Agency and Partnership Outline

AGENCY IN K LAW AND TORTS

Contract Liability:
 Principal (P) becomes liable to third party (3P) through the actions of agent (A) as long as A and
P both: 1) consent and 2) A is subject to P’s control
 Capacity: P must have contractual capacity (because the K is between 3P and P ultimately) but
the agent’s contractual capacity does not matter, he’s just an intermediary. Must have minimal
mental capacity though.
 Writing: Agency law does not require a writing but the Statute of Frauds may.
 No Consideration required to have K liability.

Actual Authority: All about the reasonable belief of the Agent

 Creating Actual Authority Can Be Either
o 1) Express
o 2) Implied. P’s conduct leads A to believe that he has authority.
 Termination of Actual Authority:
o After a specified time or reasonable amount of time (doesn’t last forever)
o By change of circumstances (subject matter is destroyed)
o If agent acquires an adverse interest (joins a competitor)
o When agent says so
o When Principal says so—UNLESS the power is “coupled with an interest” which makes
the power irrevocable; unfair to A otherwise.
o By death/incapacity/bankruptcy (unless coupled with an interest)
 Delegating Authority:
o OK as long as P consents (may be express or implied from circumstances)

Substitutes for Actual Authority

 1) Apparent Authority: is about the 3P’s reasonable belief
o P leads 3P to mistakenly believe A has authority. Protects the innocent 3P who relies on
P’s holding out of A as agent.
o Key Fact--- reasonable belief must be created by P not by A alone. Otherwise unfair to P
o Apparent Authority can linger after Actual authority ends.
 3P’s may not know that the actual authority has ceased
 2) Ratification:
o Even if the A had no authority, P can ratify later on by expressly affirming the K,
accepting the benefit of it, or suing 3P on it.
o Requirements:
1) knowledge of all material facts
2) All or Nothing: can’t pick and choose. P must accept the entire transaction
3) Capacity- P must have capacity at both the time of ratification and the time
of the original K because ratification is retroactive.
o Intervening Rights: because ratification is retroactive- a bona fide purchaser’s rights must
be protected. Can’t cut off the intervening rights of innocent BFP.

 3) Adoption:
o Same concept as ratification, but NOT retroactive. Liability applies only at adoption
forward. And cannot relieve prior party of liability- just makes new party liable too.
Subagents
 A subagent is a person appointed by the agent to do agent’s work. A has Absolute liability to the
P for breaches by the SubA.
 If authorized by P- then Sub owes the P same duties as A. If unauth, he owes no duties to P, only
to A.
 P has no duty to compensate a sub even if the A had authority to hire the sub.

Relationship of Parties
 Principal-Agent:
o Agent is a fiduciary. Owes duty of loyalty (must put P’s interests above A’s), a duty of
care (“slide scale” depending on if A has special skills), and a duty of obedience.
o Unless gratuitous A, the P MUST reimburse and indemnify
o Remedies: wide range available. Constructive trust if A breaches, i.e.
 Principal-3P
o Principal ALWAYS liable to 3P
o 3P almost always liable to P.
 Exception: undisclosed P and A has special skills.
 3P-Agent
o Generally no liability. A is just an intermediary.

Liability in Tort
 The point here is to apply vicarious liability when appropriate to protect innocent 3P
 TEST: Was the tort committed by a servant acting within the scope of employment? If so,
master and servant are jointly and severally liable to the injured 3P.
 Servant or Independent Contractor?
o Did the employer have the right to control how employee did the job (even if not
exercised)? Most important factor. Other factors:
 Who supplied tools/workplace?
 Was the job part of employer’s regular business?
 Was the payment in regular intervals or by the job?
 Was it long term?
 Scope of Employment:
o Master (M) not automatically liable for the torts of Servant (S). M will be liable only is
S was acting within the scope of employment.
 USUAL TASK: If S was doing a usual task, the tort was within the scope
 DEVIATION: if minor (a detour) usually within scope. If substantial (frolic) it
is not within the scope.
o Intentional Torts—Outside scope unless force is used to further the M’s business, M
ratifies it, or M authorizes it.
 Liability: joint and several. 3P can sue either 1) S alone or M alone, or 2) join them as
defendants. But is entitled to only one total satisfaction. Can’t double dip.
o Releasing servant/master from liability releases the other as well.
o Borrowed Masters- liable for S if they had the right to control S at time of accident.
 Direct Liability:
o M can be directly liable for its own negligence if M fails to train or supervise employees
or check an employee’s criminal record or job history.
 Even if not vicariously liable for S’s tort, for instance, if one of the above
examples is applicable.
 Mini-Review
Contract: Is P liable to 3P on a K signed by A?
 Did the agent have Actual Authority or Apparent Authority at the time of the K?
 Did the Principal Ratify or Adopt the K later on?
 If so- P is liable, A is not.

Tort: Is an employer liable for a tort committed by an employee?

 Was a tort committed by a servant acting in the Scope of Employment?
 If so, M and S are jointly and severally liable.

GENERAL PARTNERSHIPS

I. Formation:
 A partnership is an association of 2 or more persons to carry on as co-owners for profit, whether
they intend to form a partnership or not.
 Factors to determine who is a partner:
o Capital. But capital contributions are NOT required to be a partner.
o Documents (written agreements, tax returns)
o Right to Control
o Profit. Person who shares in profits is presumed to be a partner
 Writing: Partnership law does not require one, but SoFs may.
 Purported Partners: If no partnership has been formed, parties may still be liable as purported
partners to protect 3P’s reasonable reliance

II. Property Interests:

 Rules for determining Partnership Property:

o Partnership Property
 If acquired in the partnership’s name or even in a partner’s name when it’s
apparent from the document that he is acting for a partnership
o Presumed Partnership Property
 If partnership funds are used
o Presumed Partner’s Property
 If acquired in his name without partnership funds and no indication he is acting
for the partnership
 Partnership’s Rights in its own property: Totally unrestricted.
 A Partner’s Rights in Partnership’s Property: Extremely limited! Only for partnership purposes.
Not a transferable right.

A Partner’s Economic Interest

 Defined As: the Partner’s share of the profits.
 It is transferable. A partner can assign/devise her interest in the partnership (but that person does
not become a partner, just redirects the profits). And a judgment creditor can attach it.

III. Relations Among Partners: The statute supplies the default rules, but the partners are free to
contract around them. Thus the partnership agreement usually controls here.
 Profits and Losses are Shared Equally regardless of each partner’s share of contribution. Unless
otherwise Agreed (UOA).
 No automatic right to compensation as a partner UOA. Only exception: winding-up of
partnership’s affairs at end of partnership.
 Equal Management Rights. UOA- majority rules on votes.
 Right to Indemnification with Interest for any partner
 Fiduciary Duties owed to Partnership—can’t be eliminated, but can be tinkered with:
o Duty of Care
o Duty of Loyalty
o Duty of Good Faith
o Disclosure:
 Without demand- a partner must render information about the partnership
reasonably required for a partner to exercise her rights
 With reasonable demand- any other information
 Admitting a new partner:
o Must be unanimous consent among partners UOA
o New partner liable for past debts, but not to anything other than econ interests

IV. Relations between Partners and 3Ps: Use Agency Law

A. Contract- Partnership is the Principal, Partner is the Agent
 Actual Authority: Created by the partnership agreement, or majority vote of partners,
or statute which makes every partner an agent for carrying on business
 Apparent Authority look at partner’s title and prior conduct
 If no authority—look to ratification/adoption

B. Statement of Authority: may be filed with Secretary of State to protect the partnership
against certain 3P claims for 5 years.
a. Real property: a grant of, or restriction on, authority to transfer real property in
partnership’s name is effective only if the statement is also recorder at county
recording office where property located
b. Other K’s A grant of authority is conclusive in favor of a BFP. Restrictive effective
only against a person with actual knowledge of it.
C. Tort: only question was whether it was committed within the ordinary course of the
partnership’s business
D. Partners’ Liability for Partnership Obligations (of course the partnership is liable, but the
partners are, too!)
a. Joint and Several Liability but the Plaintiff must first exhaust partnership resources
before going after the partners themselves

 LLP Limited Liability Partnership

o Just like a general partnership, but no vicarious liability
 File statement with Sec of State and pay a fee to become LLP/Professional LLP
o If a partner commits a tort—he is liable, so is the LLP, but not other partners.
o If the LLP itself breaches a K- only the firm is liable, as the principal on the K.
V. Dissociation – When a partner “makes a break” from the partnership
 Effect: Usually no big deal. Partnersip buys out the disassociating partner, and continues in
business without him.
 Apparent Authority Problem: a disassociated partner can bind the partnership for 2 years after
dissociation to a 3P who was unaware of the dissociation
o Notice: the partnership can protect itself by notifying creditors or filing a statement of
dissociation (effective 90 days after filing)
o Indemnification: partnership can seek indemnification from withdrawn partner since he
had no actual authority to bind it
 Dissociating Partner’s Liability:
o To existing creditors. Unless relased by a creditor
o To subsequent creditors who reasonably believed he was then a partner and had no
knowdlege. Exposure lasts 2 years
o To other Partners for breach of K if she withdrew before term up or specific task
completed (“wrongful withdrawal”). Otherwise no liability for partnership at will. Most
partnerships are at will.

VI. Dissolution and Winding Up

A. Causes of Dissolution:
 By law/ct order
 Event in partnership requiring it
 If there’s a definite term or specific task and the term ends/task is completed
 Partners unanimously agree
 At least ½ the partners agree to wind ip
B. Partners who wrongfully disassociate have no rigt to wind up.
C. Apparent Authority still exists to bind partnership unless the partnership notifies creditors
(effective immediately) or files a statement of dissolution (effective after 90 days)

D. Asset Distribuiton on Winding Up

 First- Always to creditors, including partners who are creditors.

 Second- To partners for what is left in their capital accounts (contributions+profits-losses)
 Insufficient Funds?
o Split the funds pro rata

LIMITED PARTNERSHIPS (L.P.s)

I. Nature and Formation
 Definition: A partnership with 1 or more General Partners (GP) generally liable, and 1 or
more limited partners (Liability limited to their investment). Name must contain
Limited/LP/Ltd., etc.

II. Liability of Limited Partners

 General Rule: Limited Partners have limited liability. Not personally liable.
o Exception: when a limited partner takes part in “control”.
 Safe Harbors (no liability): being employed, advising GP, guaranteeing $,
even acting as an O/D
 Eventually you’ll cross the line into “control”
  Liability for Exercising Control: Only to those persons transacting business with the LP with
actual knowledge of her control.
 Other ways a limited partner can become liable:
o Name: if a LP knowingly lets his name be included in the L.P.’s name, he’s liable to
creditors who didn’t know
o No Filing: The LP is just a GP, and joint and several liability Is the law.

III. Liability of General Partners- personally liable

 Exception: LLLP (Limited Liability Limited Partnership)
 Limits the liability of a general partner

IV. Priority on Distribution

 Repay Creditors first, then return capital to limited partners, then split the balance per LP
agreement or in proportion to capital contributions (different than GP)

LLC’s
I. Formation
 Must files articles of organization, have agent, etc.
 Name must state LLC or Ltd or something
 If it’s a Professional LLC (PLLC) all members must be licensed in OH
 Management: by managers or members, but members run LLC in proportion to capital
contributions, unless otherwise provided in an operating agreement (OA)
 Freedom Of K: Members free to vary statutory default rules in an operating agreement, which
will generally be given effect. May also tinker with fiduciary duties
 Profits/Losses: Split per the OA; otherwise, in proportion to capital contributions

II. Limited Liability for Members (except for their own torts)a

4 Types of Partnerships:
 GP: Joint and Several Liability for all
 LP: General Partners personally liable, Limited Partners not
 LP: Joint and Several Liability for general partners (unless LLLP), no liability for limited
partners (unless have control)
 LLC: no liability