Agency & Partnership Rules

Question 1

Subject Acrostic - Principals CORRAL their agent’s activities.

Answer 1

CREATION of agent/principal relationship OBLIGATIONS loyalty, obedience, stewardship RIGHTS of parties RATIFICATION by principal AUTHORITY express, implied, apparent LIABILITY primary & vicarious (respondeat superior)

Question 2

Formation of Agency Relationship - Creating an agency relationship is as easy as ABCD.

Answer 2

ASSENT (usually requires mutuality)

BENEFIT conferred upon principal

CONTROL of agent by principal

DURING and within scope of agent’s employment

Question 3

AGENCY DEFINITION

Answer 3

An agency is a legal relationship where an agent is authorized to represent a principal in business dealings with third parties. This requires assent by the parties, benefitting the principal, and control of the agent by the principal.

Question 4

AGENCY FORMATION

Answer 4

ASSENT: An agreement between a principal and agent.
o Capacity: While an agent does not require capacity, a principal must have contractual capacity – thus, for example, a child could be an agent but not a principal.
BENEFIT: The agent’s conduct must be for the principal’s benefit.
CONTROL: The principal must have the right to control the agent. Control means having the power to supervise the manner of the agent’s performance.
CONSENT: Consent of both parties is required.
WRITING: Not required, but if the agreement falls within the SOF, then writing necessary.

METHODS TO CREATE AN AGENCY:
o An act of the parties where they enter into an agency agreement between the principal and agent (actual authority) holding out by the principal (apparent authority) or ratification; or
o By operation of law:
• Estoppel which requires third party reliance on the principal’s communication; or
• Statutes creating agencies

Question 5

DUTIES AGENT OWES TO PRINCIPAL

Answer 5

CARE: Duty to exercise reasonable care.

OBEY: Duty to obey reasonable instructions (i.e., not lie or break the law) – obedience.

LOYALTY:
o Self-dealing- Agent cannot:
1. Receive a benefit to the detriment of the principal;
2. Usurp the principal’s opportunity; or
3. Receive secret profits (“at the principal’s expense”).

Question 6

PRINCIPAL’S REMEDIES

Answer 6

1. Contract actions (against compensated agents);
2. Tort actions;
3. Actions for secret profits;
4. Equitable actions for an accounting; and
5. Withholding of compensation for intentional torts or intentional breaches of fiduciary duty.

o 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.

Question 7

DUTIES PRINCIPAL OWES THE AGENT

Answer 7

• *DUTIES IMPOSED BY CONTRACT:**
  1. Reasonable Compensation: If the agent agreement is silent as to this term, the agent is entitled to reasonable compensation.
  2. Reimbursement for Expenses.
  3. Agent’s Performance: Cannot unreasonably interfere with the agent’s performance

Question 8

AGENT’S REMEDIES

Answer 8

A compensated agent has the usual contract remedies against the principal (also a duty to mitigate) and the right to a possessory lien for any money due from the principal, including compensation owed for services.

Question 9

AGENCY POWER: CONTRACT LIABILITY-
TYPES OF AUTHORITY

Answer 9

A principal will be liable for any contract that is entered into by an agent, if the principal authorized the agent to enter into the contract.

Actual (Express) Authority: Principal uses words to express authority to agent to enter into the contract. Can be an oral agreement, unless the contract if an interest in land lasting longer than one year (SOF)
Actual Implied Authority: Authority which agent reasonably believes the principal has given, because of Necessity, Custom or Prior Dealings.
Apparent Authority: Occurs when an agent appears to have authority, and a third-party reasonably relies on this appearance.
o Limitations on authority: Even if a principal has limited the authority, the principal will still be liable if the third party is unaware.
o Continuation of authority: If the agent continues to act on the principal’s behalf after the authority has ended, the principal will still be liable until a third party has notice that the agency has ended.
Ratification: Even if an agency did not exist when an act or task transpired, the principal may be bound if s/he later validates the act.

Question 10

AGENCY POWER: CONTRACT LIABILITY-
LIABILITIES TO THIRD PARTIES

Answer 10

THIRD PARTY v. PRINCIPAL: The principal will be liable to the third party on the contract entered into by her agent if the agent had valid authority to act (any of above).

THIRD PARTY v. AGENT: Depends on disclosure of principal:
o Disclosed Principal: The principal will be liable when the third party knows the agent is working for the principal, and also knows who the principal is (i.e., the principal is disclosed). An exception is if the contract intends the agent to be responsible.
o Partially Disclosed or Undisclosed:
• Partially Disclosed Principal: One whose existence is known, but identity is withheld.
• Undisclosed Principal: Neither identity nor existence is disclosed. This results in liability for BOTH the agent and principal.

PRINCIPAL v. THIRD PARTY: When the principal is disclosed, only the principal (not the agent) may enforce the contract and hold the third party liable. If the principal is undisclosed or partially disclosed, either the principal or the agent can enforce the contract against the third party.

Question 11

AGENCY TORT LIABILITY: RESPONDEAT SUPERIOR

Answer 11

Generally, a principal will be vicariously liable for the torts committed by an agent.

• *REQUIREMENTS:**
  1. A principal-agent relationship exists; and
  2. The tort was committed by the agent within the scope of that relationship.
  a. Sub-agents: When an agent enlists the help of a sub-agent, the principal will not be liable for a sub-agent’s torts unless the principal has the right to control the sub-agent. This rule also applies if a principal borrows another principal’s agent.
  b. Independent Contractor: A principal will not be liable for an independent contractor’s torts (element of control is lacking).
  i. Exceptions: Ultra-hazardous activities & Estoppel

SCOPE:
Normal Conduct: If the agent’s conduct is of the kind the agent was hired to perform (for example, if it was in the job description), then the more likely it will be within the scope of the agency.

Frolic v. Detour: When did the tort occur?
o A Frolic is a new and independent journey. Principal is not vicariously liable.
o A Detour is a mere departure from an assigned task. Principal will be vicariously liable

Question 12

AGENCY TORT LIABILITY:
INTENTIONAL TORTS

Answer 12

Intentional torts are ordinarily outside the scope of agency.

Exceptions: Intentional torts are within the scope if the conduct was:
o Specifically authorized by the principal;
o Natural from the nature of employment; or
o Motivated by a desire to serve the principal.

Question 13

PARTNERSHIP: DEFINITIONS

Answer 13

A partnership is an association of two or more persons to carry on as co-workers a business for profit. Partnership law is based on the law of contract and agency.

LEGAL STATUS: A partnership is a legal entity – it is distinct from the partners that make up the partnership. The partnership can own land and property, as well as be sued.

GOVERNING LAW: The Revised Uniform Partnership Act (“R.U.P.A.”) sets out default rules for partnerships. Partners may agree to follow different rules, which must be outlined in a partnership agreement. There are certain provisions that cannot be waived, such as the duty of loyalty and the right of a court to expel a partner. Any rules that are not covered in the agreement will be governed by the R.U.P.A.

Question 14

PARTNERSHIP FORMATION

Answer 14

PARTNERSHIP FORMATION

FORMALITIES: There are no formalities to becoming a general partnership – a partnership may exist through conduct alone (i.e., acting as though the relationship is a partnership, such as sharing profits).

• *AGREEMENT**: No formal agreement is required. Party’s intent is implied from conduct.
• *WRITING**: Generally not required, unless a partnership exists for more than one year.
• *CAPACITY**: Anyone capable of entering into a contract can be a partner.
• *LEGALITY OF PURPOSE**: Cannot be formed for an illegal purpose.
• *CONSENT**: Need express consent from all partners.
• *STATEMENT OF PARTNERSHIP AUTHORITY**: A partnership may choose to file a statement of partnership authority with the secretary of state, which can give constructive knowledge of the extent of the partners’ authority with regard to the partnership

Question 15

FUDICIARY DUTIES OF PARTNERS

Answer 15

DUTY OF LOYALTY: Partners may not engage in: (1) Self-dealing; (2) Usurping partnership opportunities (by competing with the partnership); or (3) Making a secret/undisclosed profit at the partnership’s expense.
o REMEDY: Action for Accounting. Only form of action that can be brought by a partnership against one of its own partners for a breach of duty of loyalty. Partnership may recover: (1) Losses caused by the breach; and (2) May disgorge profits made by the breaching partner.

INDEMNIFICATION: A partnership must indemnify every partner with regard to payments made and obligations reasonably incurred in carrying on partnership business.

DUTY TO INSPECT: Partner has a duty to inspect and copy partnership books.

Question 16

PARTNERSHIP PROPERTY

Answer 16

Partnership capital is the property or money contributed by each partner for the purpose of carrying on the partnership. Partnership property consists of everything the partnership owns, including both capital and property acquired in partnership transactions.

PROPERTY DEEMED TO BE A PARTNERSHIP PROPERTY:
o Is titled in the partnership name; or
o Is titled in the name of one or more the partner’s and the instrument transferring title notes the titleholder’s capacity as a partner / existence of a partnership.

RIGHTS OF PARTNERS IN THE PROPERTY: Partnership property can only be used for the benefit of the partnership. A partner has no right to use it otherwise.

SPECIFIC PARTNERSHIP ASSETS: Land; Leases; and Equipment, owned only by the partnership

SHARE OF PROFITS AND SURPLUS: Each partner’s share of profits, if any; and it is personal property owned as such by each partner. Individual partners may freely transfer their share of profits and surplus to third parties (including through a Will)

SHARE IN MANAGEMENT: Management (voting, etc.) is an asset that belongs only to the partnership and not to any individual partner. Individual partners may not transfer their share in management to some third party.

Question 17

PARTNERSHIP: SHARE OF PROFITS AND LOSSES

Answer 17

PROFITS: Absent an agreement, profits are shared equally.

LOSSES: Absent an agreement, losses are shared like profits.

Question 18

LEGAL ACTIONS INVOLVING PARTNERS

Answer 18

A partnership may sue or be sued in its own name; however, to reach a partner’s personal assets, there must be a judgment against the individual partner.

A partnership may sue a partner for breach of the partnership agreement or of a duty owed to the partnership.

A partner may sue the partnership or other partners to enforce a right created by partnership act or agreement, or a right otherwise belonging to the partner.

Question 19

PARTNERSHIP: TYPES OF AUTHORITY

Answer 19

Partners are agents of the partnership for carrying on usual partnership business.

• *APPARENT AUTHORITY**: The act of any partner, for apparently carrying on in usual partnership business, binds the partnership UNLESS:
  1. The partner had no authority to act for the partnership matter; and
  2. The person with whom the partner was dealing knew or had reason to know (received notice) that the partner lacked authority.

ACTUAL AUTHORITY: Partnership will also be bound if partner had actual authority. (Authority of a partner reasonably believes he has based on communications with other partners).

GENERAL PARTNERSHIP LIABILITY BY ESTOPPEL: One who represents to a third-party that a partnership exists will be liable as if a partnership exists (even if a partnership does not exist).

IF AUTHORITY IS FOUND:
o Partnership is bound by torts committed by partners in scope of partnership business.
o Partnership is bound by contracts entered by partners with authority.

Question 20

PARTNERSHIP: PERSONAL LIABILITY

Answer 20

Each partner may be personally liable for any other partner:

INCOMING partner’s liability for pre-existing debts: An incoming partner is not liable for prior debts, except any money that is contributed to the partnership by an incoming partner can be used by the partnership to satisfy prior debts.

OUTGOING partner’s liability for subsequent debts: An outgoing partner retains liability on future debts until actual notice of dissociation is given to creditors, or until 90 days after filing notice of dissociation with the state.
o Criminal Liability: Partners will not be criminally liable for the crimes of other partners committed within the scope of the partnership business, unless the other partners participated in the commission of the crime either as principals or accessories.

Question 21

PARTNERSHIP DISSOCIATION

Answer 21

This occurs when a partner stops being associated in the carrying on of the partnership, and thus causes a change in the relationship of the partners. Note, however, this does not mean that the partnership has ended.

Question 22

PARTNERSHIP DISSOLUTION

Answer 22

Dissolution generally requires the partnership business to be wound up.

Events Causing Dissolution:
o In a partnership at will, (no agreement), dissolution occurs automatically upon notice of express will of any single general partner to dissociate.
o In a partnership not at will, where there is an agreement, dissolution occurs only upon the happening of an event specified in the agreement or upon the majority vote of the partners to dissolve within 90 days of dissociation of any single partner.
o Issue of a judicial decree by a partner that: (1) economic purpose of the partnership is likely to be frustrated, and (2) not reasonably practicable to carry it on.
o Happening of an event makes it unlawful to carry on.
o If business can only be continued at a loss.

Termination: Termination is the real end.

Winding Up: The period between dissolution and termination when the remaining partners liquidate the partnership’s assets to satisfy the partnership’s creditors

Question 23

PARTNERSHIP: PRIORITY OF CREDITORS FOR DISTRIBUTION OF ASSETS

Answer 23

• *LEVELS OF PRIORITY**: Each level must be satisfied in full before the next level starts.
  1. Creditors must be paid - all outside non-partner trade creditors and all inside partners who have made loans to the partnership must be repaid as well.
  2. Capital contributions by partners must be paid - any money paid in by the partners must be fully repaid (this is not a loan, this is capital to the partnership)
  3. Profits and surplus, if any: Absent an agreement, partners share profits equally.

COMPENSATING THE PARTNERS: Each partner must be repaid his or her loans and capital contributions, plus that partner’s share of the profits or minus that partner’s share of the losses. If there are losses, which include un-repaid capital contributions by partners, all partners must pay into the partnership their percentage of loss allocation, which is then used to pay for the losses.

Question 24

LIMITED LIABILITY COMPANY (LLC

Answer 24

ORIGINAL PURPOSE: To provide owners of business the same limited liability of shareholders in a corporation plus the beneficial tax status of a partnership.

FORMATION: File the Articles of Organization and an operating agreement.

LIABILITIES: The members (owners) are not liable for any debts of the company, if the company has partnership characteristics.

PARTNERSHIP CHARACTERISTICS:
o Members control, but may delegate to managers;
o Limited Liquidity: Member interests are not freely transferable; and
o Limited Life: Events of dissolution apply.

L.L.C.: Limited liability plus limited liquidity plus limited life plus limited tax

Question 25

LIMITED PARTNERSHIP (LP)

Answer 25

DEFINED: Partnership with at least one general partner and at least one limited partner.

FORMATION: File a certificate of limited partnership (with names of general partners).

LIABILITY AND CONTROL: Differs between General and Limited Partners:
o General Partners: Still liable for all debts and obligations of the business, but they may exercise substantial managerial control.
o Limited Partners: Not liable for partnership’s debts and obligations, but they may not exercise substantial managerial control.

Question 26

REGISTERED LIMITED LIABILITY PARTNERSHIPS (RLLP)

Answer 26

Limited to partnerships engaged in professional services (e.g., lawyers).

FORMATION: Register by filing a statement of qualification with the Department of State and annual reports.

LIABILITIES: No partner will be liable for the partnership’s debts and obligations. Partner is always liable for his or her own wrongs (and anyone under direct supervision – think Agency law).