AGENCY & PARTNERSHIP

2/6/2010

AGENCY
THREE AGENCY PROBLEMS

I. Liability of Principal to Third-Parties for Torts of an Agent

II. Liability of Principal to Third-Parties for Contracts Entered by an Agent

III. Duties Which Agents Owe to Principals

I. LIABILITY OF PRINCIPAL FOR TORTS OF AGENT -- RESPONDEAT

SUPERIOR OR VICARIOUS LIABILITY

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

B. Start essay response with the two-Part Test: Principal will be liable for torts
committed by agent if: (1) a principal-agent relationship exists, AND (2) the
tort was committed by the agent within the scope of that relationship.

1. The Principal-Agent Relationship.

a) Principal-agent relationship requires (3 part test):

(1) Assent: An informal agreement between the principal,

who has capacity, and the agent.

(2) Benefit: The agent's conduct must be for the principal's

benefit.

(3) and Control: The principal must have the right to control
the agent by having the power to supervise the manner of
the agent's performance.

(a) Sub-agents: The typical situation is the agent

employs an agent of his own.
There can be no vicarious liability for a sub-agent's
tort UNLESS there's assent, benefit and the right to
control that sub-agent tortfeasor's manner of
performance.
Usually the principal will not have assent to and
control over the sub-agent.

© copyright BAR/BRI Bar Review

 (b) Borrowed agents: One principal borrows another
principal's agent.
There can be no vicarious liability for a borrowed
agent's tort UNLESS there's assent, benefit and the
right to control the borrowed agent tortfeasor.
Typically the right to control element is missing and
therefore there is no vicarious liability.

b) Contrast Agent with Independent Contractor.

(1) Factors: There's no right to control an independent

contractor because there's no power to supervise the
manner of an independent contractor's performance.

(2) Start in essay with the rule: There can be no vicarious

liability for an independent contractor's torts, UNLESS:

(3) Exceptions: Either:

i. The ultra hazardous activity exception: If the
independent contractor is engaged in tort while
dealing with an ultra hazardous activity, there will
be vicarious liability even for independent
contractor's torts.

ii. Estoppel: If the principal held out his independent

contractor with the appearance of agency, he will be
estopped, preventing denial of vicarious liability for
the independent contractor.

Hypo: Tory Victus went to E-Stop-L Gas Station to have her brakes repaired. E-
Stop-L Gas Station had an independent contractor arrangement with the brake
repairer. Brake repairer negligently repaired Tory Victus' brakes, resulting in an
accident. Is E-Stop-L Gas Station liable?
Yes. As a rule there's no vicarious liability for independent contractor's torts.
Except for (i) ultra hazardous activity and (ii) estoppel. In this case, brake repair is
an ultra hazardous activity, therefore there will be vicarious liability even for
independent contractor's torts. Moreover, E-Stop-L Gas Station will be estopped,
preventing from denying vicarious liability, if it held out its independent
contractor with the appearance of agency (e.g. if it advertises "E-Stop-L Gas
Station and Brakes Repair").

2. Scope of Principal-Agent Relationship Factors (3 part test):

a) Was conduct "of the kind" agent was hired to perform?

If the conduct was within the job description it is likely to be
within the scope of agency.

b) Did the tort occur "on the job"? Frolic v. Detour (this is the most
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 important factor tested)
"Frolic" is a new and independent journey.
"Detour" is a mere departure from an assigned task.
A detour is within the scope of agency whereas a frolic is not.

c) Did the agent intend to benefit the principal?

If the agent even in part intended to benefit the principal that is
enough for the activity to be within the scope of agency.

Hypo: Employer instructs employee to drive across town to deliver files to a

branch office. On the way back, employee stops to pick up shirts at the dry
cleaner for work the next day. In the parking lot of the dry cleaner, employee hits
a pedestrian. Is employer liable?
Note there's always agency between employer and employee since there's always
assent, benefit and control.
The principal will be liable for its agent's torts within the scope of agency. In this
case, the agent was on a detour, a mere departure from an assigned task, because
the tort occurred on the way back to work. Therefore the tort occurred within the
scope of agency and there will be vicarious liability for the tort.

3. Intentional Torts.

(a) Rule: As a rule, intentional torts are outside the scope of agency.

(b) Exceptions. Intentional torts are within the scope if the conduct
was (each one is strong enough to trump the rule):

(1) Specifically authorized by the principal.

(2) Natural from the nature of employment.

(3) Motivated by the desire to serve the principal.

The typical fact pattern used by the Bar is a bouncer in a club, and
it usually demonstrates all 3 exceptions (the owner tells the
bouncer to throw someone out, battery is natural from the nature of
bouncing and the bouncer says "boss, this one if for you").

II. LIABILITY OF PRINCIPAL FOR CONTRACTS ENTERED BY AGENTS

A. Issue: Whether principal is liable for contracts entered into by its agent.

B. One Test: Principal is liable for contracts entered into by its agent if the principal
authorized the agent to enter the contract.

C. There are four types of authority (each one is enough to constitute authorization):
actual express, actual implied, apparent or ratification.

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 1. Actual Express Authority: Principal used words to express authority to
agent.

a) Rule: Oral, Private, Narrow.

b) Except for land: An interest in real estate which could last longer
than 1 year then the express authority to enter that contract must be
in writing.

Hypo: Agent tells Principal that she is an expert in negotiating real estate
transactions. Principal whispers into Agent's ear at party that principal wants
Agent to negotiate the sale of Green Acres Farm. Agent negotiates the sale of
Green Acres Farm for the Principal. Is Principal bound on the sale?
No. The principal will be liable on its authorized contracts. In this case, because
the contract involved the sale of land, the express authority must have been in
writing. Therefore the oral private whisper wasn't sufficient to convey authority,
hence there can be no liability on that unauthorized contract.

c) Express authority will be revoked by:

(1) Unilateral act of either party, or

(2) Death or incapacity of the principal.

Hypo: Paula collects rare books. She hires Alice to find a rare book to complete
her collection. Alice searches everywhere for the rare book. As Alice is about to
pay for the book, Paula dies. Is Paula's estate bound by the contract?
No. The principal will be liable on its authorized contracts. In this case, actual
express authority terminated upon principal's death. Therefore there was no
express authority to enter the contract and therefore Paula's estate will not be
liable to pay for the book. Alice therefore becomes personally liable for that book
since she acted without authority.

d) Except: express authority CANNOT be revoked if there's a

durable power of attorney.
"Power of attorney" is a written expression of authority to enter
into a transaction.
"Durable" means conspicuous survival language (e.g. "this
authority survives incapacity but never death").

2. Actual Implied Authority:

a) Authority which agent reasonably believes the principal has given,

because:

(1) Necessity: There is implied authority to do all tasks which are

necessary to accomplish an express task (smaller tasks necessary to
carry out bigger authorized task). E.g., express authority to close a
deal has an implied authority to rent a conference room.

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 (2) Custom: There is implied authority to do all tasks customarily
performed by persons with the agent's title or position.
For example, a lawyer has implied authority to perform tasks
customarily performed by lawyers.

(3) Prior dealings between the principal and the agent. There is
implied authority to do all tasks which the agent believes to be
authorized from prior acquiescence by the principal.

3. Apparent Authority: Two-Part Test: (1) Principal "Cloaked" agent with the
appearance of authority AND, (2) third-party reasonably relies on appearance
of authority.

a) Secret Limiting Instruction - Agent has actual authority, but principal has
secretly limited that authority. Agent acts beyond the scope of the
limitation.

Hypo: Charles owns an antique store. A shipment of antique clocks arrives from
London. Charles tells his employee Dufus not to sell a special grandfather clock.
Charles goes to lunch. Dufus sells the clock. Is Charles bound on the sales
contract?
Yes. The principal will be liable on its authorized contracts. In this case, there was
no actual expressed or implied authority to sell the clock (Charles specifically said
"not to sell"). Nonetheless, there was apparent authority because the principal did
"cloak" the agent Dufus with the appearance of authority and the buyer of the
clock relied reasonably on Dufus' appearance of authority. Therefore Charles is
liable based on apparent authority.

b) Lingering Authority - Actual authority has been terminated.

Afterwards, agent continues to act on principal's behalf.

Hypo: For many years, Agnes has sold goods as Priscilla's agent. Priscilla finds
out, however, that Agnes has been stealing money from her. Priscilla terminates
Agnes. Agnes continues selling to customers and runs away with their money. Is
Priscilla bound?
Yes. The principal will be liable on its authorized contracts. In this case, actual
expressed and implied authority has been terminated. Nonetheless, apparent
authority still lingers because the principal has "cloaked" the agent with the on
going lingering appearance authority and customers may continue to rely
reasonably on the lingering authority, until they receive notice of termination.

4. Ratification: Authority can be granted after the contract has been entered, if:

a) Principal has knowledge of all material facts regarding the contract, and

b) Principal accepts its benefits.

c) Except: Ratification CANNOT alter the terms of the contract.

The contract must be ratified completely. Partial ratification is not
allowed.
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 Hypo: Priscilla gives Agnes a power of attorney to purchase steel drums. Agnes
enters a contract to purchase 11,000 wooden barrels. Priscilla tells Agnes "great
job, I love wooden barrels, but I only need 10,000." Is Priscilla bound?
No. The principal will be liable on its authorized contracts. In this case, there was
no actual expressed or implied authority to purchase wooden barrels (the power of
attorney referred only steel drums), nor is there evidence of apparent authority to
purchase wooden barrels. Nonetheless, the principal arguably ratified the contract
through knowledge and acceptance of benefits ("great job..."). But, in NY
ratification is not valid because it was not complete, since P tried to change the
terms of the deal (she wanted only 10,000 barrels instead of 11,000). Therefore
there was no authority and no liability on the contract.

D. The Rules of Liability on the Contract

1. General Rules:

a) If no authority, principal is not liable on the contract. If no

authority, agent is liable on the contract.

b) If authority, principal is liable on the contract. If authority,

agent is NOT liable on the contract.

2. Exception: If principal is partially disclosed (only the identity of

principal concealed) or undisclosed (fact of principal concealed),
authorized agent may nonetheless be liable at the election of the
third-party.

III. DUTIES AGENT OWES TO PRINCIPAL

A. Duty to exercise reasonable care.

B. Duty to obey reasonable instructions (i.e., not lie or break the law).

C. Duty of Loyalty.

a) Self-dealing - Agent cannot receive a benefit to the detriment of the

principal.

b) Usurping the principal's opportunity, or

c) Secret profits.

D. Hypo: Priscilla authorizes Agnes to buy diamonds. Agnes spots choice diamonds,
and secretly buys them for herself for $1 million. Agnes then resells the diamonds
for $2 million.

(a) What duties, if any, has Agnes breached?

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 The agent has breached the duty of loyalty by:
1. Self dealing, i.e. receiving a benefit to the principal's
detriment.
2. Usurping the principal's opportunity to buy those
diamonds.
3. Making a secret undisclosed profit at the principal's
expense.

(b) What remedies, if any, does Priscilla have against Agnes?

The principal may recover any losses caused by the breach and
also may disgorge any profits made by the breaching agent as well.

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 PARTNERSHIP
FOUR ISSUE AREAS:

Most questions are on general partnerships.

NY still uses the old law, the Uniform Partnership Act.

I. Partnership Formation

II. Liabilities of Partners to Third-Parties

III. Rights and Liabilities Between Partners

IV. Partnership Dissolution

I. PARTNERSHIP FORMATION

A. Formalities:
There are no formalities to becoming a general partnership. Every other form has
some filing requirement.
Furthermore, conduct alone after the fact can be enough to determine a person is a
general partner, even if no such intention existed.

B. Definition: A general partnership is an association of 2 or more persons, for

carrying on as co-owners of a business for profit.

C. Sharing of the profits: The contribution of money or services in return for a share
of the profits, if any, is prima facie evidence of a general partnership.

II. LIABILITIES OF PARTNERS TO THIRD-PARTIES

A. Agency Principles Apply.

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

business.

2. Partnership is bound by torts committed by partners in scope of

partnership business.

3. Partnership is bound by contracts entered by partners with authority.

B. GENERAL PARTNERS ARE PERSONALLY LIABLE FOR DEBTS OF

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 THE PARTNERSHIP.

1. Incoming partner's liability for pre-existing debts?

As a rule, an incoming partner is NOT liable for prior debts, except any
money which is contributed to the partnership by the incoming partner can
be used by the partnership to satisfy prior debt.

2. Outgoing partner's liability for subsequent debts?

An outgoing partner retains liability on future debts until they die,
UNLESS notice of their withdrawal has been given to all known and even
potential creditors.

C. General Partnership Liability by Estoppel: One who represents to a third-party

that a partnership exists will be liable as if a partnership exists.

Hypo: Paula convinced her friend Peter to start a sailing school, and agreed to
lend Peter money to purchase a boat for that purpose. At a party, Paula told a
wealthy friend: "My partner Peter and I are starting a sailing school and we need
a boat." The wealthy friend offered to sell Paula and Peter a boat, and agreed to
allow Peter to take it for a test ride the next day. Later that night, however, Peter
and Paula fight and decide to drop the sailing school idea. The next day Peter
takes the boat for a ride and destroys the boat. May wealthy friend sue Paula for
the loss of the boat?
General partners are liable for all partnership obligations, including co-partners'
torts. In this case, however, Paula and Peter never really formed a general
partnership because there was a lending arrangement and not an arrangement
based on a sharing of profits.
Nonetheless, Paula has represented to that 3rd party that she is a partner in a
partnership with Peter and therefore will be liable as though she were. Therefore
Paula is liable for co-partner Peter's torts.

Discuss in Essay: FORMATION + LIABILITY + ESTOPPEL

D. Contrast Formation and Liability Within Other Unincorporated Business

Organizations.

1. Limited Partnerships:

a) Defined: A limited partnership is a partnership with at least one

general partner and at least one limited partner.

b) Formation: Must file a certificate of limited partnership with the

Department of State that includes the names of all general
partners.

c) Liability and Control:

(1) General Partners: Are still liable for all debts and
obligations of the business form. But they exercise
substantial managerial control.

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 (2) Limited Partners: They are NOT liable for partnership's
debts and obligations. BUT they may not exercise
substantial managerial control.

2. Registered Limited liability Partnerships (RLLP)

Limited to partnership engaged in professional services.

a) Formation: Must register by filing a certificate of registration

with the Department of State that includes the profession to be
practiced (e.g. lawyering).

b) Liabilities: No partner will be liable for the partnership's debts or

obligations. Each partner continues to be liable for his own torts
and wrongdoing and for acts performed under his direct
supervision.

3. Limited Liability Companies (LLC)

a) Original Purpose: To provide owners of a business the same limited

liability of shareholders in a corporation plus the beneficial tax status of
partners in a partnership.

b) Formation: File the articles of organization plus publish a summary of

the articles once a week for 6 weeks in a row in at least 2 newspapers.

c) Liabilities: The members are not liable for any debt or obligations of the
company. Meaning limited liability.

d) Partnership Characteristics:

(1) Members control, but may delegate to managers;

(2) Limited Liquidity -- Member interests are not freely transferable;

(3) Limited Life -- events of dissolution.

e) L.L.C.: Limited liability + limited liquidity + limited life + limited tax.

III. RIGHTS AND LIABILITIES BETWEEN PARTNERS

A. Partners are FIDUCIARIES of each other and the partnership.

1. Duty of loyalty: Partners, just like agents, may not:

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 1. Engage in self dealing.

2. Usurp partnership opportunities.

3. Make a secret undisclosed profit at the partnership's expense.

2. Action for Accounting.

This is the only form of action that can be brought by the partnership
against one of its own partners for the breach of the duty of loyalty.
In an action for accounting the partnership may recover losses caused by
the breach and may also disgorge profits made by the breaching partner as
well.

B. Partners' rights in partnership property.

1. Specific Partnership Assets: Land, leases and equipment owned by the

partnership. Therefore NO individual partner may transfer these
partnership assets without partnership's authority.

2. Share of profits and surplus: This is the only liquid personal asset. Each
partner's share of profits, if any, is personal property (own share) owned as
such by each individual partner. Therefore individual partners may freely
transfer their share of profits and surplus to third parties.

3. Share in management: Share in management is a partnership owned asset

and not any individual asset. Therefore individual partners may NOT
transfer their share of management to third parties.

4. Conflict between specific partnership assets and personal property.

The rule is who's money was used to buy the property. If partnership's
money was used to buy the property it becomes partnership property. If
personal funds were used it becomes personal property.

Hypo: John buys a car in John's own name with John's money which John uses in
partnership business. John dies. Does John's spouse Yoko get the car or is it a
specific asset of the partnership?
In this case, John bought the car with his owns money and therefore it is his own
car; and he may freely transfer it to Yoko through inheritance.

C. MANAGEMENT -- Absent an agreement, each partner entitled to EQUAL

control (vote).

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 Hypo: A, B, and C agree to contribute money and share profits 60-30-10. How
do they vote?
Absent an agreement, equal control is the default rule (one partner, one vote). We
do not infer from the way profits are shared the control each partner has.

D. SALARY -- Absent an agreement, partners get NO SALARY.

Hypo: A and B are partners. A works 96 hours a week. B sleeps all day. Does
A get any salary?
Absent an agreement, no salary.

Exception: A partner is entitled to compensation for helping to wind up the

partnership business.

E. PARTNER'S share of profits and losses.

1. Absent an agreement, PROFITS SHARED EQUALLY.

2. Absent an agreement, LOSSES SHARED LIKE PROFITS.

Hypos:

(1) If Agreement -- silent on profits and losses?

First, in the absence of agreement on profits, they are shared equally.
Secondly, in the absence of agreement on losses, they are shared like
profits, here equally as well.

(2) If Agreement -- "Profits shared 60/40." Losses shared?

In the absence of agreement on losses, they are shared just like profits,
which would be here 60/40 as well

(3) If Agreement -- "Losses shared 60/40." Profits shared?

In the absence of agreement on profits, they are shared equally. We don't
care how losses are shared.

(4) Partner A puts up all of the money. Partner B does all of the work.
Partner C gives the partnership its fine name. Partner D does nothing.
How are profits shared?
In the absence of agreement on profits, they are shared equally.

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IV. DISSOLUTION

A. Key definitions:

1. Dissolution: Occurs upon any material change in the partnership caused

by the death or withdrawal of any single partner, UNLESS the
partnership agreement provided otherwise.
This is automatic.
This is only the beginning of the process.

2. Termination: The real end of the partnership.

3. Winding Up: The period between dissolution and termination in which

the remaining partners liquidate the partnership assets to satisfy the
partnership's creditors.

B. Compensation and liability for winding up.

1. Compensation for winding up: As an exception for the no salary default

rule, partners do receive compensation for helping to wind up the
partnership business.

2. Partnership's liability for winding up.

a) Old Business?
The partnership and therefore the individual general partners retain
liability on all transactions entered into to wind up old business
with existing creditors.

b) New Business?
The partnership and therefore its individual general partners still
retain liability on brand new business transactions until notice of
dissolution is given to all existing and even potential creditors.
{But see NYT #43 for different analysis.}

C. Priority of distribution.

1. Each level of priority must be fully satisfied before beginning the next
level in this order:

a) First, creditors must be paid:

First, all outside non-partner trade creditors must be paid.
Secondly, all inside partners who made loans to the partnership
must be paid.

b) Second, capital contributions by partners must be paid. Meaning

any money paid in by a partner to the partnership (not a loan) must
be repaid in this time as well.
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 c) Profits and surplus, if any. Profits, if any, are shared equally in the
absence of an agreement.

2. Rule: 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.

3. Distribution Hypos:

(1) A and B dissolve the AyeBee Partnership. In winding up, they

liquidate the partnership assets and have a total of $1 million to
distribute. How should that amount be distributed, if (1) the
partnership owes $600,000 to trade creditors; (2) Partner A loaned
the partnership $100,000; and (3) Partner B made capital
contributions of $200,000?
First, all outside trade creditors receive their full $600,000.
Secondly, inside partner A must receive $100,000 in return of his
loan.
Thirdly, capital contributions must be repaid - partner B must be
repaid his $200,000 capital contribution.
Fourthly, there is a profit or surplus of $100,000 which A and B
share equally, $50,000 each, in the absence of an agreement.

(2) Suppose, in the prior hypo, the AyeBee Partnership has only
700,000 to distribute?
First, all outside trade creditors receive their full $600,000.
Secondly, inside partner A must receive $100,000 in return of his
loan.
The partnership has no more money, but it still has to repay partner
B his $200,000 capital contribution. As a result the partnership will
have a loss of $200,000. In the absence of agreement partner A and
partner B share the losses equally, meaning each one has to pay to
the partnership $100,000.

MINI-REVIEW

A. AGENCY

1. Principal's Liability for Agent's Torts:

(a) Assent, benefit, control + scope.

(b) No vicarious liability for independent contractors' torts.

(c) Intentional torts generally outside scope.

2. Principal's Liability for Agent's Contracts:

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 (a) Express authority → oral, except land.
Revocable UNLESS durable.

(b) Implied authority → necessity, custom or prior dealings.

(c) Apparent authority → principal "cloaks" + 3rd party relies.

(d) Ratification = knowledge + acceptance of benefits.

(e) Authorized agents not liable UNLESS undisclosed principal.

3. Duties Agent Owes Principal:

(a) Care.

(b) Obedience.

(c) Loyalty (disgorge profits).

B. PARTNERSHIP

1. Formation

(a) No general partnership formalities.

(b) Association, 2 or more persons, carrying on as co-owners a business for

profit (prima facie).

2. Liability to Third-Parties

(a) General partners are liable personally to all partnership obligations.

(b) Estoppel → representors are liable as if partners.

(c) Limited partners, registered limited liability partners and LLC members
have a limited liability.

3. Relations Between Partners

(a) Fiduciaries / accounting action.

(b) Only the share of profits is liquid personal property.

(c) Absent an agreement, equal control, no salary, equal profits and losses like
profits.
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4. Dissolution

(a) Definitions: Dissolution equals any material change.

(b) Priority:

1. All outside creditors.

2. All inside creditors.

3. Capital contributions.

4. Profits, if any, shared equally.

(c) Distribution Rule: Each partner must receive their loans and capital
contributions plus their share of profits, but also minus their share of
losses.

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