Week Ten: Agents and Partners

Chapter 29: Agency

An Agent is like an actor playing a role

A asks B to act in place of (represent) A, and B agrees

Employment relationships overlap agency

Employee may be acting as agent, but independent contractor may also be agent. Test for agency: is there express or implied authority to bind principal by contract or conduct?

Employer-employee: right of control test. Issues here because of tax classification ambiguity

Employer liable for employee torts committed in the course of employment, usually not those of IC

Some agents are "fiduciaries"

From latin "faithful one" -- someone holding a position of trust, paid to advance the interests of another. Attorneys, investment managers, trustees.

Creating Agency and Granting Authority

Principal must have capacity to contract (not be crazy, minor, etc.) because one can't delegate what one does not have

Agent, however, need not have capacity: isn't dealing for self

"Express" agency

Means specifically granted by principal.

A "power of attorney" is a formal, written, notarized grant of express agency that can be recorded in county land records. Can be "durable" and can be "springing". May also refer to what in CA is called an Advance Health Care Directive.

Implied Agency

Power to do things incidental to express agency. For example, various powers are included in the general power to operate a business

Apparent Authority

Not a "real" agent, but appears such to 3rds, and principal allowed it to happen or is aware and doesn't disavow. As tho principal allowed the play to continue

Agency by ratification

Not a "real" agent, or deal is outside scope of authority, but principal agrees to accept the deal

Termination of agency

by accomplishment, lapse of time, mutual agreement or at will

If wrongful, action for damages: eg. exclusive 90 day RE sales listing

If by agreement, need to notify 3rd parties who would otherwise rely -- else agent still has apparent authority

Irrevocable agency: power plus interest

eg. contract appoints dealer agent to sell car for defaulting buyer. Significance -- principal can't terminate at will. Agent always can, tho may be liable for breach

Chapter 30: Principals and Agents

A's duties to P

To Perform, Notify, be Loyal, be Obedient, be Accountable: in general, to follow the script.

P's duties to A

Compensate, reimburse, cooperate: in general, to let the show go on.

A's Contract Liability to third parties

Depends on what A discloses. If A says "I'm an Agent", not liable -- unless P is undisclosed. Reason for exception: the 3rds are relying on A if they don't know who P is. A is playing the role of himself.

P's tort liability to third parties

P liable for A's lies and carelessness w/in the scope of the agency.

For intentional torts, look to A's motivation (to help P or not) and whether A did it while on P's business

For employees, concept of "respondeat superior" -- the boss is liable

For independent contractors: they are liable for own torts, P generally isn't, due to lack of control as to the manner of doing the work

Chapter 34: Proprietors and Partners

Choosing the Form of Business Organization: the issues

One participant ("owner") or several?

The possibilities

Other relations among business organizations



the contract licensing of name and system for doing business

Joint venture

a partnership for a particular limited purpose


is transaction-based association typically for the distribution of securities

Trusts/ business trusts

May be used as an alternative to corporation or partnership in holding property or carrying on business

Mutual Associations: insurance, credit unions

Purchaser or consumer cooperatives

Treated as partnerships or corporations depending on whether formally incorporated

Non-profit corporations

Name is a misnomer. Non-profit status only matters if organization is profitable

Sole proprietorship

Minimal formalities: local business licenses, fictitious name filings, employer ID numbers

Unlimited liability to creditors, and for torts

Financial accounting treats proprietor as separate entity, but law and tax do not. The financial concept of a proprietor's draw does not exist on a tax return.

General Partnerships: Background

Law codified in early 1900's, Uniform P'ship Act. Updated in 1994

Very general and flexible. Regarding relation of partners, tends just to provide default rules: "unless agreed otherwise". e.g. Sec 16103

The Nature of partnerships

"The association of two or more persons to carry on as coowners a business for profit forms a partnership, whether or not the persons intend to form a partnership" UPA Sec. 16202(a) Think of it as a business "marriage of convenience". The sociologist Irwin Goffman described partnership as: "intimacy without warmth"

The fundamental duality of partnership law

Is a partnership an "entity", a thing separate and apart from the partners? Or is "partnership" just the label that describes the relation of the partners as a group?

"Entity" versus "aggregate" theory:

Business and tax law have an internal inconsistency

Partnership consequences are based on agency

Partners are mutual agents and co-owners: Implies unlimited joint & several liability for committments made and torts done, w/in the scope of partnership business

Formation of partnership

No formalities required - holding out to third parties may suffice

The partnership agreement governs the relationship internally. May be oral or implied (w/ law providing default rules)

Interests generally nontransferable. Need unanimous consent to admit new partner

Economic Interests, and Accounting for Partnerships

"Unless agreed otherwise ..."

Income shares and capital interests. Refers to: Pr's agreed share of the income statement, and their cumulative shares of balance sheet equity. Income shares can differ for different items -- tho to be valid for tax purposes, they must have "substantial economic effect"

Annual income/loss plus contributions less draws clears to partner's capital

Significance of capital account

Partners may agree to have current income shares depend on capital invested

If sufficient assets, partners entitled to book value of capital on dissolution

Surplus above book value of capital divided by income interest unless agreed otherwise

Ending a partnership

Anyone may leave at any time: no involuntary agency

Tho departure may be "rightful" or "wrongful", depending on agreement: affects what departing partner is entitled to

Wrongful leaver in effect forfeits share in unrealized goodwill: under new UPA is liable for damages caused by departure.

Effect of departure on liability to 3rds

Departed partner is still liable for preexisting debts

And for new, unless there's notice to the world that the agency relationship is ended

Death of a partner

Heirs are "successors in interest" with rights to get the economic value of decedent's interest from the partnership -- they do not automatically become partners.

Partner's Creditors

One can pledge a p'ship interest -- or assign the benefits, but like heirs, creditors and assignees don't become partners. Just obtain "charging interests" against any distributions

Rights and Duties of Partners

Distinguish inside and outside relations

"Inside", with respect to each other

"Unless agreed otherwise", all manage equally. Partners are mutual, equal agents: majority vote rules. If you don't agree -- you can always leave (tho at your peril)

Certain issues require unanimity: outside ordinary course. Admission of new partner requires unanimity

Right to share in profits, and to an accounting on departure. Shares can be by whatever formula they agree -- can be different % interests in different items ("special allocations"). Accounting can be compelled by a suit in equity

Duty of loyalty -- partners are "fiduciaries" for each other. No self-dealing, taking opportunities, competing

Liability to 3rd parties: Outside

Contract liability: based on agency. What's tricky is apparent authority: partner limited by inside agreement that 3rds not aware of. 3rd party can choose who to go after, and partners then settle up internally

Each partner is personally liable "down to the last shirt button" for partnership debts and obligations

Tort Liability: joint and several liability, if wrong is w/in scope of p'ship business.

New partner means a new set of p'ship relations. New is liable for prior debts and obligations only to extent of capital contribution

notes and format (c) 2001-08 Robert H. Daniels