Agency & Partnership

NEW YORK AGENCY & PARTNERSHIP

OUTLINE AND HYPOTHETICALS

ByProfessor Michael J. Kaufman

Loyola University of Chicago Law School

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. 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: "ABC"

(1) Assent, A n informal agreement between the principal, who has capacity, and the agent.

(Note: agency is a consensual relationship. But informal agreement is enough.)

(2) Benefit,T he agent conduct must be for the principal's benefit .

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AGENCY & PARTNERSHIP

(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 :

(Context: The agent will go out and find a sub-agent. The sub-agent becomes the tortfeasor.)

There can be no vicarious liability for a sub-agent's tort unless there is assent , benefit and the right to control that sub-agent tortfeasor.

(Usually no assent will be found in the fact pattern of the question.)

(b) Borrowed agents :

(Context: One principal will go out and borrow another principal's agent, and the borrowed agent becomes the tortfeasor.)

There can be no vicarious liability for a borrowed agent's tort unless there is assent , benefit and the right to control that borrowed agent tortfeasor.

(In bar exam questions, there usually might not be right to control the borrowed agent.)

b) Contrast Agent with Independent Contractor.

(1) Factors :

T here is no right to control an independent contractor b/c there is no power to supervise the manner of an independent contractor's performance.

(2) Rule :

There can be no vicarious liability for an independent contractor's torts.

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(3) Exceptions :

i. The ultra hazardous activity exception:

If the independent contractor commits a tort while engaging in ultrahazardous (i.e. really dangerous) activity, there is vicarious liability.

ii. Estoppel :

If you hold out your independent contractor with the appearance of agency, you will be estopped from denying vicarious liability even for an independent contractor's torts.

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, it is vicariously liable for the repairer's torts. As the rule, there is no vicarious liability for an independent contractor's torts, except: i) ultrahazardous activities; and ii) estoppel. In this case, brake repair is an ultrahazardous activity, and therefore there will be vicarious liability even for an independent contractor's torts. Moreover, the station will be estopped from denying vicarious liability if it has held out its independent contractor with appearance of agency. (e.g. if there is great sign of "E- Stop-L Gas Station and Brake Repair")

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

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

If the conduct was within the job description , it's likely to be within the scope of agency.

b) *Did the tort occur "on the job"? (where & when question) Frolic v. Detour

A Frolic is a new and independent journey, outside the scope of agency. By contrast, a Detour is a mere departure from the assigned task. If your agent is on a Detour, it is still within the scope of agency .

c) Did the agent intend to benefit the principal?

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If the agent even in part intended to benefit the principal, that's enough. We call that conduct within the scope of agency.

Hypo: Employer instructs employee [symbol of true, pure agency agreement] 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?

The principal will be liable for its agent's torts within the scope of agency. In this case, the agent was on a detour, i.e. a mere departure from the assigned task, b/c the tort occurred on the way back to work. Therefore, this tort occurred within the scope of agency and there will be vicarious liability for that tort.

3. Intentional Torts.

(a) Rule :

As a rule, intentional torts, like assault and battery, are generally outside the scope of agency.

(b) Exceptions . Intentional torts are within the scope if the conduct was:

(1) specifically authorized by the principal; or

(2) natural from the nature of employment; or

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

Typical fact pattern: A bouncer in the bar assaulting the patron. (The bouncer's act is authorized, natural and motivated and therefore still within the scope of agency. [State general rule first])

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: 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 (narrowly construed and tailored) is OK.

b) Except :

For LAND : if the contract involves a conveyance in land [which could last longer than one year] , the express authority to enter into 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, b/c the contract involved the sale of land, the express authority must have that in writing. Therefore, the oral private whisper is not sufficient for authority for this transaction. Therefore there was no authority to enter into the contract and there is no liability on its unauthorized contract..

c) Express authority will be revoked by:

(1) Unilateral act of either party ("easy come easy go") , 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 the principal(Paula)'s death. Therefore there was no express authority to pay for the book and Paula's estate will not be liable for that unauthorized contract. Alice becomes personally liable to pay for that book on that unauthorized contract (Paula ’ s estate is not authorized agent).

d) Except : express authority cannot be revoked if:

there is a durable power of attorney.

"Power of Attorney": is a written expression of authority to enter into a transaction.

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"Durable": look for a conspicuous survival language : e.g. "survives incapacity" or "survives death"

2. Actual Implied Authority:

a) Authority which agent reasonably believes the principal has given, because: (conduct and circumstances)

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

which are necessary to accomplish an expressly authorized task .

e.g. an express authority to close the deal, it includes all task necessary to achieve that task such as to enter into a contract.

(2) Custom : There is implied authority to do all tasks:

customarily performed by persons with the agent's title or position . E .g. lawyer

(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 is liable on its authorized contracts. In this case, there was no actual expressed or implied authority to sell the clock. Nonetheless, there was apparent authority b/c i) the principal did cloak Dufus with the appearance of authority, and ii) the third party buyer reasonably relied on Dufus' appearance of authority. Therefore, Charles is liable based on apparent authority.

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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 is liable on its authorized contracts. In this case, actual express and implied authority has then terminated. Nonetheless, there is apparent authority b/c i) the principal has cloaked the agent with lingering appearance of authority, and ii) customers may continue to rely reasonably on the lingering authority until they receive notice of termination . Therefore, Priscilla is liable based on apparent authority

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.

(Knowledge + Acceptance of Benefits = Ratification)

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

Ratification must be whole and complete, cannot be partial. [NY]

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. Nor is there any evidence of apparent authority to purchase wooden barrels. Nonetheless, the principal arguably ratified the contract through knowledge and acceptance of its benefits. But in New York the ratification is not valid b/c it was not complete. Therefore there was no authority here and therefore no liability on that transaction.

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.

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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. (Undisclosed Principal Situation: the identity or existence of the principal was not disclosed, third party may choose to hold the agent liable.)

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 at principal's expense.

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? [liability question]

The agent has breached the duty of loyalty by i) self-dealing, i.e. receiving a benefit to the principal's detriment, ii) by usurping the principal's opportunity to buy those diamonds, and iii) by making a secret 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 recover any profits made by the breaching agent as well.

PARTNERSHIP

[usually test general partnership or three other limited liability forms]

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In New York, the Uniform Partnership Act governs the following:

FOUR ISSUE AREAS:

I. Partnership Formation

II. Liabilities of Partners to Third-Parties

III. Rights and Liabilities Between Partners

IV. Partnership Dissolution

I. PARTNERSHIP FORMATION (general partnership)

A. Formalities:

There are NO formalities to becoming a general partnership. By your conduct alone, you will be deemed as a general partnership.

B. Definition:

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

C. Sharing of the profits . – It is the Key!

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 THE PARTNERSHIP.

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

As a rule, incoming partners are NOT liable for prior debts, but any money contributed to the partnership by an incoming partner can be used by the partnership to satisfy prior debts.

2. Outgoing partner's liability for subsequent debts?

Outgoing partners retain 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?

As a rule, general partners are liable personally for all partnership obligations, including co-partner's torts. In this case, however, Paula and Peter never really formed a general partnership because there was a lending arrangement, not based on a sharing of profits. Nonetheless, under partnership by estoppel, Paula will be liable b/c Paula has represented to that third party that she is a partner in a partnership with Peter. Therefore, she will be liable as if she were. Therefore she is liable for the co-partner Peter's torts.

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 :

You must file a certificate of limited partnership with the Department of State that includes the names of all general partners .

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c) Liability and Control :

(1) General Partners:

General partners are still liable personally for all limited partnership obligations of the business formed. But they may exercise[ substantial managerial control] of business.

(2) Limited Partners:

Limited partners are not liable for the obligations of limited partnership. But they may not exercise control of the business without forfeiting their limited liability status.

2. Registered Limited liability Partnerships (RLLP) (limited to partnerships engaged in professional services)

a) Formation :

You must register by filing a certificate of registration with the Department of State that includes the profession to be practiced.

b) Liabilities :

No partner will be liable for the partnership's debts and obligations. Note, however, that individual partners are always liable for their own wrongdoings. They are also liable for the wrongdoings of those under their direct supervision.

3. Limited Liability Companies (LLC)

a) Original Purpose :

To give the owners of the business the same rights and limited liabilities of shareholders of a corporation plus the beneficial tax status of a partnership.

b) Formation :

You must file the articles of organization plus you must publish a summary of the articles once a week for six weeks in a row in at least two newspapers.

c) Liabilities :

The members who are the owners are not liable for any obligations of the company itself. [derivative suits available]

d) Partnership Characteristics: (LLC must have at least two of the three)

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(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 (general partners)

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

1. Duty of loyalty.

Partners, just like agents, may not:

a) engage in self-dealing; or b) usurp partnership opportunities; or c) make a secret undisclosed profit at the partnership's expense.

2. Action for Accounting – Remedy for the breach of duty of loyalty

[It's the only form of action that can be brought by the partnership against one of its own partners for breach of duty of loyalty].

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.

include land, leases, or equipment owned only by the partnership as specific partnership assets. Therefore, no individual partner may transfer these assets without partnership authority .

2. Share of profits and surplus.

Each partner owns their share of profits as personal property. Therefore, individual partners may freely transfer their share of profits [and surplus] to third parties.

3. Share in management.

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An asset owned only by the partnership itself and not individual partners. Therefore, individual partners may not transfer their share in management to third parties.

4. Conflict between specific partnership assets and personal property.

Test: " Whose money was used to buy the property?".

If the partnership money was used to buy the property, it becomes the 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, because John bought the car with his own money, it is his own car. And therefore, he may freely transfer that car to Yoko through inheritance.

C. MANAGEMENT -- Absent an agreement, each partner entitled to EQUAL control (vote). (Default rule: equal control, one partner one vote.)

Hypo: A, B, and C agree to contribute money and share profits 60-30-10. How do they vote?

Absent an agreement, "equal control/one partner one vote" is our default rule.

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" is our default rule.

Exception:

Partners do receive 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: 200813



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

First, in the absence of an agreement on profits, they are shared equally. Second, in the absence of an agreement on losses, they are shared just like profits, which will be equally as well.

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

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

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

In the absence of an agreement on profits, they are shared equally.

(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 an agreement, profits are shared equally.

IV. DISSOLUTION

A. Key definitions:

1. Dissolution:

[Dissolution of a general partnership occurs upon] any material change in the partnership caused by the death or withdrawal of any single general partner causes automatic dissolution of general partnership..

2. Termination:

The real end of the partnership.

3. Winding Up:

Winding up is the period between dissolution and termination in which the remaining partners must liquidate the partnership's assets to satisfy the partnership's creditors.

B. Compensation and liability for winding up.

1. Compensation for winding up .

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Partners do receive compensation for helping to wind up the partnership business. [an exception to general rule of no salary]

2. Partnership's liability for winding up .

a) Old Business?

The partnership, and therefore its individual general partners still, retain liability on all transactions entered into to wind up old business with existing creditors.

b) New Business?

For brand new business, the partnership, and therefore its individual general partners, still retain liability even on brand new business transactions until notice of dissolution is given to all existing and even potential creditors.

C. Priority of distribution.

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

a) First, all creditors must be paid.

i) all outside non-partner trade creditors must be paid; and

ii) all inside partners who have loaned to the partnership must be paid as well.*

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

Any money paid in, not loaned, by the partners to the partnership MUST be fully repaid right now .

c) Profits and surplus, if any.

Any leftover is shared equally among partners 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.

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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 $600,000 in full. Secondly, inside partner A must receive $100,000 in return for his loan. Third, capital contributions must be repaid. Partner B must receive $200,000 for his capital contribution. Finally, the remaining profits and surplus of $100,000 are shared equally by A and B without agreement, i.e. each receives $50,000.

(2) Suppose, in the prior hypo, the AyeBee Partnership has only $700,000 to distribute?

First, all outside trade creditors must receive $600,000 in full. Secondly, inside partner A must receive $100,000 in return for his loan. However, the partnership still owes to B $200,000 capital contribution. So, Partner A and Partner B must share that loss equally. Therefore, A and B must pay in $100,000 each to cover the loss. [B will be paid its $200,000 capital contribution later]

MINI-REVIEW

A. AGENCY

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

(a) Assent, Benefit, Control plus Scope

(b) No vicarious liability for independent contractor's torts.

(c) Intentional torts generally outside the scope.

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

(a) Express authority – oral, except land; revocable unless durable.

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

(c) Apparent authority – principal cloaks + third party reliance 200816



(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, two or more persons, carrying on as co-owners of a business for profit . (profits are prima facie evidence)

2. Liability to Third-Parties

(a) General partners are liable personally for partnership obligations.

(b) Estoppel – representors are liable as if general partners.

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

3. Relations Between Partners

(a) Fiduciaries-Accounting for profits

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

(c) Without an agreement, equal control, no salary, equal profits, and losses like profits.

4. Dissolution

(a) Definitions:

Dissolution equals any material change including death or withdrawal.

(b) Priority:

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i) outside creditors ; ii) inside creditors; iii) capital contributions; iv) profits, if any, shared equally without an agreement.

(c) Distribution Rule:

Each partner receives their loans and capital contributions plus their share of profits, but also minus their share of losses.

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Agency & Partnership