bound by the agent’s acts. However, there are certain situations in which the principal may be bound.
- —Lingering Apparent Authority: Remember, apparent authority can exist even when actual authority doesn’t. Similarly, apparent authority can linger after actual authority ends.
- Notice May Be Necessary: Where an agent’s actual authority has terminated, he will have apparent authority to act on the principal’s behalf as to all third parties with whom the principal knows he dealt unless and until the third parties receive either actual or constructive notice of the termination.
- Writing Manifesting Authority:Where an agent’s actual authority has been terminated but third parties rely on a written authority of the agent, the agent’s apparent authority is not considered to be terminated—unless the principal recovers the written authority.
- —Unilateral Agent Representations: Generally, a principal won’t be bound when the principal does nothing to hold the agent out as having authority and the only statement of authority comes from the purported agent’s claim they have authority. This is because apparent authority is based on the principal’s manifestations to a third party. Thus, generally apparent authority can’t be created by the mere representations of an agent or other actor.
- Exception—Impostors: If the principal negligently permits an impostor to be in a position to appear to have agency authority, the principal may be liable for the impostor’s actions based on estoppel principles.
- Inherent Authority (Inherent Agency Power): Inherent authority is derived solely from the agency relationship and results in the principal being bound even though the agent had no actual or apparent authority to perform the particular act. This occurs because courts wish to protect innocent third parties rather than a principal who gave some actual authority to the agent. Examples of inherent authority include:
- —Respondeat Superior: Under the doctrine of respondeat superior, the principal is held liable for the torts of their employee committed within the scope of employment.
- —Conduct Similar to that Authorized: Where an agent exceeds their actual authority (that is, violates orders), but the conduct is similar to acts authorized, the principal will be held liable.
Improper Disposition of Goods
The principal will be held liable for the disposition of their goods by an agent possessing them if the agent was given some indicia of ownership, or if the goods disposed of were sold by an agent who is a dealer in the particular goods.
Ratification
Contract Liability - Substitutes for Actual Authority
Effect of Ratification
An agency relationship is created by ratification when an “agent” purports to act on behalf of a “principal” without any authority at all, but the “principal” subsequently validates the act and becomes bound. In other words, even if the “agent” had no authority at the time of entering into the contract, the “principal” will still be bound by the “agent’s” actions if the “principal” ratifies the contract. Ratification effectively serves as a substitute for before-the-transaction authority. It gives the transaction retroactive effect unless the “principal” lacked contractual capacity at the time the “agent” entered into the unauthorized transaction (in which case the “principal” is deemed to have “adopted” the contract), or unless retroactivity would interfere with intervening third-party rights. Upon ratification, the “agent” is relieved of liability for breach of duty.
How to Ratify
Ratification may be express or implied through the conduct of the “principal.” The most common form of express ratification is oral or written affirmation of a contract (for example, a company resolution). The most common form of implied ratification is when the “principal” accepts the benefits of the contract. Other ratifying conduct would include silence if there is a duty to disaffirm or suing on the transaction.
Requirements for Ratification
For ratification to occur, the “principal” must:
- Have knowledge of (or have reason to know) all material facts regarding the contract
- Accept the entire transaction (meaning the “principal” cannot merely ratify a portion of the transaction or ratify and disavow a misrepresentation the “agent” made) AND
- Have capacity (be competent and of legal age) both at the time of ratification and at the time of the original contract (because ratification is retroactive)
Note: Ratification is a unilateral act of the “principal” and requires no consideration.
Intervening Rights
Since ratification is retroactive, we must protect the intervening rights of a bona fide purchaser (“BFP”).
What May Be Ratified and by Whom
Generally, a “principal” may ratify anything unless: (1) performance was illegal at the time of ratification, (2) the third party has withdrawn, or (3) there has been a material change in circumstances. Note that an undisclosed “principal” (one whose existence and identity is withheld from the third party) may not ratify. Only disclosed (existence and identity of the principal are known to the third party) or partially disclosed (existence of the principal is known, but the principal’s identity is withheld) “principals” may do so. Note: A purported “agent” may not treat the contract as their own.
Adoption
Contract Liability - Substitutes for Actual Authority
Principal and Agent Relationship
Contract Liability - Substitutes for Actual Authority
Agent’s Duties to the Principal
An agent (even an unpaid one) is a fiduciary of their principal. So, in addition to any express contractual duties that the agent owes the principal, fiduciary duties of loyalty, obedience to lawful instructions, and reasonable care under the circumstances (including a duty to disclose all relevant information) are owed.
- Duty of Loyalty: The agent owes a duty of undivided loyalty to the principal, meaning, the agent must put the principal’s interests above their own. This duty includes the following obligations:
- An agent may not use their position as agent to profit for themselves. If they do, they must account to the principal for any profits made while carrying out the principal’s instructions.
- An agent must act solely for the benefit of the principal and not to benefit themselves or a third party.
- An agent must refrain from dealing with their principal as an adverse party or from acting on behalf of an adverse party.
- An agent may not compete with their principal concerning the subject matter of the agency.
- An agent may not use the principal’s property (including confidential information) for the agent’s own purposes or a third party’s purposes.
- Duty of Care: An agent owes a duty to their principal to carry out their agency with reasonable care. The degree of care is a “sliding scale” depending on any special skills that the agent may have. While a gratuitous and a compensated agent may owe the same duty of care, the measure of “reasonableness” may vary because compensation is a proper circumstance to consider (that is, courts will probably expect a gratuitous agent to put less effort into being careful than they would expect a paid agent to exercise).
- Duty of Obedience: An agent must obey all reasonable directions of their principal. If the agent disobeys a reasonable direction, the agent will be liable to the principal for any loss that the principal suffers.
Principal’s Duties to the Agent
A principal’s duties to an agent are not fiduciary in nature, as fiduciary responsibilities run only from the agent to the principal. Nevertheless, a principal has several obligations to an agent. The principal owes the agent all of the duties imposed by their contract, reasonable compensation, and reimbursement for expenses. So, for example, if an agent incurs expenses or suffers other losses in carrying out the principal’s instructions, the principal has a duty to indemnify the agent. The principal also generally should cooperate with the agent and not unreasonably interfere with the agent’s performance.
Remedies
A wide range of remedies are available to the principal and agent in event of a breach by either party.
- Principal’s Remedies for Agent’s Breach of Duties: The principal’s remedies against the agent include contract actions (against compensated agents), tort actions, actions for secret profits, equitable actions for an accounting, imposition of a constructive trust (an equitable remedy whereby a “trust” is imposed to transfer property gained through unjust enrichment back to the intended party, meaning, from the wrongdoing agent to the principal), and withholding of compensation for intentional torts or intentional breaches of fiduciary duty. The principal may recover the actual profits or properties held by the agent whether or not the agent’s profit has caused the principal any loss. The principal may also terminate the agency prior to any termination date in a contract. When it comes to breach of fiduciary duty, note that a wide range of equitable remedies are available to a court. In general, a court can do whatever it wants to “do justice” in the situation.
- Agent’s Remedies: A compensated agent has the usual contract remedies against the principal (but has a duty to mitigate damages).
Subagents and Coagents
A subagent is a person appointed by an agent to perform functions that the agent has consented to perform on behalf of the agent’s principal. Remember that not every person appointed by an agent is a subagent. An agent may also appoint a coagent (that is, another agent of the principal). In doing so, the agent does not delegate their own power to that person. Employees of a single organization are presumed to be coagents, not subagents (for example, manager and store clerk are coagents).
- Liability of Agent: An agent has absolute liability to the principal for breaches by a subagent.
- Duties: If the principal authorized the agent to appoint the subagent, the subagent owes the principal the same duties as the agent owes the principal. If the agent was not authorized to appoint a subagent, the subagent does not owe duties to the principal but does owe duties to the agent.
Real Estate Brokers’ Contracts
In a typical real estate broker’s contract, the broker is entitled to compensation when there is a buyer ready, willing, and able to purchase the property. If the seller/principal refuses a buyer’s offer that was within the terms agreed by the broker/agent and the seller/ principal, the seller/principal will be found to be breaching the duty not to interfere with the agent’s duties and will owe the agent their agreed compensation.
Third Party vs. Principal
Contract Liability - Substitutes for Actual Authority
A principal will be liable to the third party on a contract entered into by their agent if the agent had valid authority (actual, apparent, or through ratification) to act. If the agent did not have authority to enter the contract and the principal has not ratified the contract, the principal cannot be held liable on the contract.
Third-Party Liability to Principal and Agent
Contract Liability - Substitutes for Actual Authority
Disclosed Principal Situations
When the principal’s existence and identity are disclosed to the third party (a “disclosed principal” situation), only the principal, not the agent, may enforce the contract and hold the third party liable.
Partially Disclosed and Undisclosed Principal Situations
When the principal is partially disclosed or undisclosed, either the principal or agent may enforce the contract and hold the third party liable.
- A principal is partially disclosed if the third party knows the agent was dealing on behalf of a principal but does not know exactly who the principal is (that is, the principal is unidentified).
- A principal is undisclosed if the agent doesn’t reveal that they are contracting on behalf of a principal.
Note that if the agent enforces the contract against the third party, the principal is entitled to all of the rights and benefits thereunder. Also remember that a third party is almost always liable to the principal (the exception is when there’s an undisclosed principal and the agent has special skills).
- When Principal May Not Enforce Contract: The principal may not enforce the contract if there has been an affirmative fraudulent misrepresentation of the principal’s identity or if there is an unforeseen increased burden to the third party due to the fact that performance is due to the principal and not the agent.
Third Party vs. Agent
Contract Liability - Substitutes for Actual Authority
As a general rule, if the agent had actual authority or apparent authority to enter a contract for the principal, or if the principal ratified a previously unauthorized contract, the agent cannot be held personally liable on the contract (the agent is just a “go-between”). However, an exception applies (that is, the agent may be held personally liable) if the existence and identity of the principal are not disclosed.
Disclosed Principal
Although in a disclosed principal situation the general rule is that the principal will be liable on an authorized contract and the agent will not be, the agent will be liable if the parties to the contract intended the agent to be liable.
- Agent Breaches Warranty of Authority: Even if the principal’s existence and identity are fully disclosed, if the agent didn’t have authority to enter into the contract (so the principal will not be liable), the agent can be held liable to the third party for damages for breaching an implied warranty that a principal with contractual capacity exists and that they, the agent, had authority to contract for the principal.
Partially Disclosed and Undisclosed Principals
If the principal is partially disclosed (that is, unidentified) or their existence is fully undisclosed, either the principal or the agent can be held liable on the contract if the agent had authority to enter the contract. Courts permit a third party to file suit against both the principal and agent but, upon objection of either defendant, the third party must elect prior to judgment which party they wish to hold liable. On the other hand, if the third party obtains a judgment against the agent without knowledge of the principal’s identity, they can later sue the principal when their identity is discovered if the judgment has not been satisfied.
Remember that the type of principal (disclosed, partially disclosed, or undisclosed) is relevant only when you are considering whether the agent is liable. Do not discuss the type of principal when analyzing the principal’s liability. Any type of principal will be bound as long as the agent had authority.
In General
Liability in Tort
A principal may be vicariously liable for the torts of their agent under 2 theories:
1. respondeat superior and
2. apparent authority.
Vicarious liability means that joint and several liability for the agent’s tort will be imputed to the principal. The underlying policy here is that vicarious liability may be imputed in certain circumstances to protect an “innocent” third party. The derivative nature of this liability means that if the agent isn’t liable, the principal generally can’t be held liable; however, an agent’s immunity from a lawsuit doesn’t necessarily bar recovery from the principal. Note that in addition to vicarious liability, a principal may be directly liable for their own negligence in hiring, retaining, or supervising the agent. A principal may also be directly liable for an agent’s tort if they gave the agent actual authority to commit the tort or ratified the tort, or in other circumstances involving independent contractors.
Employer-Empoyee Relationship
Liability in Tort: Respondeat Superior
A principal’s liability for torts committed by their agent is not determined in the same manner as determining the principal’s liability for a contract. A principal can be liable for the torts of an agent under the doctrine of respondeat superior (“let the master answer”). Under the doctrine, an employer (formerly called a master) is liable for the torts of an employee (formerly called a servant) committed within the scope of the employment. A principal generally is not liable for torts committed by an independent contractor. So the first step in determining a principal’s tort liability is to determine whether there is an employer-employee relationship between the tortfeasor and the principal. If the tort was committed by an employee acting within the scope of employment, then the employer and employee are jointly and severally liable to the injured party.
Independent Contractor or Employee?
The difference between an employee and an independent contractor is that the principal/employer retains the right to control the manner in which an employee performs their work (even if such control is never exercised). A principal does not reserve/have a right to control the manner in which work is performed by an independent contractor. In other words, if the principal has the right to tell the agent how to achieve the results the principal desires, the agent is an employee; if the principal does not have the right to tell the agent how to achieve the results sought, the agent probably is an independent contractor.
- Right to Control–Factors to Consider: If it is not clear whether the principal has the right to control the method and manner of the work, consider:
- The degree of skill required on the job (where great skill is required, more likely to be independent contractor)
- Whose tools and facilities are used (if the principal supplies the tools and facilities used to perform the job, more likely to be employee)
- The period of employment (definite and/or short, more likely to be independent contractor; indefinite and/or long, more likely to be employee)
- The basis of compensation (if on time basis, more likely employee; if on job basis, more likely independent contractor)
- The business purpose (if person hired to perform an act in furtherance of principal’s business, more likely employee; if nonbusiness purpose, such as mowing a lawn, more likely independent contractor)
- Whether the person has a distinct business (person who has their own business or occupation is more likely to be an independent contractor)
- The characterization and understanding of the parties
- The customs of the locality regarding supervision of work
Scope of Employment
Liability in Tort: Respondeat Superior
Remember, an employer is not automatically liable for an employee’s torts. The employer is liable for the employee’s torts only if they were committed within the scope of the employee’s employment. There are 3 factors helpful in making this assessment:
- Was the conduct “of the kind” that the agent was hired to perform?
- Did the tort occur “on the job” (that is, within the time and space limits of the employment)?
- Was the conduct actuated at least in part to benefit the principal?
Of the Kind—Same General Nature as Job
To be within the scope of employment, the employee’s conduct need not be actually authorized. Nor does prohibition by the principal necessarily remove the conduct from the scope of employment. If the nature of the employee’s conduct is similar or incidental to that which was authorized—a usual task—the conduct is probably within the scope of employment. However, serious criminal acts are normally considered to be outside the scope of employment.
On the Job—Frolic and Detour
Consider whether the employee’s conduct was within the time and place of the authorized employment. A detour or minor deviation from the employer’s direction is within the scope of employment, while a frolic or major deviation requiring a substantial departure from employment is beyond the scope. Once it is shown that the employee has left the scope of employment, there must be proof of return before the employer will be held liable for the employee’s tort.
Motivation to Serve Employer
Finally, consider whether the employee’s conduct was actuated, at least in part, by a purpose to serve the employer.
- Passengers: The employee’s invitation to passengers, unless expressly authorized by the employer, is generally held to be outside the scope of the employment relationship, and the employer would not be held liable for injuries sustained by such passengers.
- Unauthorized Instrumentalities: The employer is not liable for torts caused by the use of substantially different instrumentalities from those authorized (that is, those creating a greater risk of harm). For example, an employer allows its lawn care employees to use manual rakes. A homeowner is injured when the employee is using a gas-powered raking machine. The employer likely will not be held liable.
- Trips with Two Purposes: If the employee makes a trip with two purposes (one of them being personal), it will still be within the scope of employment if any substantial purpose of the employer is being served.
Ratification
An employer may ratify an employee’s torts if the normal requisites of ratification are met. In tort ratification situations, pay particular attention to the requirement that the employer must have knowledge of all material facts.
Intentional Torts
Liability in Tort: Respondeat Superior
The general rule is that the employer is not liable for the intentional torts of an employee (for example, battery or assault). Intentional torts are not normally within the scope of employment.
Exceptions—Torts Within Scope of Employment
Intentional torts will be viewed as within the scope of employment if the conduct is:
1. a natural incident of the employee’s duties (as where force is authorized or the nature of the work gives rise to hostilities);
2. where the employee is promoting the employer’s business or is motivated to serve the employer; or
3. specifically authorized or ratified by the employer.
Also, a principal is liable for an agent’s misrepresentations (including intentional misrepresentation) if the agent had actual, apparent, or inherent authority to make statements concerning the subject matter involved.
Joint and Several Liability
Liability in Tort: Respondeat Superior
As mentioned, if vicarious liability is imposed, the employer and employee will be jointly and severally liable to the third party. This means the third party can sue the employee or employer alone or join them as defendants, but is entitled to only one total satisfaction.
Note that in Georgia, unlike most states, releasing the employee does not release the employer from their vicarious liability.
Liability for Acts of Borrowed Employees
Liability in Tort: Respondeat Superior
An employer may lend the services of an employee to another. If the employee commits a tort in the loaned role, who is liable—that is, who is the employer? The key issue is who has the primary right of control over the employee—the loaning principal or the borrowing principal? That employer is liable.
Direct Liability
Liability in Tort: Respondeat Superior
Every person is liable for their own torts. Thus, an employer is liable for their own negligence if they fail to properly train or supervise employees or independent contractors, or fail to check an employee’s or independent contractor’s criminal record or job history.
Liability for Acts of Subservants
Liability in Tort: Respondeat Superior
The doctrine of respondeat superior also applies to duly authorized subservants. Authorization to hire subservants can be express or implied. Implied authorization can arise from: past practices, emergency situations, or a reasonable necessity to achieve an authorized result. However, the employer is generally not liable for the torts of a subservant engaged without authority.
Employer-Employee by Estoppel
Liability in Tort: Respondeat Superior
Where a principal creates the appearance of an employer-employee relationship upon which a third party relies, that principal will be estopped from denying the relationship and will be liable under the doctrine of respondeat superior.
Liability for Acts of Independent Contractors
Liability in Tort: Respondeat Superior
A principal will incur liability for the acts of an independent contractor where:
1. inherently dangerous activities (such as blasting) are involved,
2. nondelegable duties have been delegated, or
3. the principal knowingly selected an incompetent independent contractor (if the principal was merely negligent in selecting the independent contractor, the principal is liable only for their own negligence in selection, not for the contractor’s negligence).
Apparent Authority
Liability in Tort
If respondeat superior does not apply, the principal may still be vicariously liable in certain circumstances if the agent acted with apparent authority. (See above for discussion of apparent authority.) This theory of liability is not commonly tested on the bar exam; most vicarious tort liability questions will focus on whether a principal is liable under respondeat superior. Still, it is wise to consider apparent authority as an alternate theory if respondeat superior does not apply.
Requirements
Liability in Tort: Apparent Authority
A principal is vicariously liable where an agent appears to deal or communicate on behalf of the principal and the agent’s apparent authority enables the agent to
1. commit a tort or
2. conceal its commission.
This means that for the principal to be liable, there must be a close link between the agent’s tortious conduct and the agent’s apparent authority.
Formation
In Georgia, a partnership is an association of two or more competent persons to carry on as co-owners a business for profit. This is the case whether or not they intend to form a partnership. Partnership law is based on the law of contract and agency.
Note, then, that there must be at least two persons involved in forming a partnership. A partnership may not exist with only one partner. But also remember that a “person” may be an individual, partnership, corporation, or other association. Thus, Partnership A and Corporation B can agree to form Partnership C.
Partnership Not a Full Legal Entity
The debts of the partnership are the debts of the individual partners. However, title to land may be in the partnership name, and a partnership may sue or be sued in the partnership name.
Factors Indicating Partnership Existence
In the absence of a statement of partnership (discussed below), in determining the existence of a partnership, the express intent of the parties governs. If the parties’ intent is uncertain, courts consider the following rules:
Evidence Indicative of Partnership
- The parties’ right to control the business may be enough to prove partnership even if control is never exercised (because owners usually have the right to control operations)
- Title to property is held in joint tenancy or in common
- The parties designate their relationship as a partnership
- The amount of activity involved in the enterprise undertaken by the parties (the more activity, the more likely it is a partnership)
- Sharing of gross returns
Note that a capital contribution is not required. Note also that the absence of an agreement to share losses is evidence that the parties did not intend to form a partnership.
Sharing of Profits Is Prima Facie Evidence of Partnership
In contrast to the factors above (which raise no presumption), a person receiving a share of profits is presumed to be a partner. In other words, the sharing of profits is prima facie evidence of a partnership unless the sharing is actually repayment of debt; payment of wages or other compensation to an employee; rent; an annuity to a surviving spouse or deceased partner; interest on a loan; or consideration for the sale of goodwill of a business or other property.
Applicability of Contract Rules
Capacity
Anyone who is capable of entering into a binding contract may be a partner. A would-be partner who lacks capacity is liable only to the extent of their capital contribution.
Formalities
- General Rule—No Formalities: No formalities are required to form a partnership unless the contract falls within the Statute of Frauds (see below). The partnership agreement can be express or implied (that is, established solely through the conduct of the parties).
- When Writing Necessary: A writing is required only if the partnership agreement cannot be performed within a year.
Legality of Purpose
A partnership will be void if the purpose of its existence is illegal.
Consent
Unless otherwise agreed, no one can become a partner without the express or implied consent of all partners.
Statement of Partnership
In Georgia, a partnership may file a statement of partnership that limits or expands the authority of the partners. The filing of a statement of partnership conclusively establishes the existence of a partnership, so if one has been filed, there’s no need to address the factors above. This statement is filed with the superior court clerk of any county and discloses what the partnership wants to make a matter of public record.
Partnership by Estoppel
If no partnership is formed, parties may still be liable as if they are partners to protect reasonable reliance by third parties.
Liability of Person Held Out as Partner
When a person by words or conduct represents themselves or permits another to represent them as a partner, they will be liable to third parties who extend credit to the actual or apparent partnership in reliance on the representation.
Liability of Person Who Holds Another Out as Partner
When a person holds another out as a partner, they thereby make that person their agent to bind them to third parties. (If there is a partnership, only those partners who know of or consent to this holding out will be bound.)
Classifications
Property Interests
Partnership Capital
Partnership capital is the property or money contributed by each partner for the purpose of carrying on the partnership’s business.
Partnership Property
Partnership property, in its broadest sense, is everything the partnership owns, including both capital and property subsequently acquired in partnership transactions.
Partnership Property
Property Interests
There is no restriction as to what may be included in partnership property. In determining what comprises partnership property, the controlling factor is the partners’ intent to devote the property to partnership purposes. Georgia partnership law contains specific rebuttable presumptions regarding whether property is partnership property or the separate property of a partner.
Partnership
Property is presumed to be partnership property if it is:
- Described as such in the partnership agreement or any recorded statement of partnership;
- Acquired in the partnership’s name; or
- Purchased with partnership funds.
Partner
Property is presumed to belong to a partner if it’s acquired in their name without partnership funds (even if it is used for partnership purposes).
Title
If real property is held other than in the partnership’s name, it will not be deemed partnership property to the prejudice of an innocent person (that is, if a third party detrimentally relies on the appearance that the real property is property of an individual partner, the property may be treated as that of the partner under an estoppel theory).
Rights in Partnership Property
Property Interests
Partnership’s Rights
The partnership’s rights are totally unrestricted, since it owns the property.
Partner’s Rights
In contrast to the above, a partner’s rights in partnership property are very limited. A partner’s ownership interest in any specific item of partnership property is that of a tenant in partnership. The incidents of this tenancy are:
- Right of possession for partnership purposes only
- Not assignable, mortgageable, subject to allowances to a surviving spouse or children or homestead laws, attachable, or subject to any individual claims on a partner
- Right of ownership vests in surviving partners after death of partner
Partner’s Economic Interest in the Partnership
Property Interests
A partner also has an interest in the partnership, which is their share of profits and surplus (for example, a 25% stake). This interest is:
- Treated as personal property
- Assignable without dissolving the partnership (so, transferable just like any other financial asset, such as stock) AND
- Attachable
Note that assignment of this interest gives the assignee no rights with regard to the operation of the partnership. It merely entitles the assignee to receive profits to which the assigning partner would otherwise be entitled. A partner may not sell their partner status (that is, may not make another a partner) without the unanimous consent of the other partners.