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Flashcards in Agency and Partnership Deck (128):

Three Agency Problems

1. Liability of Principal to Third Parties for Torts of an Agent.
2. Liability of Principal to Third Parties for Contracts Entered into by an Agent.
3. Duties which Agents Owe to Principals.


Liability for Principal for Torts of Agent - Respondeat Superior or Vicarious Liability

Issue: Whether the principal will be vicariously liable for torts committed by its agent.


Two Part Test for Principal Liability to Torts

1. There is a Principal Agent Relationship;
2. The Tort must be commited by the agent within the scope of the relationship.


Principal-Agent Relationship Requirements

1. Assent
2. Benefit
3. Control



An informal agreement between the Principal, who has capacity, and the Agent



The Agent's conduct must be for the Principal's benefit.



The Principal must have the right to control the Agent by having the power to supervise the manner of the Agent's performance


Sub-Agents: Will the principal be vicariously liable if its agent gets the help of a "sub-agent" and they commit a tort?

Only if there is:
1. Assent
2. Benefit
3. Control
Between Principal and Sub-Agent tortfeasor

**Without all three, NO VICARIOUS LIABILITY


Borrowed Agents: Will the principal who borrows another principal's agent be vicariously liable the "borrowed agent" tort?

Only if there is:
1. Assent
2. Benefit
3. Control
Between Borrowing Principal and Borrowed Agent tortfeasor

**Without all three, NO VICARIOUS LIABILITY


The key distinction between an Agent and an Independent Contractor

There is NO RIGHT TO CONTROL an Independent Contractor because there is NO POWER to supervise the manner of its performance or work.


Vicarious Liability Rule for Independent Contractor Torts

As a rule, there can be no vicarious liability for an Independent Contractor's torts.


Exceptions to NO Vicarious Liability for Independent Contractors

1. Inherently dangerous activities - if youR IC commits a tort in an inherently dangerous activity, Vicariously Liable. (Non-Delegable Duty)

2. Estoppel - if you hold out your IC with the appearance of Agency you will be estopped from denying liability.


Scope of Principal-Agent Relationship Test

1. Was conduct "of the kind" agent was hired to perform?

2. Did the tort orccur "on the job"? Frolic v. Detour

3. Did the agent intend to benefit the Principal?


Was conduct "of the kind" agent was hired?

Was the conduct within the job description, if so likely inside the scope.


Did the tort occur "on the job"? **Tested often

A frolic is a new and independent journey and is outside the scope.

A detour is a mere departure from an assigned task and is inside the scope.


Did the agent intent to benefit the Principal?

If the Agent, even in part, intended to benefit the Principal by its conduct that is enough to be inside the scope.


Vicarious Liability of the Principal for Intentional Torts Committed by the Agent

Intentional torts are generally outside the scope.


Exceptions to Vicarious Liability of the Principal for Intentional Torts Committed by the Agent

1. If conduct was authorized by the Principal
2. If conduct was natural from the nature of employment
3. If conduct was motivated by a desire to serve principal


What to look for in within the scope?

Detour if you are driving back to work.


Liability of Principal for Contracts Entered by Agents Issue

Whether the principal is liable for contracts entered into by its agent?


Test for Liability of Principal for Contracts Entered by Agents Issue

Principal is liable for contracts entered into by its agent only if the principal authorized the agent to enter the contract.


Four Types of Authority

1. Actual Express
2. Actual Implied
3. Apparent
4. Ratification


Actual Expressed Authority

Principal used words to express authority to agent.

Actual express authority can be
1. Oral
2. Private

Narrowly Interpreted - confined to words used in it.


Exceptions to Oral and Private Actual Expressed Authority

If the contract itself must be in writing, then the express authority must be in writing.

**Land Sales (Look up Statute of Fraud)


How to revoke Express Authority?

1. Unilateral act of either the principal or the agent
2. Death or incapacity of the principal.


Where to start on essays for points?

"The Principal is liable only on its authorized contracts", "in this case", "therefore"


Exception to Protect the Agent

If the Principal gives the Agent a durable power of attorney.


Power of Attorney

Written expression of authority to enter into a transaction.






"Survives Death"


Actual Implied Authority

Authority which the principal gives the agent through conduct or circumstance:
1. Necessity
2. Custom
3. Prior Dealing



There is implied authority to do all tasks that are necessary to accomplish an expressly authorized task.



There is implied authority to do all tasks which by custom are performed by persons with the Agent's title or position.



There is implied authority to do all tasks which the agent believes to be authorized to do from prior acquiescence


Apparent Authority

The appearance of authority to the third party.


Two Part Test for Apparent Authority

1. Principal "cloaked" agent with the appearance of authority;
2. Third Party reasonably relies on appearance of authority.



Authority can be granted after the contract has been entered, IF:
1. The Principal has knowledge of all material facts regarding the contract,
2. Principal accepts its benefits.


Ratification Exception

Ratification cannot alter the terms of the contract.


The Rules of Liability on the Contract

The General Rule is the principal is liable on its authorized contracts and therefore as a rule an authorized Agent is not liable on its authorized contracts


Exception to the Rules of Liability on the Contract

The undisclosed principal, if principal is partially disclosed (only the identity of the principal concealed) or undisclosed (fact of principal concealed), authorized agent may nonetheless be liable at the election of the third party.

Result: Authorized Agent becomes liable


Duties Agent Owes to Principal

In return for reasonable compensation and reimbursement of expenses, agents owe principals:
1. Duty of Care
2. Duty of Obey Reasonable Instruction
3. Duty of Loyalty


How would an Agent breach duty of loyalty?

What can the Agent NEVER do?

1. Self-dealing: Agent cannot receive a benefit to the detriment of the principal;
2. Usurping the principal's opportunity: take away;
3. Secret profits: making a profit at the principal's expense without disclosure.


On Principal Questions always start with this language

"The Principal is liable only on its authorized contracts."


What remedies does a Principal have?

May recover:
1. Losses that are caused by the breach;
2. the Principal may disgorge the profits made.


Partnership Issue Areas

1. Formation
2. Liability of General Partners to Third Parties
3. Rights and Liability between General Partners
4. General Partnership Dissolution
5. Alternative Unincorporated Business Organzations


General Partnership Formation: Formalities


Behavior can lead to being classified.


General Partnership Formation: Definition

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


Sharing of Profits is the Key Factor to General Partnerships. Therefore what?

The contribution of money or services in return for a share of profits creates a presumption that a General Partnership exists.

**Not salary, wage, commissions, fixed rate of interest.

**Must be share of profits.


Liability of General Partners to Third Parties

1. Agency Principles Apply:
2. Each General Partner is personally liable for all debts of the Partnership and for each co-partner's torts.
3. General Partnership Liability by Estoppel


Agency Principles in General Partnership

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

2. Therefore, the general partnership is liable for each partner's torts in the scope of partnership business and for each partner's authorized contracts.


Two Spins on Partner being liable for all debts of partnership

1. Incoming partner's are generally not liable for prior debts, but any money paid in by that incoming partner can be used to satisfy those prior debts.

2. Dissociation (withdrawing) partner's retain liability for subsequent debts UNTIL:
- actual notice of their dissociation is given to creditors
- 90 days after filing Notice of Dissociation with the State.


Dissociating Partners

Death, leaving, withdrawing


General Partnership Liability by Estoppel

One who represents to a third party that a general partnership exits will be liable as if a general partnership exists.


Question on Page 11, someone tells a friend that they are a partner and a friend will offer to sell something. May a third party victim sue one partner?

As a rule, General Partners are liable for all partnership obligations including co-partners torts. In this case, however Paula and Peter never formed a partnership because theirs was a lending arrangement not based on sharing profits.

Nonetheless, under estoppel, Paula will be liable because she did represent to that third party tort victim that she is a partner of Peters.

**Formation, Liability, Estoppel


Rights and Liabilities between General Partners

General Partners are fiduciaries of each other and the Partnership


Fiduciary Relationship of a General Partnership

General Partners own to each other and the partnership:
1. Duty of loyalty
- Self Dealing
- Never Usurp
- Never make secret profit at partnership expense


What remedy does a partnership/partner have against bad partner?

Action for Accounting


Action for Accounting

1. The partnership may recover losses caused by the breach;
2. May disgorge the profits.


Partner's Rights in Partnership Property and Liquidity

1. Specific Partnership Assets - not liquid
2. Share of Profits - liquid/transferable
3. Share in Management - not liquid

**Relatively non-transferable, ill-liquid*


Test for Property Owned by the Partnership or Personal Property Owned

Whose money was used to buy the property.

If Partnership money, then Partnership property. Visa verse


Specific Partnership Assets

1. Land
2. Leesses
3. Equipment owned ONLY by partnership

Therefore may not be transferred by individual partners without Partnership authority.


Share of Profits

Personal property owned by individual partners and therefore they may transfer their share of profits to some third party.


Share in Management

Asset owned only by the Partnership itself and therefore may NOT be transferred by individual partners.

**Can't sell or assign right to vote.


Management of General Partnership

Absent an agreement, each partner is entitled to EQUAL CONTROL (vote)


Salary of General Partnership

Absent an agreement, partners get NO SALARY


Exception to Salaries of General Partnership

Partners do receive compensation for helping to wind up the business.


Partner's Share of Profits and Losses

1. Absent an agreement, profits shared equally.

2. Absent an agreement, losses shared like profits.

**If silient on both, without an agreement on profits they are shared equally, without an agreement on losses they will be treated like profits, therefore equal.



Without an agreement that sets out events of dissolution, a general partnership dissolves upon notice of the expressed will of one general partnership dissociate.


The Real End of the Partnership is Called



Winding Up

Period Between Dissolution and Termination in which;
the remaining partners liquidate the partnership's assets to satisfy the partnership's creditors


Partnership's Liability on Old Business during Winding Up

The partnership and therefore its individual general partners retain liability on all transactions entered into to wind up old business by satisfying creditors who existed when winding up began.


Partnership's Liability on New Bus

The partnership and therefore its individual general partners retain liability on brand new transactions during winding up UNTIL;
1. actual notice of dissolution is given to creditors
2. 90 days after filing Statement of Dissolution


Priority of Distribution

1. First, the partnership must pay ALL creditors.

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

3. Third, profits if any are shared equally without agreement.



Outside, classic, third party trade creditors
PLUS all partners who have loaned money to the partnership


Rule of Distribution to Partners (Where to start)

Each partner must be repaid his or her loans and capital contributions, PLUS that partner's share of any profits, or MINUS that partner's share of any losses.


Limited Partnership Defined

A partnership will at least 1 general partner and at least 1 limited partner.


Limited Partnership Formation

You must file with the state what is called a Limited Partnership Certificate that includes:
- The names of the general partners;


Liability and Control of Limited Partnership: General Partners

Are liable for all limited partnership obligations.

They get control and right to manage the business.


Liability and Control of Limited Partnership: Limited Partners

They are not liable for the limited partnerships obligation. They are like arms of stock.

The law in most states is that Limited Partners may not manage the business w/out forfeiting Limited Liability BUT under the newly revised Uniform Limited Partnership Act, Limited Partners now may manage without forfeiting limited liability status.


Registered Limited Liability Partnership (RLLP): Formation

You must register with the State by filing a Statement of Qualification plus annual reports


Registered Limited Liability Partnership (RLLP): Liabilities

No partner is liable for the obligations for the partnership.

Not even general partners.


Limited Liability Company Defined

An LLC is a hybrid between a Corporation and a Partnership in which its owners who are called members have the same limited liability as shareholders in a corporation PLUS the benefits of Partnership tax status.


Limited Liability Company Formation Requirements

File Articles of Organization and may adopt an operating agreement.


Limited Liability Company Control

Members may manage
Members may delegate their management to a team of managers.


Limited Liability Company Limited Liquidity

A full membership interest may not be transferred without:
1. Unanimous consent of the member
2. As provided in the Operating Agreement


LLC Life

Dissolves upon:
1. Unanimous Consent of the Members
2. As provided in the Operating Agreement


LLC Equals

Limited Liability + Limited Liquidity + Limited Life + Limited Tax


A, a resident of State Y, was involved in an auto accident while driving in State X. State X nonresident motorist statute provides that the driving of a vehicle on the highways of State X amounts to an appointment of the secretary of state as the agent of the nonresident driver for service of process in any action arising out of the operation of the vehicle. What theory of agency creation?

Agency by Operation of Law: Statute


A is employed full time by P to purchase timberland for P in a designated area. A purchases some land in the designated area for herself with her own money. Does P have an action and remedy against A?

Yes: An Action for Secret Profit
A violated Duty of Loyalty
A holds land as constructive trustee for P and must convey to P at cost.


A is employed as clerk in P's retail store. All goods are marked with a fixed price. A sells a $20 radio to customer for $25. What result?

P is entitled to additional $5 even though P suffered no injury.
A gained a secret profit


A is employed on a commission basis by P to act as agent for the sale of P's land. A breaches fiduciary duty to P by accepting additional compensation. Will A receive compensation?

A is not entitled to commission.
Where A commits intentional tort or intentional breaches fiduciary duty P may refuse to pay A for any unapportioned compensation.


A is employed by P to act as agent for the sale of three parcels of P's land. A is to receive $1,000 for sale of each. After properly selling first two parcels, A breaches fiduciary duty when selling third parcel through accepting additional compensation. Does P owe A compensation?

A is entitled to $2,000.
Sale of individual portions is apportioned
If A were to receive $3,000 total for sale of all portions A would be entitled to nothing.


Lucy retains Joe, a real estate broker, to sell her house. Lucy knows Joe has employees, such as Mark, who help him advertise properties and show properties to prospective purchasers. What is Mark's relationship to Lucy?

Mark is Lucy's subagent.


A convenience store owner employs a manager. the manager hires a clerk to work the night shift and report to manager. What is the clerk's agency status?

The clerk is a coagent; i.e. the clerk is not the manager's agent.


If P hires A for $500 a month to sell widgets, P has no obligation to to provide A with widgets to sell. However, if A is to be paid by commission or A's compensation is otherwise based on the results of her work, it is reasonable for A to assume that P will provide her with an opportunity to work, and so P must provide A with widgets to sell. Which duty does this example describe?

P's duty to cooperate.
P generally should cooperate with A to help them carry out agency functions.
Includes requisite opportunities and not unreasonably interfering with performance.


A is employed by P under a 10 year written contract that provides for salary of $40,000 per year. P fires A after two years. Does A owe P any duties?

Yes: Duty to Mitigate
A must actively seek other employment


A purchases coins for P with his own funds. P does not reimburse A for the cost of the coins. A has possession of coins, what result?

A has a lien against coins
A may retain until P reimburses A for coins
Lien can be assert if compensation for services owed unless agree otherwise


Peter wishes Chauncey to enter into a transaction on his half but mistakenly tells Mary to do it. Is Mary authorized?

Yes: Express Authority can be granted by mistake
Mary has actual express authority to act for Peter


Peter wishes Mary to buy Blackacre on his behalf. Mistakenly, he tells Mary to purchase Whiteacre. Is Mary authorized to purchase Whiteacre?

Yes: Express Authority can be granted by mistake.
Mary has actual express authority to purchase Whiteacre for Peter
Note: Equal Dignities Rule applies to these facts


P authorizes A to manage his apartment building. The express grant of authority states quite simply that A is "to manage"--nothing more. Nonetheless, A employs a janitor, purchases fuel for heating, arrange painting and repairs as needed, and occasionally redecorates an apartment. Does A have authority?

Yes: A is implied authorized through P's express authority to manage apartments.
Express authority implies all means reasonably necessary for its accomplishment.


Mary, the office manage for Peter's company, has regularly bought its office supplies without previous authorization. Peter has never objected. Is Mary authorized?

Yes: Implied by Acquiescence


P employs A to manage his shoe store. A hires several college students to help take an annual inventory. Is A authorized?

Yes: A may employ subagent to execute ministerial acts
Theory--Authority to Delegate Ministerial Acts


P hires A, a contractor, to build a high rise apartment building for him. A hires an electrician to install the wiring of the building. Is A authorized?

Yes: A has implied authority
Theory--Delegation Required by Circumstances.


P hires A to manage his new high rise apartment building. Is A authorized to janitors, doorman, etc.,?

Yes: Will be implied
Custom to delegate in this situation


P employs A to transact business that requires a license. P is aware A does not have license nor can A produce one. Can A appoint a licensed subagent?

Yes: Delegation due to Impossibility
Implied Authority Exists


A is hired to work on public relations for the space exploration program until an astronaut has successfully been landed on Mars. Has the agency relationship been terminated?

Yes: Occurrence of a Specified Event


P owes A $20,000. P gives A a written power of attorney authorizing A to sell Blackacre, which P owns, and to remit to P any money received in excess of $20,000. A accepts this as a discharge of the debt. Can P revoke?

P cannot revoke
A's agency is coupled with an interest


Chauncey lends $2,000 to Bullwater in exchange for Bullwater's promissory note. Two weeks later, at Chauncey's request, Bullwater secures his obligation to repay Chauncey the $2,000 by giving Chauncey a security interest in his car. The security interest provides that Chauncey may sell the car upon Bullwater's defualt on the promissory note. Is this an effective power given as security? (i.e. is the agency revocable?)

No: Chauncey's authority to sell car upon default is revocable as the security interest was given without consideration.


A, in P's presence, tells T that she is P's agent when in fact she is not. Under these circumstances is P obligated to correct A's representation?

Yes: Failure to do so will create apparent authority in A.


P, a hotel corporation, employs one person as a night clerk. While the night clerk is away a stranger goes behind desk and poses as the clerk. Stranger accepts valuables for placement in hotel safe from guest and absconds with them. Is P liable?

Yes: P negligently permitted an impostor to be in position to act on his/her behalf.
Rationale: appearance of authority (Apparent Authority)


A has been employed as P's agent for 10 years. During that period A regularly purchased office supplies from T within the scope of her actual authority. P notifies A that actual authority has been terminated. T does not have notice of this termination. Will P be liable to T if A purchases office supplies after the termination?

Yes: Lingering Apparent Authority
P will be liable to T unless P provides T with notice


A, a janitor in P's employ, has no authority to employ other people for P. On two prior occasions, A hired T, a painter, to do some painting on P's building. P paid T without protest. Will P be liable if A hires T to do another paint job?

Yes: Prior Act Authorization
A exceeds authority, P allowed and knows third party aware; P liable


P, a country club, hires A to be the food service manager with the understanding that A will personally pay for all expense of the dining room and will split the profits with P. A orders $10,000 worth of food from T, but A does not pay. Will P be liable?

Yes: A is authorized due to customary duties associationed with position.


P owns an antique store. An antique clock shipment arrives from London. P tells A not to sell a special grandfather clock because the value is undetermined. P goes to lunch and A sells to third party. Will P be liable on A's agreement with the third party?

Yes: P will be liable because his limiting instruction was made secretly.


P loans his watch to A with understanding that A will return it in one week. A sells watch to T. May P recover watch from T?

Yes: Mere possession does not entitle A to sell/transfer


P borrows money from A and gives A, for security, 100 shares of stock along with blank assignment of title signed by P. A improperly sells stock to T. Did T take good title?

Yes: P provided A with indicia of ownership
A has power to transfer good title even though unauthorized to do so


P takes his watch to Acme Watch Store to have it repaired. Acme, which also sells watches, sells P's watch to T. Will T take good title?

Yes: P's remedy is to sue Acme
UCC 2-403 provides that where a dealer in goods of type sold improperly sells in ordinary course of business the third party will take good title.


A without authority contracts to sell P's automobile to T for $2,500. P without knowledge of A's purported transaction contracts to sell automobile to X for $2,000. A decides to affirm A's action after learning. Will P be able to ratify?

No: X's intervening rights in subject matter with prevent ratification.
X would be prejudiced through retroactive validity.


On June 1, A, without any authorization, contracts on P's behalf to establish an off-track betting parlor. On December 1, legislature legalizes off tract betting. Can P ratify?

No: P may not ratify because A's original act was illegal.
P cannot affirm illegal conduct of A if illegal when A acted or when P ratifies.


A signs a contract: "P by A." Will A be bound to contract?

No: A will not be bound due to intent to sign in representative capacity.
If signed: "P, A" the use of parol evidence would be admissible to prove intent


P company wishes to enter into a licensing agreement with T respecting a process that T has developed, but knows that T would never deal with it. P employs A to enter into agreement. A enters into agreement with T in her own name and represents actin on her own behalf. Can P get specific performance on the cotnract?

No: P may not get unless T waives right of rescission.
Theory: Fraudulent Concealment of P's Identity


A, on behalf of an undisclosed P enters into a "requirements" contract with T. In fact requirements of P are substantially greater than T believed requirements of A to be. Is T liable?

No: T may avoid this contract
Theory: Increased burden to third party by virtue that third party is dealing with P and not A.


Assume A authorizes B to hire employees on her behalf. Pursuant to this authorization B hires C. What is the employment relationship of the parties?

Employer relationship exists between A and C.
Employer relationship does not exist between B and C
Under vicarious liability A is liable for C's torts


P hires X to lay bricks, compensating X on basis of number of bricks laid. X hires a helper, Y. Will P be liable for Y's torts?

Yes: Implied authority to accomplish task
Y is under P's control: P liable for Y's torts within scope.


Same is hired to drive a delivery truck. Sam is busy one day, so he asks his friend George to drive it for him without permission from his boss. George negligently cause an accident and injures Ted. Is the boss liable to Ted?

No: General rule employer not liable for unauthorized acts of subservant.


Assume a shoe repair department in a department store is run by an independent contractor, but the department is run in such a manner that appearance indicate that its operator is an employee of the store. Can the store be found liable?

Yes: the store will be estopped from denying the employer employee relationship.
Reliance situation
If store makes true relationship known to public no liable will be imposed.


P authorizes X to deliver messages by bike. If X instead uses a car and strikes a pedestrian with P be liable?

No: a was using an unauthorized instrumentality.
P is not liable for pedestrians injuries.


S, M's employee is the manager of a store whose employees are on strike and picketing. S, without M's knowledge, hires some thugs to beat up the picketers, one of whom is injured. Will M be liable?

Yes: S's action intentionally used a wrongful means of promoting M's business
M is liable for the picketers injuries.