Top MEE Rules

Question 1

Creation of agency (7.4%)

Answer 1

Agency is the fiduciary relationship that exists between an agent and principal where the agent acts on the principal’s behalf and is subject to the principal’s control.

An agency relationship is created when:

(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 (e.g., supervision is sufficient – the amount of control may be limited).

Question 2

Termination of agency (5.6%)

Answer 2

[Ending Proxy Mechanism In Different Manners]

The agency relationship may be terminated by the parties or by operation of law.

(1) The agency relationship may be terminated by the parties if:
(a) The express terms of the agency expire (e.g., principal expressly hires agent for 6 months);
(b) The purpose of the agency relationship is fulfilled; OR
(c) The agent or principal manifests to the other the desire to cease the agency relationship (termination is effective when the other party receives notice of the termination).
(2) The agency relationship may be terminated by operation of law if:
(a) The agent or principal becomes incapacitated (some jurisdictions require that the party receive notice of the other’s incapacity);
(b) The agent or principal dies (some jurisdictions require that the party receive notice of the other’s death); OR
(c) The agent materially breaches a fiduciary duty owed to the principal.

Question 3

Authority of agent to bind principal to a contract (general) (24.1%)

Answer 3

A principal’s liability depends on whether the agent acted with authority. An agent may bind a principal to a contract if the agent is acting within his actual 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.

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.

For Example: Principal tells Agent, “Sell my car.” Agent has the authority to take actions that are reasonably necessary to sell the car (e.g., placing advertisements in the newspaper, listing the car for sale on auto trader websites, etc.).

Exam Tip 2: You should discuss all theories of authority in your exam answer to earn full credit. Spend more time on the theory(s) of authority that are relevant, based on the exam facts.

Question 4

Actual authority (11.1%)

Answer 4

An agent acts with actual authority when, at the time of taking action that has legal consequences 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.

Actual authority can be express or implied:

(1) Actual express authority exists when the principal directs the agent to engage in the precise task in question (or directly tells the agent that he has the authority to take certain actions).
(2) Actual implied authority exists when the agent believes, 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 (based on the agent’s reasonable understanding of the principal’s instructions). Implied actual authority allows an agent to take whatever actions are properly necessary to achieve the principal’s objectives, based on the agent’s reasonable understanding of the manifestations and objectives of the principal.

Question 5

Apparent authority (24.1%)

Answer 5

An agent acts with apparent authority when:

(1) The principal holds the agent out as having authority to act on the principal’s behalf (based on the principal’s manifestations to the third party); 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 (the third party reasonably believes the agent has authority to act).

Apparent authority does NOT exist if:

(1) The third party has no notice of the principal (undisclosed principal); OR
(2) The third party has knowledge that the agent lacks actual authority.

Question 6

Inherent agency power (5.6%)

Answer 6

Pursuant to equitable considerations, the inherent agency power allows courts to hold a principal liable for damages to third parties even when 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 absorb all of the damages.

Undisclosed Principals. A principal is an undisclosed principal if the third party has no notice of the principal’s existence. 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 circumstances 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 to a third party if the third party is unaware of the principal.

NOTE. An agent who enters into a contract on behalf of an undisclosed principal becomes a party to the contract. Thus, when the agent does not inform a third party of the identity or the existence of the principal, the agent becomes liable to the third party on the contract.

Question 7

Respondeat superior (27.6%)

Answer 7

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 independent contractor relationship); AND

In determining whether an employer-employee relationship exists, the most important consideration is the extent of control that the principal exercises over the details of the agent’s work (the more control the principal exercises over the agent, the higher the likelihood that the agent will be considered an employee as opposed to an independent contractor).

(2) The employee’s commission of the tort occurs within the scope of employment.
(a) Activity is within the scope of employment when the employee’s conduct is of the same general nature as that authorized, or incidental to the conduct authorized by the employer. In making this determination, courts examine whether the employee’s conduct was:
(i) A function for which the employee was hired to perform;
(ii) Within the employer’s authorized time and space limits;
(iii) Conducted to serve the employer; AND
(iv) Foreseeable to the employer.
b) The employer remains liable during an employee’s detour (i.e., 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 (i.e., a major deviation from the scope of employment).

Intentional Torts. Generally, employers are NOT liable for the intentional torts 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 8

Independent contractor liability (9.3%)

Answer 8

Definition of Independent Contractor. An independent contractor is a person who contracts with another to do something for him but who is 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 undertaking. The principal’s amount of control is the key factor in determining whether an agent is an independent contractor. Other relevant factors include:

(1) The nature of the work;
(2) The skill required in the particular occupation;
(3) Who supplies the equipment or tools to perform the work;
(4) The method of payment (hourly, salary, per project, etc.);
(5) The length of employment; AND
(6) How the parties characterize the transaction.

Liability of Principal. Generally, a principal is NOT liable in tort for the unauthorized conduct of an independent contractor. However, the principal may be liable when an independent contractor:

(1) Makes misrepresentations for the benefit of the principal;
(2) Is engaged in abnormally dangerous activities; OR
(3) Acts with apparent authority.

Question 9

Undisclosed principals

Answer 9

A principal is an undisclosed principal if the third party has no notice of the principal’s existence.

Inherent Agency Power. Courts commonly apply the inherent agency power to hold an undisclosed principal liable for his agent’s unauthorized actions so long as the totality of the circumstances weighs against forcing the third party to absorb the damages.

Apparent Authority. An agent for an undisclosed principal CANNOT have apparent authority because the principal cannot hold the agent out as having authority to a third party if the third party is unaware of the principal.

Agent Becomes Party to Contract. An agent who enters into a contract on behalf of an undisclosed principal becomes a party to the contract. Thus, when the agent does not inform a third party of the identity or the existence of the principal—regardless of the agent’s authority or lack thereof—the agent becomes liable to the third party on the contract.

Partially Disclosed Principals. A principal is a partially disclosed principal if the third party has notice of the principal’s existence but not the principal’s identity. Unless the agent and the third party agree otherwise, an agent who enters into a contract on behalf of a partially disclosed principal becomes a party to the contract.

Question 10

Ratification of agent’s actions by principal

Answer 10

A principal can ratify an act that was done on the principal’s behalf. There are four requirements for ratification:

(i) the principal must ratify the entire contract;
(ii) the principal and the third party must have legal capacity to enter into the contract;
(iii) the ratification must occur before the third party withdraws from the contract; and
(iv) the principal must know the material facts of the transaction.

Question 11

General partnership formation (14.8%)

Answer 11

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.
(4) Themis: requires sharing of profits.

In determining whether a general partnership exists, it is irrelevant whether the parties intended to form a partnership. However, courts may consider the following:

(1) Sharing of Profits. A person who receives a share of the profits of a business is presumed to be a partner in the business unless the partner receives the profits as payment of debt, rent, wages, or for services rendered.
(2) Joint Ownership. Joint ownership of property tends to show that 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 12

Limited partnership definition/structure and formation (5.6%)

Answer 12

A limited partnership consists of one or more general partners and one or more limited partners.

Parters’ Liability. 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.

Partners’ Control. 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 generally passive investors, and only have voting rights in extraordinary situations (e.g., sale of the partnership, amending the partnership, etc.).

Formation of Partnership. 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.

NOTE. If the parties intend to form a limited partnership, but fail to substantially comply with the above requirements, they may have instead formed another business association (e.g., a general partnership).

Question 13

Contract liability of partners (9.3%)

Answer 13

General partners are jointly and severally liable for ALL debts and obligations of the partnership.

Limited partners are personally liable for the debts of the limited partnership ONLY to the extent of their investment in the limited partnership. However, limited partners are always liable for their OWN misconduct.

Question 14

Tort liability of partners (11.1%)

Answer 14

General Partners. General partners are jointly and severally 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 other partners.

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

Question 15

Contract liability of partnership (20.4%)

Answer 15

Each partner is an agent of the partnership. Therefore, the actions of every partner that are made within the ordinary course of business to carry on the partnership’s business (e.g., entering into contracts in the partnership’s name), with either actual or apparent authority, bind the partnership, UNLESS:

(1) The partner taking the action has NO authority to act on behalf of the partnership; AND
(2) The other side has knowledge or notice that the partner lacks authority.

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 16

Tort liability of partnership

Answer 16

A partnership is liable for a partner’s tortious acts, including fraud, committed in the ordinary course of partnership business OR with partnership authority.

Question 17

Transferability of partner’s interest and transferee’s liability (5.6%)

Answer 17

Absent an agreement to the contrary, a partner may transfer his interest in the profits and losses of the 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 the partnership incurred before or after the transfer, because he is not a partner. However, a transferee may become a partner if the other partners unanimously consent. If the transferee becomes a partner, he will be liable for the obligations of the partnership incurred AFTER his admittance pursuant to the normal rules of agency and partnership.

Question 18

Partners’ rights to manage and control (7.4%)

Answer 18

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. A majority of the partners can make a decision as to ordinary business matters. All partners must consent to a matter outside the course of ordinary business.

Question 19

Partners’ duty of care (7.4%)

Answer 19

Each partner owes a limited fiduciary duty of care to the partnership and other partners, which requires that each partner act as a reasonable partner and REFRAIN from engaging in:

(1) Grossly negligent or reckless conduct;
(2) Intentional misconduct; OR
(3) A knowing violation of the law.

If a partner breaches the duty of care, he may be held personally liable for damages.

Note: According to Themis there is also an obligation of good faith and fair dealing.

Question 20

Duty of loyalty (13%)

Answer 20

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 toward 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:
(a) Competing with the partnership within the scope of the business (even during dissolution);
(b) Usurping a business opportunity that properly belongs to the partnership (OK if partnership declines it);
(c) Themis: Using partnership property or business to derive a personal benefit without notifying the partnership;
(d) Themis: Advancing an interest adverse to the partnership.

If a partner breaches the duty of loyalty, he may be held personally liable for damages (the duty of loyalty may be eliminated in the partnership agreement if reasonable).

Question 21

Dissociation of partners (18.5%)

Answer 21

RequirementS. Any partner can choose to dissociate from the partnership at any time by giving notice. A partnership agreement cannot prevent a partner from withdrawing from the partnership, but it can require that the partner’s notice of withdrawal be in writing.

Wrongful Dissociation. A partner’s dissociation may be wrongful under limited circumstances. For a partnership that is unlimited by time or undertaking (i.e., a partnership at will), a partner’s dissociation is wrongful only when it is in breach of an express provision of the partnership agreement. A partner has the power to dissociate from the partnership at any time, even if the dissociation is wrongful.

Note: Under the UPA, if the dissolution is wrongful, the remaining partners may hold the dissolving partner liable for damages.

Rights and Duties. A dissociated partner generally does not have the right to participate in the management or conduct of the partnership business. A partner’s duty not to compete terminates upon dissociation. The dissociated partner’s other duties of loyalty and care also terminate upon dissociation, unless the partner participates in winding up the partnership’s business if the partnership itself dissolves.

Question 22

Dissolution of partnerships at will (definition and primary causes) (18.5%)

Answer 22

A partnership at will is an open-ended partnership that does not have a fixed termination based on a period of time or particular undertaking. A partnership at will may dissolve when a partner chooses to dissociate from the partnership by giving notice of his withdrawal.

The partnership may dissolve when a partner dissociates, but not necessarily, and not immediately. Rather, the partnership 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).

Dissolution Causes. There are three main causes of dissolution:

(1) Actions taken by the partners (e.g., disassociation, partners agree to certain causes for dissolution, etc.);

If a partnership is composed of only two partners, the dissociation of one partner automatically triggers dissolution.

(2) Operation of law (e.g., it becomes illegal to continue the business of the partnership); OR
(3) Court order (e.g., a court may grant a judicial dissolution if it is no longer reasonably practicable to continue operation of the partnership business).

Special dissolution rules exist under the Uniform Partnership Act (UFA) and the Revised Uniform Partnership Act (RUPA).

Question 23

Dissolution under Uniform Partnership Act (UPA) (18.5%)

Answer 23

Under the UPA, any change in partner membership automatically triggers dissolution of the partnership 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 dissolving partner liable for damages.

Question 24

Dissolution under Revised Uniform Partnership Act (RUPA), including term partnerships (18.5%)

Answer 24

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 business. Under RUPA, absent an agreement to the contrary, the “disassociation” (occurs when a partner ceases his association with carrying on the partnership business) of a partner does NOT automatically trigger dissolution UNLESS either of the following exceptions apply:

(1) At-Will Partnerships. Any member of an at-will partnership can disassociate at any time, automatically triggering 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 or undertaking).

Term Partnerships. A term partnership is a partnership that exists for a specified duration of time or until a specified event occurs. Under RUPA, a term partnership may be dissolved before its term expires if:

(a) At least half of the partners express their will to wind up the business within 90 days after a partner’s disassociation by death, declaring bankruptcy, becoming incapacitated, or wrongful disassociation; OR
(b) ALL of the partners agree to amend the partnership agreement by expressly agreeing to dissolve the partnership.

Question 25

Partner’s authority to bind partnership (types of authority)

Answer 25

A partner is an agent of the partnership for the purpose of its business and can contractually bind the partnership when the partner acts with either actual or apparent authority.

a. Express Actual: Express authority can arise from the partnership agreement itself, an authorization of the partners, or a statement of authority filed with the state.
b. Implied Actual: Based on partner’s reasonable belief that an action is necessary to carry out his express authority.
c. Apparent Authority: Exists when a partner acts in the ordinary course of partnership business and the third party reasonably believes the partner has authority to act.

A partner’s act that was not authorized by the partnership may nevertheless bind the partnership under the principle of apparent authority. For apparent authority to apply, the partner must perform the unauthorized act in the ordinary course of apparently carrying on either the partnership business or business of a kind carried on by the partnership. However, the third party with whom the partner was dealing cannot hold the partnership liable when that party knew or had received notification that the partner lacked authority. For the partnership to escape liability, the third party generally must possess actual knowledge of the partner’s lack of actual authority.

Question 26

Winding up

Answer 26

A person who is winding up the partnership business may dispose of and transfer partnership property and may discharge the partnership’s liabilities.

Question 27

Partner’s authority to act (independently make decisions) (20.4%)

Answer 27

Acting individually, a partner has the actual authority to commit the partnership to matters within the ordinary course of the partnerhip’s business, UNLESS the partner has reason to know that other partners might disagree.

If there is a decision as to a matter outside the ordinary course of the partnership’s business, the decision requires the consent of all partners.

Question 28

Waiver of right to terminate; buyout

Answer 28

Once a partnership has been dissolved, but before the winding up of its business is complete, the partnership may resume carrying on its business as if dissolution had never occurred. To do so, all partners (including any properly dissociated partners) must agree to waive the right to terminate the partnership.

When a partner dissociates from the partnership but the partnership is not dissolved, the partnership must buy out the dissociated partner’s partnership interest. A dissociated partner may maintain an action against the partnership to determine the buyout price and to compel the partnership to pay that amount to the partner. The action must be commenced within 120 days after the partnership has tendered payment or an offer to pay or within one year after written demand for payment if no payment or offer to pay is tendered.

The dissociated partner is NOT entitled to receive a buyout payment if s/he did not agree to waive the right to terminate the partnership (and the partnership dissovled as a result of the dissociation).

Question 29

Limited liability partnership: liability of partner

Answer 29

A limited liability partnership (LLP) is a partnership in which a partner’s personal liability for obligations of the partnership is eliminated. To enjoy LLP status, the partnership must file a statement with the state. In other respects, an LLP is governed by the same rules as a partnership. A limited partner in an LLP is not personally liable for an obligation of an LLP, regardless of the type of obligation. However, a limited partner is personally liable for his own personal misconduct.

Question 30

To whom is a partner liable for breaching a duty?

Answer 30

A partnership may pursue a legal action against a partner for breach of the partnership agreement or for violating a duty owed to the partnership that caused the partnership harm. A partner may pursue a legal action against the partnership or another partner to enforce the partner’s rights under the partnership agreement or the RUPA.