Agency & Partnership Essentials – Exam Review

Agency Relationship

• Created when all four elements exist:

  • Principal manifests assent to Agent through words or conduct, indicating the Agent will act for the Principal.

  • Agent acts on Principal’s behalf, meaning the Agent is acting to further the Principal's interests.

  • Agent’s actions are subject to Principal’s control, even if the Principal does not exercise that control; the right to control the means and manner of performance is sufficient.

  • Agent assents/consents to act on the Principal’s behalf and under the Principal’s control.

• Capacity: Principal needs contractual capacity (e.g., must not be a minor or legally incompetent) because the Principal is directly bound by the Agent's actions. The Agent only needs minimal capacity to perform the tasks (can be a minor or legally incompetent, but their own contracts are voidable by them).

• Generally no writing, no consideration required for the agency relationship itself. However, the equal-dignities rule applies: if the underlying transaction that the Agent is authorized to enter into on behalf of the Principal must be in writing (e.g., real estate contracts), then the Agent's authority to enter into that transaction must also be in writing.

Principal

• Any person or entity with legal capacity, including individuals, corporations, partnerships, or trusts, can serve as a Principal.

• Control: The key aspect is the Principal's right to control the ultimate result of the Agent's work, not necessarily the specific methods or daily tasks. This right to supervisory control is sufficient.

• Common types: Individual (a person), Employer (in an employer-employee relationship), Entrepreneur, Corporation, Partnership.

Agent

• An agent is a person who acts on behalf of another person (the Principal) at the Principal’s direction and control.

• May be Employee (high control over manner and means of performance), Independent Contractor (low control over manner and means, typically only over the result), Gratuitous Agent (acts without compensation), Subagent (appointed by an Agent to perform functions for the Principal), Trustee (holds property for the benefit of another).

• No formalities required; an agency relationship can be formed verbally or even through implied conduct. A gratuitous relationship (no payment involved) is still a valid agency, and the gratuitous agent still owes duties to the principal.

Authority to Bind Principal

• Actual Authority: The Agent reasonably believes, based on the Principal's manifestations, that they are authorized to act.

  • Express: Authority directly communicated through clear oral or written words from the Principal to the Agent (e.g., "You are authorized to sell my car for 10,000").

  • Implied: Authority that is reasonable, necessary, usual, or proper for the Agent to carry out the express authority. This can include authority stemming from custom, past dealings, or circumstances (e.g., an Agent hired to manage a store has implied authority to hire and fire employees, order supplies).

• Apparent Authority: The Principal's manifestations to a 3rd party lead that 3rd party to reasonably believe that the Agent is authorized to act, even if the Agent has no actual authority. The 3rd party's reasonable belief is key, not the Agent's belief.

• Estoppel: Arises when a Principal is at fault for creating the appearance of authority (e.g., by negligently allowing someone to appear as an agent), and a 3rd party, relying on that appearance, changes their legal position to their detriment. The Principal is then estopped from denying the authority.

• Ratification: Occurs when a Principal affirms an act performed by an Agent (or a purported Agent) who acted without authority. For valid ratification, the Principal must affirm the entire act, have knowledge of all material facts, have contractual capacity at the time of ratification, and the ratification must occur before the 3rd party withdraws from the transaction. Ratification makes the unauthorized act retroactively authorized.

Termination of Authority

• By parties: Revocation by the Principal (unless agency is coupled with an interest) or renunciation by the Agent. Also, mutual agreement to terminate the agency.

• By law: Automatic termination upon change of circumstances (e.g., destruction of subject matter, insolvency of party), passage of time (if specified or reasonable), death/incapacity of either the Principal or the Agent, statutorily mandated event (e.g., a specific legal requirement for the agency to end), or the Agent’s material breach of fiduciary duty.

• Apparent authority lingers until the 3rd party has notice of the termination (actual or constructive notice, depending on the prior dealings). It may require filing a statement of dissociation or publication where available (e.g., for partnerships).

Principal’s Liability to 3rd Parties

• Contracts: A Principal is bound by a contract entered into by an Agent if the Agent had actual authority, apparent authority, or authority based on estoppel, or if the Principal subsequently ratified the contract. The Principal's liability depends on the disclosure status of the Principal:

  • Disclosed Principal: 3rd party knows the Agent is acting for a Principal and knows the Principal's identity. Only Principal is liable.

  • Partially Disclosed Principal: 3rd party knows Agent is acting for a Principal but does not know the Principal's identity. Both Principal and Agent are liable.

  • Undisclosed Principal: 3rd party believes Agent is acting for themselves and does not know a Principal exists. Both Principal and Agent are liable.

• Torts (Respondeat Superior): "Let the master answer." An employer (Principal) is vicariously liable for the torts of an employee (Agent) committed within the scope of employment. This includes acts that are incidental to or foreseeably arise from the employment. Intentional torts are generally outside the scope unless for the employer's benefit, authorized, or foreseeable given the nature of employment.

  • Not liable for independent contractor's torts unless a specific exception applies: non-delegable duty (e.g., duty to keep premises safe), retained control over the method and manner of the work (making them essentially an employee), apparent agency (3rd party reasonably believed the independent contractor was an employee), or negligent selection of an incompetent independent contractor.

  • Apparent authority torts: A Principal may be liable for torts committed by an Agent acting with apparent authority (e.g., Agent makes fraudulent misrepresentations within the apparent scope of authority, or conversion of goods).

• Direct Liability: The Principal is directly liable for their own negligence (e.g., negligent hiring, supervision, or retention of an Agent), direct authorization of the tortious act, ratification of a tortious act, or breach of a non-delegable duty.

Agent’s Liability

• Contract: An Agent is liable on a contract when the Principal is undisclosed or partially disclosed, as the 3rd party is relying on the Agent's credit. If the Agent acts without authority, they may be liable to the 3rd party for breach of an implied warranty of authority (the warranty that they have the authority they claim).

• Tort: An Agent is always liable for their own torts, regardless of whether the Principal is also liable.

Fiduciary & Performance Duties of Agent

• Loyalty: An Agent must act solely for the benefit of the Principal in all matters connected with the agency. This includes: no self-dealing (Agent cannot transact with themselves on behalf of the Principal without full disclosure), no usurpation of Principal's business opportunities, no competing with the Principal, and keeping all Principal's confidences and proprietary information secret.

• Care/Obedience: An Agent must act with the care, competence, and diligence normally exercised by Agents in similar circumstances. This includes: reasonable diligence and skill, following all reasonable and lawful instructions from the Principal, keeping and rendering accurate accounts of all money and property received or paid out on the Principal’s behalf, and informing the Principal of all material facts related to the agency that the Agent knows or has reason to know.

Principal’s Duties to Agent

• Compensation (if agreed upon, or reasonable value for services if not specified), reimbursement for expenses incurred by the Agent on behalf of the Principal, indemnity for losses suffered by the Agent acting within the scope of agency not due to Agent's fault, providing safe working conditions, and acting in good faith & fair dealing.

Summary of Duties

Partnership Basics (RUPA)

• Definition: An association of ≥2 persons to carry on as co-owners a for-profit business. RUPA (Revised Uniform Partnership Act) emphasizes the entity nature of a partnership.

• Presumed by sharing profits (not merely gross returns or revenue), unless the profits are received for a specified reason listed in the DRAWING exceptions:

  • Debt (payment of a debt by installments or otherwise)

  • Rent (for use of property)

  • Annuity or other retirement or health benefit

  • Wages or other compensation to an employee or independent contractor

  • Interest or other charge on a loan

  • Goodwill from the sale of a business or other property

• Entity distinct from the partners; under RUPA, a partnership is considered a legal entity separate from its partners. This means it can sue and be sued in its own name, hold title to property in its own name, and incur liabilities distinct from its individual partners.

Partner Rights & Duties

• Management: Generally, each partner has equal rights in the management and conduct of the partnership business, regardless of capital contributions. Ordinary matters of partnership business are decided by a majority vote of the partners. Extraordinary matters (e.g., admitting a new partner, selling all assets, amending the partnership agreement) require unanimity among the partners.

• Profits/Losses: How profits and losses are shared is determined by the partnership agreement. In the absence of an agreement, RUPA's default rule is that profits are shared equally among partners, and losses are shared in the same proportion as profits (e.g., if profits are shared 50/50, losses are also shared 50/50).

• Fiduciary Duties (owed by partners to the partnership and to the other partners in the conduct and winding up of the partnership business. These duties cannot be eliminated by agreement):

  • Loyalty: A partner must not compete with the partnership, engage in adverse transactions with the partnership, or usurp partnership opportunities. However, the partnership agreement may identify specific activities that do not violate the duty of loyalty, or specific acts can be approved by a majority of disinterested partners (safe-harbor approval).

  • Care: A partner's duty of care to the partnership and other partners is limited to refraining from engaging in gross negligence, reckless conduct, intentional misconduct, or a knowing violation of law.

  • Obligation of good faith & fair dealing: This underlying obligation applies to every contract or duty under RUPA and cannot be eliminated by the partnership agreement, though the agreement can prescribe reasonable standards to measure performance of the obligation.

Partner Liability

• Joint & Several: Under RUPA, partners are jointly and severally liable for all partnership obligations (debts, contracts, and torts). This means a creditor can sue one partner for the full amount, or sue multiple partners. However, usually partnership assets must be exhausted before a partner's personal assets can be reached.

• New partner not liable for pre-admission debts of the partnership but is still a partner for all purposes moving forward. Their liability for pre-existing debts is limited to their capital contribution to the partnership.

• Dissociated partner remains liable for pre-dissociation debts. They can also be liable for partnership obligations incurred within up to 2 years after dissociation if the 3rd party reasonably believed the person was still a partner and did not have notice of the dissociation. This period is reduced to 90 days for transactions entered into by the partnership if a statement of dissociation is filed.

• Personal assets reachable after partnership assets are exhausted (e.g., through a judgment against the partnership and an unsatisfied execution) unless a specific exception applies (e.g., direct tortious act).

Partner Dissociation & Dissolution

• Dissociation: When a partner ceases to be associated with the carrying on of the business (e.g., voluntarily withdraws, death, bankruptcy, expulsion).

• Dissolution: The commencement of the winding up of the partnership business.

• At-will partnership: A partnership where partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking. Any partner may withdraw at any time, and this withdrawal causes dissolution and winding up of the partnership business (unless partners agree to continue).

• Term/undertaking partnership: Does not dissolve automatically upon a partner's dissociation. Dissolution occurs when the term ends, the task is complete, all partners unanimously consent to dissolve, or, if a partner dissociates, if at least half of the remaining partners vote to dissolve within 90 days of certain specified events (e.g., another partner's death, bankruptcy, or wrongful dissociation).

• Winding up: The process of liquidating partnership assets, paying off creditors, and distributing remaining assets. The order of settling debts is: 1) outside creditors, 2) partner-creditors (loans made by partners to the partnership), 3) partners’ capital contributions, 4) remaining profits (shared according to profit-sharing ratios).

• Dissociated partner is entitled to a buy-out of their interest, typically at a price equal to the greater of the liquidation value or the value based on a sale of the entire business as a going concern, with interest from the date of dissociation. Valuation is generally as of the dissociation date.

LLP (Limited Liability Partnership)

• A type of partnership that provides limited liability to all partners.

• To form, the partnership must file a statement of qualification with the state and ensure its name includes an LLP designation (e.g., "Limited Liability Partnership," "LLP," or "R.L.L.P.").

• Partners are not personally liable for the LLP's obligations arising from contracts, torts, or other liabilities of the partnership itself. However, partners remain personally liable for their own misconduct (e.g., their own negligence or torts).

Limited Partnership (LP)

• A partnership with two types of partners: at least one General Partner and at least one Limited Partner.

• Requires filing a certificate of limited partnership with the state, which must include names and addresses of each General Partner, and a registered agent for service of process. Formation is statutory and requires strict compliance.

• General Partner: Has rights to manage the partnership business and subjects themselves to unlimited personal liability for partnership obligations.

• Limited Partner: Generally has no management rights in the partnership. Their liability is limited to the amount of their capital contribution to the partnership. A Limited Partner may lose their limited liability and be treated as a General Partner if they participate in the control of the business and a 3rd party reasonably believes, based on the Limited Partner’s conduct, that they are a General Partner. Most states provide a safe-harbor list of activities that a Limited Partner can engage in without losing limited liability (e.g., being a contractor for the LP, consulting, voting on extraordinary matters).

• Profits/losses & distributions are shared as per the partnership agreement. If not specified, RUPA's default for LPs is proportional to the value of each partner's contributions.

• Dissolution triggers: Occurs at the time/event specified in the partnership agreement, upon written consent of all partners, withdrawal of a General Partner without a replacement within 90 days, or a judicial decree.

Conversion & Merger

• Conversion: Allows a business entity formed under one statutory form to transform into another (e.g., partnership to LLP, or partnership to limited partnership).

  • Partnership ⇄ LLP via filing a statement of qualification (for conversion to LLP) or a statement of cancellation (for conversion back).

  • Partnership ⇄ Limited Partnership via statutory conversion, which typically requires approval by all partners of the converting partnership and the filing of articles of conversion (or similar document) with the state.

• Merger: The combination of two or more entities into a single entity, with one surviving entity absorbing the others.

  • Merger is allowed with other entities (including other partnerships, LPs, LLPs, corporations, LLCs, etc.) under RUPA.

  • A plan of merger must be approved by all partners (unless the partnership agreement provides otherwise) and must list specific details such as the names of the merging entities, the identity of the survivor, the terms and conditions of the merger, and the manner of converting ownership interests in the merging entities into interests in the survivor.

  • The survivor entity succeeds to all assets and liabilities of the merging entities.

While the provided notes focus solely on the Revised Uniform Partnership Act (RUPA), a comparison between RUPA and its predecessor, the Uniform Partnership Act (UPA), reveals key differences in partnership law:

RUPA vs. Uniform Partnership Act (UPA) Comparison