Rule Statements

Question 1

Agency

Answer 1

A principal is subject to liability on a contract that the agent enters into on the principal’s behalf if the agent has the power to bind the principal to the contract. An agent has the power to bind the principal to a contract when: (i) the agent has actual authority (express or implied); (ii) the agent has apparent authority; or (iii) The principal is estopped from denying the agent’s authority. In addition, even if an agent acts with no power to bind the principal, the principal can become subject to liability on the contract if the principal ratifies the contract.

Question 2

Express Actual Authority

Answer 2

Express actual authority can be created via: (i) oral or written words; (ii) clear, direct, and definite language; or (iii) specific detailed terms and instructions. For express (actual) authority to exist, the principal’s manifestation must cause the agent to believe that the agent is doing what the principal wants (subjective standard), and the agent’s belief must be reasonable (objective standard).

Question 3

Implied Actual Authority

Answer 3

Implied actual authority allows an agent to take whatever actions (designated or implied in the principal’s manifestations) are properly necessary to achieve the principal’s objectives, based on the agent’s reasonable understanding of the manifestations and objectives of the principal. A principal may manifest assent to the actions of his agent by placing the agent in a position that customarily has certain authority, such as vice president or treasurer.

Question 4

Apparent Authority

Answer 4

Apparent authority derives from the reasonable reliance of a third party on that party’s perception of the level of authority granted to the agent by the principal. The perception is based on the principal’s behavior over a period of time.

Question 5

Ratification

Answer 5

A principal can ratify an act performed by another person, whether or not the person is an actual agent of the principal. Ratification occurs when a principal affirms a prior act that was done or purported to be done on the principal’s behalf. The principal’s affirmation may be either express or implied (such as through conduct), and consideration is not required. If the principal ratifies the agent’s action, then the principal is bound just as if the action had been authorized at the time it occurred.

Question 6

Creation of the Agency Relationship

Answer 6

An agency relationship is created when a principal manifests assent to an agent, the agent acts on the principal’s behalf, the agent’s actions are subject to the
principal’s control, and the agent manifests assent or otherwise consents.
The principal will generally be bound by any contract created on the principal’s behalf, by an agent with the power to bind the principal, whether the power to bind is expressed orally or in a writing, implied by principal’s conduct, or misinterpreted by a 3rd party.

Question 7

Principal’s Control

Answer 7

The principal has the right to control the result or the ultimate objectives of the agent’s work. The consensual nature of the relationship requires an agent to have minimal capacity, manifest assent and consent to act on the principal’s behalf, and to be subject to the principal’s control.

Question 8

Capacity to Enter Relationship

Answer 8

To become a principal and be bound by an agent’s actions, a person must have capacity both to consent to the agency relationship and to enter into the transaction to which the agent purports to bind the principal. A person can serve as an agent as long as he has the physical and mental capability to do whatever he has been appointed to do.

Question 9

Principal’s Contractual Liability

Answer 9

A principal is subject to liability on a contract the agent enters into on the principal’s behalf if the agent has the power to bind the principal to the contract. An agent has power to bind the principal to a contract when the agent has actual authority (express or implied), apparent authority, or the principal is estopped from denying the agent’s authority.

Question 10

Principal’s Vicarious Liability for the Agent’s Torts

Answer 10

Under the doctrine of respondeat superior, a principal may be vicariously liable for a tort committed by an agent acting within the scope of his employment. An employee is within the scope of employment when either performing work assigned by the employer or engaging in a course of conduct subject to the employer’s control.

Question 11

Principal’s Direct Liability to 3rd Parties

Answer 11

A principal is directly liable to a third person harmed by an agent’s conduct if the principal authorizes or ratifies the agent’s conduct; the principal is negligent in selecting, supervising, or otherwise controlling the agent; or the principal delegates performance of a non-delegable duty to use care to protect other persons/property and the agent breaches the duty.

Question 12

Agent’s Contract Liability

Answer 12

When an agent enters into a contract on the principal’s behalf and binds the principal to the contract, the agent might also become a party to and liable on the contract. Whether the agent becomes a party depends on the terms of the contract and the degree to which the agent discloses to the 3rd party the existence and identity of the principal.

Question 13

Agent’s Tort Liability

Answer 13

An agent is subject to liability to a third party harmed by the agent’s tortious conduct. An agent’s individual tort liability extends to negligent acts and omissions as well as intentional conduct. An agent is not liable for torts committed by the principal.

Question 14

Rights of Principal

Answer 14

Control of Agent—right to control Agent’s acts on Principal’s behalf
Agent’s duty of care
Agent’s duty of loyalty/obedience
Notice/accounting

Question 15

Duties of Principal to Agent

Answer 15

Deal fairly and in good faith per K terms
Compensation
Duty not to interfere
Duty to indemnify

Question 16

Rights and Duties of an Agent

Answer 16

Rights of Agent—compensation, not have Principal interfere,
indemnification/reimbursement, safe work environment, and K or tort remedies
Duties of Agent to Principal
- Duty of loyalty
- Performance based duties

Question 17

Partnership Formation - Requirements

Answer 17

In order to form a partnership, at least two persons must intend to carry on a business for profit as co-owners, but it is not necessary that such persons have the specific intent to form a partnership.

Question 18

Partnerships - Profit Sharing Test

Answer 18

The key test applied to ascertain whether a business arrangement is a partnership is whether there is a sharing of the profits from the business; if so, such an arrangement generally is presumed to be a partnership and persons who share in the profits are partners.

Question 19

Partnership Formation - Partner by Estoppel

Answer 19

When no partnership exists, a person may be treated as a purported partner if there is an oral, written or implied by conduct representation that person is in a partnership; the person consents to representation; a 3rd party reasonably relies on the representation; and the 3rd party suffers damages as a result of the reliance.

Question 20

Partnership Duty of Loyalty

Answer 20

Under the duty of loyalty, a partner is required to refrain from the following activities: competing with the partnership business, advancing an interest adverse to the partnership, and usurping a partnership opportunity. However, a partnership agreement can designate certain activities as not violating this duty, and may provide a safe harbor under which the other partners could authorize or ratify the transaction, after full disclosure of material facts.

Question 21

Partnership Duty of Care

Answer 21

A partner is required to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law. A partnership agreement may not reduce this duty unreasonably.

Question 22

Partnership Duties - Good Faith and Fair Dealing

Answer 22

In observing the duties of loyalty and care and in exercising any rights, a partner has the obligation of good faith and fair dealing. The partnership agreement cannot eliminate this obligation but can prescribe reasonable standards by which the performance of the obligation is measured.

Question 23

Partnership Interest

Answer 23

A partner has a personal property interest in a partnership, consisting of rights to share in a partnership’s profits and losses and to receive distributions. A partner can transfer all or part of the partnership interest absent a restriction in the agreement, the transferor partner retains all rights and duties of the partner (except for an interest in the distributions), and the transfer doesn’t cause dissolution or dissociation.

Question 24

Partnerships - Power to Bind Partnership

Answer 24

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.

Question 25

Partnerships - Actual Authority

Answer 25

A partner’s act that was authorized by the partnership binds the partnership. Actual authority includes both express authority and implied authority. Express authority can arise from the partnership agreement itself, an authorization of the partners, or a statement of authority filed with the state. Implied authority is based on a partner’s reasonable belief that an action is necessary to carry out his express authority.

Question 26

Partnerships - Apparent Authority

Answer 26

A partner’s act that was not authorized by the partnership may nevertheless bind the partnership under the principle of apparent authority. To be binding, the partner must perform the unauthorized act in the ordinary course of P business, and a 3rd party with whom the partner was dealing cannot hold the P liable if the 3rd party knew or was notified that partner lacked authority.

Question 27

Partnership Changes - Conversion

Answer 27

When a partnership is converted to a limited partnership, all of the general partners and a majority of the limited partners must approve the conversion, and the general partners remain liable for pre-conversion obligations. When a limited partnership is converted to a partnership, all of the general partners and a majority of the limited partners must approve the conversion, and the limited partners remain liable for pre-conversion limited partnership obligations and post-conversion partnership obligations.

Question 28

Partnership Mergers

Answer 28

All partners of a general partnership must approve a merger as required by law or as specified in the agreement. When a merger becomes effective, all parties to the merger other than the surviving entity cease to exist. All property and obligations of the entities that are parties to the merger become the property and obligations of the surviving entity.

Question 29

Termination of Partnership

Answer 29

Termination of a partnership is a two-step process—dissolution and winding up. The happening of an event triggers dissolution, the first step in the termination of a partnership. Next, the partnership must wind up its business, which is a process that entails liquidating the assets, paying off creditors, and distributing any remaining funds to the partners. The partnership is not terminated until the partnership business is wound up.

Question 30

Limited Liability Partnerships

Answer 30

A limited liability partnership (LLP) is a partnership in which a partner’s personal liability for obligations of the partnership is eliminated. In order to enjoy LLP status, a statement must be filed with the state. In other respects, an LLP is governed by the same rules as a partnership.

Question 31

Limited Partnerships

Answer 31

A limited partnership is a partnership formed by two or more persons that has at least one general partner and at least one limited partner. A limited partner’s liability for partnership debts is limited to the amount of her capital contribution to the partnership. To form a limited partnership, a certificate of limited partnership must be filed with the state.

Question 32

Partnership P + L

Answer 32

If there is no agreement or the agreement is silent as to the division of the profits and losses, each partner is entitled to an equal share of the partnership profits and losses. When the agreement addresses only the division of partnership profits, partnership losses are shared in the same manner.

Question 33

Liability for P obligations

Answer 33

As a separate entity, a partnership is subject to suit for its obligations. A partner is jointly and severally liable for all partnership obligations.

Question 34

Distribution of Partnership Assets

Answer 34

In winding up a partnership’s business, creditors have priority over partners to the partnership’s assets. Partnership assets are first applied to discharge partnership obligations to creditors (including partners who are creditors of the partnership) before being distributed to the partners. Each partner’s account, which reflects not only that partner’s contributions to the partnership but also the partner’s share of the partnership’s pre-dissolution profits and losses, must be adjusted to reflect the profits and losses that result from the liquidation of the partnership assets. After these adjustments, any partners with a negative account balance must contribute to the partnership the amount necessary to bring the account balance to zero.

Question 35

Partnership Management

Answer 35

Each partner has equal rights in the management and conduct of the partnership