Partnership and Agency

Question 1

Agency

Answer 1

Agency is the Fiduciary Relationship that exists between an Agent and a Principal where the agent acts on the principal’s behalf and is subject to the Principal’s control.

Question 2

Creation of Agency Relationship

Answer 2

An agency relationship is created where:
1. The parties voluntarily consent (express or implied) to enter into an agency relationship; AND
2. The Agent is subject to the principal’s control (eg. supervision is sufficient – the amount of control may be limited.

Question 3

Termination of Agency by Parties

Answer 3

Agency relationship may **be terminated by the parties **if:
1. The agent or the principal manifests to the other the desire to cease the agency relationship (termination is effective when the other party receives notificiation of the termination.)
2. The express terms of the agency expire (e.g. principal expressly hires agent for 6 months).
3. The purpose of the agency relationship is fulfilled.

Question 4

Termination of Agency by Operation of Law

Answer 4

The agency relationship may be terminated by the parties if:
1. The agent or principal dies (some jurisidictions require that the party recieve notice of the other’s death);
2. The agent or principal loses capacity (some jurisdictions require that the party receive notice of the other’s incapacity);
3. The agent materially breaches a fiduciary duty owed to the principal.

Question 5

Authority of Agent to Bind Principal

Answer 5

An Agent may bind a Principal to a contract if the agent is acting within his actual authority or apparent authority, or inherent agency power. Once a principal is validly bound to a contract by his agent, the principal is liable under the terms of the contract.

Question 6

Actual Authority

Answer 6

A) An agent acts with actual authority when, at the time of taking action that has legal consequeunces for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes him, the agent to act.

Question 7

Actual Express Authority

Answer 7

Actual Express Authority exists when the principal directs the agent to engage in the precise task in question.

Question 8

Actual Implied Authority

Answer 8

Actual implied authority exists when the agent beleives, based on a reasonable interpretation of the principal’s words or conduct, that the principal wishes him (the agent) to act on the principal’s behalf.
1. Incidental Authority: The agent’s authority to conduct a transaction includes the authority to engage in actions that are incidental to it, usually accompany it, or are reasonably necessary to accomplish it.

Question 9

Apparent Authority

Answer 9

** An agent acts with ** apparent authority ** when:
1. The Principal holds the agent out as having authority to act on the agent’s behalf; AND
2. The Principal’s conduct, when reasonably interpreted causes a third party to rely on the agent’s appearance of authority when dealing with the agent.
Apparent Authority does NOT exist if the third party has knowledge that the agent does not have actual authority.

Question 10

Inherent Agency Power

Answer 10

The inherent agency power allows courts to hold a principal liable for damages to third parties even where the principal’s agent acted WITHOUT actual or apparent authority. Courts apply the inherent agency power when:
1. an agency relationship exists; AND
2. **the totality of the circumstances ** weighs against forcing the third party to absord all of the damages.

Question 11

Undisclosed Principals

Answer 11

Courts commonly apply the inherent agency power to hold a principal liable for his agent’s unauthorized actions when the principal is undisclosed to the third party so long as the totality of the cirucmstances weighs against forcing the third party to absorb the damages.
NOTE: an agent for an undisclosed principal cannot have apparent authority because the principal cannot hold the agent out as having authority if the third party is unaware of the principal.

Question 12

Respondeat Superior

Answer 12

Under the doctrine of respondeat superior an employer (principal) may be liable for torts committed by an **employee (Agent) if:
1. an employer-employee relationship exists (NOT an independant contractor relationship) baed on the extent of control the principal exercises over the details of the agent work; AND;
2. The employees comission of the tort within the scope of employment** (generally when the conduct is of the same nature as that authorized or incidental to the conduct authorized by the employer (look for functions hired to perform, within auhtorized time and space limits, conducted for the Principal; foreseeable to the Principal)

Question 13

Employer Liability during Detours and Frolics

Answer 13

Employer will remain liable during an employers Detour (a minor deviation from the scope of employment), even if the detour is mainly for the employee’s own personal reasons. HOWEVER the employer does NOT remain liable during an employee’s Frolic (a major deviation from the scope of employment.)

Question 14

General Liability for Intentional Torts by Employees

Answer 14

Generally, Employer’s are NOT liable for the intentional tort of employees UNLESS:
1. the intentional tort was authorized by the employer; OR
2. Force is within the scope of employment in the employee’s work (e.g. security guards).

Question 15

Independant Contractor Liability

Answer 15

An independant contractor is a person who contracts with another to do something for him but his not controlled by the other nor subject to the other’s right to control with respect to his physical conduct in the performance of the under taking.
The principal’s amount of control is the key factor in determining whether an agent is an independant contractor; other relevant factors include: (a) the nature of the work; (b) the skill required in the particular occupation; (c) who supplies the equipment or tools to perform the work; (d) method of payment (hourly, salary etc.).

Question 16

When the Principal may be liable for the torts of an independant contractor:

Answer 16

Principal MAY be liable if the independant contractor:
1. makes misrepresentations for the benefit of the principal;
2. the agent purported to act on the principal’s behalf; AND
3. the principal affirmed the agent’s conduct by manifesting an intent to treat the agent’s conduct as authorized (e.g. accepting the benefit of the agent’s originally unauthorized action.)

Question 17

Creation of a General Partnership

Answer 17

A General Partnership is a type of partnership that has no limited personal liability (i.e. general partners remain personally, jointly, and severally liable for ALL debts of the partnership). A general partnership is formed when:
1. Two or more persons;
2. Associate as co-owners;
3. To carry on a business for profit.
In determining whether a general partnership exists, it is irrelevant whether the parties intended to form a partnership.

Question 18

Factors courts consider in evaluating whether a general partnership was formed

Answer 18

1. Sharing of profits: a person who recieves a share of a business is presumed to be a partner in the business unless the partner receives the profits as payment for a debt, wages, rent, or for services rendered.
2. Joint Ownership. Joint ownership of property tends to show the parties associated as co-owners; however, it does not necessarily establish a partnership in and of itself.
3. Sharing of control. Sharing of control, capital investment, and labor tends to show that the parties associated as co-owners; however, it does not necessarily establish a partnership in and of itself.

Question 19

Limited Partnership

Answer 19

A limited partnership consists of one or more general partners and one or more limited partners. General partners remain personally, jointly, and severally liable for ALL debts of the limited partnership, while limited partners are personally liable for debts ONLY to the extent of their investment in the limited partnership.

Question 20

Rights of Limited Partners

Answer 20

General Partners manage and control the day-to-day operations of the business, while limited partners generally have NO say in such matters. Limited partners are usually passive investors, and have only voting rights in extraordinary situations (e.g. sale of the partnership, amending the partnership, etc.)

Question 21

Formation of a Limited Partnership

Answer 21

A limited partnership is formed when a written certificate of limited partnership is executed and filed with the secretary of state. A certificate of limited partnership must substantially comply with the following requirements including:
1. the signature of each general partner;
2. the name of the limited partnership; AND
3. The name, street, and mailing address of:
a. Each general partner;
b. The initial designated office; AND
c. The initial agent for service of process.

Question 22

Limited Liability Partnership (LLP)

Answer 22

A professional partnership that limits a partner’s potential liability for professional malpractice (ie. legal, medical, etc.) that is committed by another partner. A partner in an LLP remains liable for professional malpractice if he:
1. Committed the malpractice himself or was directly involved in the activity that resulted in the malpratice;** OR**
2. Supervised or directed the person who committed the malpractice.

Question 23

Conversion of Partnership to LLP

Answer 23

Any partnership may become an LLP upon the:
1. Approval of the partners by vote; AND
2. Filing a statement of qualification with the secretary of state.
NOTE. The filing of a statment of qualification does NOT create a new partnership; the LLP continues to be the same entity that existed prior to the filing.
3. A statement of qualification MUST contain the following: (a) the name and address of the partnership and agent for service of process, (b) the statement that the partnershup elects to be an LLP, and (c) a deferred effective date, if any.

Question 24

Annual Report (LLP)

Answer 24

If an LLP fails to file an annual report with the appropriate state office, or pay the annual filing fee, the state may revoke the partnership’s statement of qualification. A partnership whose statement of qualification was revoked may apply to the state for reinstatement within two years after the effective date of revocation.

Question 25

Tort Liability of the Partnership

Answer 25

A General Partnership, Limited Partnership, or LLP is liable for the **wrongful acts or omissions** of ANY partner acting: 1. Within the **ordinary course of the partnership's business**; OR 2. With the** authority** of **ALL** of the other partners.

Question 26

Tort Liability of the General Partners

Answer 26

**General Partners** are jointly and severably liable for **ALL** obligations of the partnership arising from any wrongful act or omission of any partner acting: 1. Within the ordinary course of the partnership's business; OR 2. With the **authority** of **ALL** the other partners.

Question 27

Tort Liability of Limited Partners

Answer 27

Limited Partners are **NOT** personally liable for obligations of the limited partnership arising from the wrongful acts or omissions of the other partners. **However,** limited partners are **always liable** for their **own** misconduct

Question 28

Contract Liablity of the Partnership

Answer 28

Each partner is an agent of the partnership. Therefore, the actions of every partner that is made within **the ordinary course of business to carry on the partnership's business** (e.g. entering into contracts in the partnership's name), bind the partnership, **UNLESS** the partner taking the action: 1. Has **NO** authority to act on behalf of the partnership; **AND** 2. the other side has **knowledge or notice** that the partner lacks autority Actions taken by a partner that are **OUTSIDE** the ordinary course of the partnership's business do **NOT** bind the partnership **UNLESS** the other partners **unanimously authorize** the action with actual or apparent authority.

Question 29

Contract Liability of the Partners

Answer 29

**General Partners: ** *Jointly and Severably liable* for **ALL** debts and obligations of the partnership. **Limited Partners:** Personally liable **ONLY** to the extent of their investment in the limited partnership. **However**, limited partners are always liable for their **own misconduct.**

Question 30

Transferability of a Partner's Interest

Answer 30

Absent an agreement ot the contrary, a **partner** may transfer his interest in the **profits and losses** of a partnership (including the right to receive distributions) to a **third party**. Upon transfer of such interests, the transferee does NOT automatically *become a partner nor does the partnership terminate or dissolve*. A **transferee **does **NOT****become liable** for the obligations of a partnership incurred before or after the transfer, because he is not a partner. **However,** a transferee may become a partner if the other partner's unanimously consent. If the transferee becomes a partner, he will be liable for the obligations of the partnership incurred **AFTER** his admittence under the normal rules of agency & partnership.

Question 31

Liability During Dissolution

Answer 31

Dissolution of a Partnership does **NOT** immediately terminate the partnership. Rather, the partnership enters a "**winding up** phase, which continues until the winding up of the partnership's affairs is completed. During the **"winding up"** phase, a partner's **actual authority** to bind the partnership is limited to actions necessary to wind up the partnership's affairs. However a partner may still have **apparent authority** to bind the partnership so long as the other side does not have notice of the partnership's dissolution.

Question 32

Rights of Partners to Manage & Control

Answer 32

Absent an agreement to the contrary, **general partners have equal rights to manage and control** the partnership's business, while limited partners generally have no say in such matters. **Disagreements **relating to **ordinary matters** connected with the business of the partnership are **decided** by a **majority** of the partners.

Question 33

Rights to use of partnership property

Answer 33

Absent an agreement to the contrary, a partner may **ONLY** use partnership property: 1. On behalf of the partnership; **OR** 2. To carry on the business of the partnership. Any **personal use** of the partnership property requires the **consent of the other partners.**

Question 34

Partnership rights to books and records

Answer 34

Absent an agreement to the contrary, every partner **MUST** have access to the partnership's books and records during normal business hours; and upon reasonable demand, the partnership **MUST** render true and full information of all things regarding the affairs of the partnership that is just and reasonable under the circumstances. **NOTE:** a partner's rights to inspect the partnership's books and records is NOT conditioned on the partner's purpose or motive. HOWEVER, an **abuse** of these rights may constitute a **violation** of the obligation of** good faith and fair dealing.**

Question 35

Partnership rights to profts and losses

Answer 35

Each **partner** is generally entitled to: 1. an **equal share** of the partnership profits; AND 2. responsible for a **share** of the partnership **losses** **in proportion** to the partner's **share of the profits.**

Question 36

Duty of Care and Loyalty

Answer 36

Each partner owes a limited **fiduciary** duty of care to the partnership and the other partners. This requires that each partner **refrain** from engaging in: 1. grossly negligent or reckless conduct; 2. Intentional miscondcut; **OR** 3. A knowing violation of the law. If a partner **breaches the duty of care** he may be held to be **personally liable** for damages.

Question 37

Duty of Loyalty

Answer 37

Each partner owes a fiduciary duty of loyalty to the partnership and other partners, which requires that each partner: 1. **Act in good faith and fairly** towards the other partners 2. **Account** for any property, profit, or benefit derived by the partner from the partnership business or property; **AND** 3. **REFRAIN **FROM: * **Competing with the partnership** within the **scope** of the business (Even during dissolution); **AND** * **Ursurping **a business **opportunity** that belongs to the partnership. If a partner **breaches the duty of loyalty** he may be held **personally liable** for damages (duty of loyalty can be contracted out in partnership agreement if reasonable)

Question 38

Dissolution of a Partnership

Answer 38

Dissolution of a partnership does **NOT** immediately terminate the partnership. Rather, the partneship enters a "**winding up**" phase, which continues until the winding up of the partnership's affairs is completed (i.e., dissolution triggers the wind up and termination of the partnership.)

Question 39

Causes of Partnership Dissolution

Answer 39

Three main causes of partnership dissolution: 1. **actions taken by the partners** (e.g., dissassociation, partners agree to certain causes dissolution, etc.) 2. **Operation of Law** (ie. it becomes illegal to continue the business of the partnership); OR 3. **Court Order:** (e.g. a court may grant judicial dissolution if it is no longer reasonably practicable to continue operation of the partnership business).

Question 40

Uniform Partnership Act Dissolution

Answer 40

Under the UPA, any change in a partner membership automatically triggers dissolution **UNLESS** there is an agreement to the contrary.** Thus, absent an agreement to the contrary**, every partner generally has the power to **dissolve **the partnership **at any time by withdrawing** from the partnership. **However, **if the dissolution is **wrongful**, the **remaining partners** may hold the d**issolving partner liable for damages.**

Question 41

Revised UPA (RUPA) Dissolution

Answer 41

RUPA provides a basis for continuing the partnership despite a partner's withdrawal from the partnership where the remaining partners may buy out the withdrawn partner's interest instead of winding up the partnership's business. Under RUPA, the "**dissassociation**" (which occurs when a partner ceases his association with carrying on the partnership) does NOT automatically trigger dissolution UNLESS either of the following exceptions apply: 1. **At-Will Partnerships:** Any member of an **at-will partnership** can dissassociate at any time trigger dissolution and liquidation. 2. **Will of the Parties:** A partnership will automatically dissolve upon the occurrence of an event that the partners specified would cause dissolution in the partnership agreement (e.g., a partnership created for a specific term of undertaking).

Question 42

Term Partnerships

Answer 42

A term partneship is a partnership that exists for a specified duration of time or until a specific event occurs. Under RUPA, a term partnership may be dissolved before it's term expires if: 1. Atleast half the partners express their will to wind up the business within **90 days **after a partners dissassociation by death, declaring bankruptcy, becoming incapacitated, or wrongful dissassosciation; **OR** 2. **ALL** of the partners agree to amend the partnership agreement by expressly agreeing to dissolve the partnership.