Agency ,Partnership & Limited Liability Companies

Business Associations: Briefed by Tiffani L Hume (3L)

Sources: * ALL SLIDES IN THIS PRESENTATION ARE REFERENCED FROM THE BELOW SOURCES: Conviser, R.J (2003) Gilbert Law Summaries: Agency, Partnership & Limited Liability Companies BAR/BRI, Chicago, IL

Kaufman, M.J (2006) Gilbert Law Summaries: Agency and Partnership Loyola University of Chicago School of Law CD Series

What is an “Agency”?

Definition: “An agency is a fiduciary relationship arising from the mutual manifestation of consent that an agent shall act on behalf of and subject to the control of the principal” [Conviser, R.J (2003)].

What is a “Principal”?

Definition: A Principal is the one for whom the agent will perform the work for.

There are (3) types of principals:1. Disclosed Principals – the principal’s identity is known to the

third party2. Undisclosed Principals – the third party does not know there is a

principal or the identity of the principal, the third party only sees the agent.

3. Partially Disclosed Principals – the third party knows the

What is an “Agent” ?

An agent is the person who assents to perform tasks for the benefit of the principal and is subject to be under the control of the principal. There are different types of agents:

1. General Agent2. Special Agent3. Factors4. Subagents

The General Agent

A general agent has authority to conduct a series of transactions involving a continuity of service.

The Special Agent

A special Agent has authority for only a single transaction or a series of transactions not involving continuity of service.

FACTORS

Definition: A Factor is a commercial agent employed to sell consigned merchandise in the agents own name for the principal

The Subagent

When an agent has the authority to appoint another to assist in performing tasks for the principal – this person is considered a subagent

If the agent is authorized to appoint a subagent, the subagent will perform tasks for the principal just as the agent does.

The Agent is responsible for the subagent primarily (pay, torts, etc)

The Principal is liable for the “authorized” subagent “Secondarily”

The Subagent – part 2

UNAUTHORIZED SUBAGENTS These people are not considered

subagents They are considered “agents of the

agent” The principal is not responsible for

the unauthorized agent – the agent who appointed the unauthorized agent is liable for the torts, contracts, payment of the agent and actions therein.

Working into Agency Law Liability

The most common question is: Is the principal liable for the torts of his agent?

The second part of this is: “When, how and why?”

To get to the answer, we must first find out IF there is an agency relationship in existence.

Requirements For An Agency To find out if there is a “Principal –

Agent” relationship established three things must exist:

ASSENTBENEFITCONTROL

“ABC” “ABC” “ABC” “ABC” “ABC” “ABC” “ABC”

Agency

ASSENT Assent is an informal agreement

between a principal with capacity and an agent

Agency

BENEFIT The agent’s conduct must be for the

principals benefit only

Agency

CONTROL The principal must have the right to

control the agent by having the power to supervise the manner of the agents performance

Subagents & Borrowed Agents – There can be no vicarious liability for a subagents or borrowed agents tort unless there is assent, benefit and the right to control the subagent or borrowed agent.

Agency

Independent Contractors: there is no power to control an independent contractor because there is no power to supervise the manner of an independent contractors performance

GENERALLY – there can be no liability for an independent contractors torts

EXCEPTION: If the independent contractor is engaged in ULTRA HAZARDOUS activities or Estoppel is raised by a third party based on the principal holding out the I.C as one of his agents.

Determining the Liability

Once the relationship has been established and you can clearly state that there is a principal – agent relationship, we can then ask the question: “When is a principal liable for the torts of his agent (s)?”

Agency: Determining Liability

1. There must be an agency relationship that exists

2. The agents must be working within the scope of their duties when the tort occurred.

3. See the next slide

Agency: Determining Liability 2

RE: SCOPE OF PRINCIPAL- AGENT RELATIONSHIP

The questions that need to be answered 1. Was the conduct of the kind that this agent is hired

to perform? 2. Did the tort occur on the job or was it in some

other place? a. Frolic = a new and independent journey (not

liable) b. Detour = a mere departure from an assigned

task (liable) c. Did the agent intend to benefit the principal? (if

Yes, Liable)

Agency: Determining Liability 3Regarding Intentional Torts:

a. Intentional torts are generally outside of the scope of agency

b. Exceptions:

1. If the act of the agent was authorized by the principal

2. If the intentional tort was natural from the nature of the employment

3. If the conduct was motivated by a desire to serve the principal

BREAK TIME 15 minutes

When we come back we will talk about the

“Liability of a principal to third parties for contracts entered into by an

agent”

Agency: Principal liability for the contracts entered into by his agent

RULE: The principal is liable for contracts entered into by its agent if the principal authorized the agent to enter the contract

Agency: Contract Liability

Ways in which the principal can authorize the agent to enter into a contract:

1. By actual express authority2. By actual Implied Authority3. By Apparent Authority4. By Ratification

Agency: Contract Liability

Actual Express Authority: The principal has used words to express authority to an agent to enter a contract on the principals behalf.

Can be oral Can be private Narrowly construed

EXCEPTION: Equal Dignity Doctrine: “if the contract must be

in writing, then so to equally must the expressed authority to enter that contract be in writing” [Conviser, R.J (2003)]

Agency: Contract LiabilityExpress Authority will be revoked by: Unilateral act of either party Death or incapacity of the

principal

EXCEPTION: Express authority cannot be revoked if the principal gives the agent a durable power of attorney: “ A power of attorney is a written expression of authority to enter a transaction”

Agency: Contract Liability

Actual Implied Authority

a. Necessity – There is implied authority to do all tasks that are necessary to accomplish an expressed task

b. Custom: There is implied authority to do all tasks customarily performed by persons with the agents title or position

c. Prior Dealings: There is implied authority to do all tasks that the agent believes to have been authorized from prior acquiescence by the principal

Agency: Contract Liability

Apparent AuthorityThis is what the principal “holds out to the

third party or the public” by indicating he has an agent or that a certain person “is” his agent

a. Two prong test: (1) the principal has cloaked the agent with the appearance of authority & (2) the third party reasonably relies on the appearance of authority

Agency: Apparent Authority Continued

As previously stated:

1. The principal must have cloaked the agent with the appearance of authority to enter the contract AND

2. The third party must reasonably rely on the appearance of authority

Secret Limiting Instructions: where the agent has actual authority, but the principal has secretly limited that authority. The agent then acts beyond the scope of the limitation

Lingering Authority: actual authority has been terminated, but the agent still continues to act on the principals behalf

Agency: Contract Liability

Ratification Authority conferred by the principal to the

agent AFTER the contract has been entered into.

Two part test:

1) Principal has knowledge of all material facts regarding the contract; AND

2) The principal has accepted the benefits of the contract

Agency: Wrapping up Authority

1. Determine there is an agency relationship2. Determine if the agent entered into a

contract on the Principals behalf or his own3. Determine on “what authority” did the

agent have the right to enter into that contract:

Actual Expressed, Actual Implied, Apparent authority, or by Ratification

Rules of Liability on the Contract If there IS NO authority, the principal is not liable on the

contract and the agent becomes personally liable on the unauthorized contract

If there IS authority, the principal is liable on the contract. If the principal is liable on the authorized contract, then, generally, the agent is not liable on the contract.

Exception: if the principal is partially disclosed, or undisclosed, then the authorized agent may be liable even on its authorized contract. The third party may choose to sue either the authorized agent or the principal once it becomes disclosed.

Duties between Agents and Principals

Duty to exercise reasonable care Duty to obey reasonable instructions Duty of loyalty

No self dealing – the agent may never receive a benefit to herself to the detriment of the principal

No usurping the principals opportunity

No secret profits

END OF AGENCY LAW

NEXT: GENERAL PARTNERSHIP,LLP & RLLC LAW

GENERAL PARTNERSHIP FORMATION

General partnership formations do not require any formalities to form or become a general partnership

Definition: a general partnership is an association of two or more people, carrying on as co-owners of a business for a profit

The contribution of money or services in return for a share of the profits creates a presumption that a general partnership exists

General Partners: Liabilities of Partners to Third Parties

Agency principles apply

Partners are agents of the partnership for carrying on usual partnership duties

The partnership is bound by torts committed by partners in the scope of partnership business

The partnership is bound by contracts entered into by partners with partnership authority

General Partners are personally liable for debts and obligations of the partnership

Incoming partners liability for pre existing debt: there is no direct personal liability for prior debts

Dissociating partners liability for subsequent debts - dissociating partners retain liability on future debts until actual notice of dissociation is given to creditors, or until 90 days after filing of dissociation with the state

General Partnership Liability by Estoppel

A person who represents to a third party that he is a partner in a partnership will be liable to that third party as if he was a partner in the partnership even if he is not

Comparing and Contrasting Partnerships

Now that we have covered “general partnerships” lets discuss some other types of partnerships:

Limited Partnerships Registered Limited Partnerships

Limited Partnerships

Definition: a limited partnership is a partnership with at least one general partner and one limited partner

Formation: must file a limited partnership certificate that includes the names of all general partners

Limited Liability Control:

General Partners are liable for all debts and obligations. General partners have substantial managerial control;

Limited Partners are not liable for debts and obligations. Must pay full consideration for their interests. Generally, they have limited control.

Registered Limited Liability Company [RLLC]

Formation – must register with the state by filing a statement of qualification

Must file annual reports

Liabilities: No partner is liable for debts and obligations of the partnership

Example: A, B, C and D are partners in an RLLC. A wracks up a $10 million dollar trial through the law firm, A has to cover all of the expenses, debts and obligations of that case, not B,C and D. Each person is responsible for their own partnership debts and obligations. The partnership is not going to be sued for the debt, Person A will be individually sued as an agent of the company. Each person pays into their own interest within the company.

Rights and Duties of Partners General Partners are fiduciaries of

each other and the partnership:

Duty of loyalty No usurping partnership opportunities Partners may never make as secret,

undisclosed profit at the expense of the partnership

Action for accounting: the only form of action that can be brought by a partnership against one of its own disloyal, breaching partners

Rights in Partnership Property Specific partnership assets: Land Leases and

equipment that are owned by the partnership – are not transferable by any individual partner unless ALL partners agree

Share of profits and Surplus- this is a partners individual profit and surplus, they can transfer as they wish

Share in management – not transferable

Trouble figuring out who owns what? Find out who paid for the property and with whose money

Rights continued

Management: absent an agreement, all partners are entitled to equal control

Salary- absent an agreement, no partner gets a salary

Winding up – partners do get compensated for winding up a partnership

Partners share of profits and losses – absent an agreement profits are shared equally. Regarding losses - absent an agreement, losses are shared like profits

Partnership Dissolution

In a partnership at will where there is no agreement among partners, the partnership will dissolve when any single partner expresses the will to dissociate

In a partnership NOT at will, where there is an agreement among the partners, the partnership will dissolve according to the terms of the agreement, OR if any single partner dissociates and the remaining partners by majority vote, vote to dissolve within 90 days of the dissociation of the single partner

Termination = the real end of the partnership.

Winding up

The winding up period is the period between dissolution and termination in which the remaining partners liquidate the partnerships assets to satisfy the partnership creditors

Compensation for winding up Partners do receive compensation for helping to

wind up the partnership business

Partnerships liability for winding up:

a. old business: The individual general partner still retains liability to all transactions entered into to wind up business with existing creditors

b. New Business – the partnership and its individual partners, still retain liability until actual notice of dissolution is given to creditors or until 90 days after the filing a statement of dissolution with the state

Break down of Priority Distribution

Outside Creditors

Profits and Surplus if

any

Profits and Surplus if

any

Profits and Surplus if

any

Profits and Surplus if

any

Profits and Surplus if

any

Partner Creditors

Capital contributions by partners must be paid to the partnership – no fixed rate

interest

Rule: Each partner must be repaid his or her loans and capital contributions, plus the partners share of profits or minus the partners share of losses

*All slides are referenced from the above stated sources*

References

Conviser, R.J (2003) Gilbert Law Summaries: Agency, Partnership & Limited Liability CompaniesBAR/BRI, Chicago, IL

Kaufman, M.J (2006) Gilbert Law Summaries: Agency and Partnership Loyola University of Chicago School of Law CD Series

PLEASE BE SURE AND REFERENCE YOUR COURSE MATERIALS FOR A MORE INDEPTH LEARNING OF THE LAW AND ASK YOUR LAW PROFESSORS ANY QUESTIONS YOU MAY HAVE – THIS IS INTENDED AS A “BRIEF” AND MAY NOT CONTAIN EVERYTHING YOU NEED TO KNOW ALTHOUGH IT IS CONSICE.

END OF AGENCY AND PARTNERSHIP PRESENTATION