This action might not be possible to undo. Are you sure you want to continue?
Agency and Partnership
I. THE NATURE AND SCOPE OF AGENCY
A. In General (OL I.):
Law of agency is concerned with how actions made on behalf of another person consequently binds that other person
When is the principal bound by the agent’s agreement?
When is the principal responsible for what the agent did?
! Agency is a fiduciary relationship that arises when one person" the principal" manifests assent to another person" the
agent" that the agent shall act on the principal’s behalf and be sub#ect to the principal’s control" and the agent
manifests assent or otherwise consents so to act!
$! Types of Relationships
a! Master and Servant (!ployer and !ployee)
%ichael wor&s as a dental hygienist for 'r! (erry! The doctor sets %ichael’s hours" pro)ides all the equipment
%ichael needs to clean a patient’s teeth" and super)ises his actions! %ichael is 'r! (erry’s employee*ser)ant*agent
and the doctor is the master*principal!
+, -nder the doctrine of respondeat superior:
a master is generally liable for his ser)ant’s torts committed within scope of employment
b! !ployer and Independent "ontractor
+, The distinction between employer and independent contractor lies in the right to control . the
degree to which employer could inter)ene in the control of the employee’s manner of performance
Michael gro#s $ored #ith his %o$ and tells the doctor he is leaving and #ants a severance pac&age.
'hen the doctor ref(ses) Michael hires an attorney to negotiate #ith the doctor on his $ehalf. Michael
tells the attorney ho# !(ch he $elieves he is entitled to) $(t leaves the partic(lars of the negotiation
to the attorney. *ence) the attorney is a nonservant agent and) therefore) an independent contractor.
/! +o(r "onse,(ences of Agency
a! duties arise between the principal and agent
b! agent has power to bind principal and act on his behalf without the principal ha)ing to act personally"
but under the principal’s control
c! liability is imposed on the principal for the agent’s actions within the scope of the agency" and
d! &nowledge of the agent is imputed to the principal
II. FORMATION: CREATION OF THE AGENCY RELATIONSHIP
A. 0n agency relationship is created when (OL II.A.)
1rincipal grants authority to the agent to act for him! 2t can be express or implied! be )erbal or e)idenced by conduct!
Lee as&s 3ara to purchase his boo&s for 4usiness 0ssociations for him! 3ara says" 56ure!7 3ara goes to the
boo&store" where she sees that their 8)idence textboo& is finally in stoc&! 3ara buys the 8)idence boo& for
Lee! Lee wants to than& 3ara for going to the boo&store" so he guesses her school 2' and password and
registers her for a seminar once the waitlist opens! Which of these actions fall within an agency relationship?
3ara is Lee’s agent! 4ut when she bought the different boo& is not part of the agency relationship! What
Lee did is definitely not a principal9agent relationship!
-. "apacity (OL II.".)
a! generally" anyone with minimum mental capacity may act as an agent including minors and incompetents
a! any person who has capacity to effect his own transactions has capacity to appoint an agent on his behalf
0n incompetent may not act as a principal!
". .roof of Agency (OL II./)
! 0gency relationship is a question of fact and burden of proof lies with person asserting agency relationship!
$! :ele)ant factors include:
a! the situation of each party; and
b! their words" actions and circumstances!
1ierre" upset that he #ust lost a ton of money at the gambling tables" calls his financial ad)isor and complains that his retirement
fund is losing money and promptly hangs up! The ad)isor then calls his trader and tells him to sell 1ierre’s 24% stoc& and buy
energy futures! 2n this situation" what is the relationship created between 1ierre and the ad)isor! The ad)isor and the trader?
0d)isor is 1ierre’s agent also there are still questions about whether the stoc&s sold were within scope of the relationship! The
trader is the ad)isor’s agent because the ad)isor has as&ed trader to sell the stoc&! 2f 1ierre either expressly or by implication
ga)e his ad)isor permission to use the trader" and then trader is 1ierre’s sub agent!
/. Types of .rincipals (OL II.)
! /isclosed) 0ndisclosed) and .artially /isclosed .rincipals
a! 0 principal is disclosed if:
at the time of the transaction" the third party has notice that the agent is acting for a principal and has notice of the
0 potential customer enters a car dealership that has a sign outside stating that it is 504C 0utomoti)e of
%anhasset7 and is met by a salesperson who assists the customer! 2t is clear that the salesperson is an agent of
the disclosed principal" 504C 0utomoti)e!7
b! The principal is (ndisclosed if:
third party has no &nowledge of the existence or identity of a principal
'onald Trump wants to purchase land to build a new casino in 0tlantic City but is concerned that possible sellers would raise
the price if they &new he was the buyer! 4ecause of 'onald Trump’s fear that it would li&ely be impossible to conceal his
identity for too long" he instructs the agent to say nothing about a principal’s existence and to negotiate the deal as if the agent
were the ultimate purchaser!
c! 0n (nidentified (partially disclosed) principal is:
one whose existence" but not identity" is &nown to the third party
The result is the same as in the example abo)e except that because he is concerned that possible sellers would
raise the price if they &new he was the buyer" he instructs his agent to ma&e it clear that the agent is acting on
behalf of a reputable businessman whose existence is disclosed but whose identity is not!
. Types of Agents (OL II.+)
! General and Special Agents
a! General Agent
+, 0 general agent:
is employed by a principal to transact all of his business of a particular &ind! <eneral agent will
perform all things in line with the business
A is hired $y . to !anage his depart!ent store1 A #ill have n(!ero(s responsi$ilities in connection
#ith that position and is given the a(thority to e2ec(te all of the!.
b! Special Agent
+, 0 special agent:
has one )ery specific tas& and had no authority to bind principal beyond the terms of the specific
*o!e seller engages a real estate agent to sell his ho!e $(t to perfor! no other tas&s on his $ehalf1
the agent is a special agent $eca(se his responsi$ility is to co!plete only one specific transaction.
+. The Relationship -et#een .rincipals and Agents (OL II.G)
! !ployer3!ployee Relationship
a! The master9employer:
principal who employs an agent to perform ser)ice in his affairs and who controls or has the right to control the
physical conduct of the other in the performance of the ser)ice
b! The ser)ant9employee:
agent employed by a principal to perform ser)ices in his affairs whose physical conduct in the performance of
ser)ice is controlled or sub#ect to the right of control by master
$! Independent "ontractors
a! 0n independent contractor is a person who agrees with another to do something for him but:
they are not controlled by the other" nor sub#ect to the other’s right to control with respect to physical conduct in the
performance of the underta&ing
b! 6ome independent contractors are now referred to as 5non9employee agents7 when the principal exercises some
limited control that is not sufficient to establish an employer*employee relationship! 0n independent contractor may
or may not be an agent" therefore" depending on the degree of control to which he is sub#ect!
/! So!e +actors to "onsider
a! the amount of control the principal exerts o)er how the agent performs his wor&;
b! who supplies the tools required for the agent’s wor& and the place of performance;
c! the length of time the agent is engaged by the principal
=im and 1am hire 'wight to babysit their child in their home four days a wee&! They will pay him >?@@ a wee&! 'wight does some
grocery shopping and light housewor&! 2s 'wight an employee or an independent contractor?
'wight is an employee! =im and 1am exert control o)er 'wight four days a wee&! 'wight does not #ust watch a baby but
does general tas&s such as shopping and housewor&! The #ob is four days a wee&" he is paid by the wee&" and probably
does not bring his own tools to wor& so he is in a employer9employee relationship! 2f he was to commit a tort within scope
of his employment" =im and 1am would be responsible!
III. POWER OF AGENT TO BIND PRINCIPAL
We are loo&ing at the contract context:
Who is bound" who is responsible for the contract! <enerally" a principle may be bound to contracts executed by an agent if it is
within agent’s authority to contract on behalf of principal
A. A(thority of the Agent (OL III.A.)
! +ive 'ays a .rincipal is -o(nd
a! 0ctual authority 9 This can be express or implied
b! 0pparent authority
e! 2nherent authority
$! Act(al A(thority
a! 2press A(thority
+, 1rinciple directly requests the agent to act on principal’s behalf in a specific matter!
The principal #ho tells a person to 4sell !y ho(se for !e)5 or 4please $id on the .icasso at the
a(ction)5 gives a grant of a(thority.
b! I!plied A(thority
+, 2mplied in a grant of express authority is the principal’s consent to any actions that are incidental to the agent’s
carrying out of his primary grant of authority
'hen a principal directs a real estate $ro&er3agent to sell his ho(se) the $ro&er has the i!plied
a(thority to place a 4+or Sale5 sign on the front la#n.
c! 4oth implied and express and authority are:
binding upon the principal
/! Apparent A(thority
a! 0pparent authority arises:
based on the principal’s representations made not directly to the agent" but to a third party
b! What we loo& at:
+, what the principal has said to A:
+$, re)ealed to the third party
c! -nder the doctrine of apparent authority" a principal is accountable for:
a third party’s beliefs about an agent’s authority to act as an agent when the belief is reasonable
and is traceable to a manifestation of the principal
1rincipal hires a housepainter" =oe" to paint house" but tells =oe" 52 hate blue paint" don’t use any blue paint!7
1rincipal calls paint store and tells them =oe will be coming in to buy paint and tells store to put it on 1rincipal’s bill!
=oe buys blue paint! 1rincipal will be liable for the other blue paint which =oe purchases because 1rincipal granted
0gent apparent authority to buy paint" and the third party doesn’t &now about the specific color authoriBation!
1rincipal could ha)e claim against 0gent for exceeding authority and )iolating instructions!
a! 8stoppel arises when:
The principal does something wrong and is estopped from denying existence of the agency relationship!
b! 0 third party can assert an estoppel claim by showing entered into transaction because:
+, 1rincipal intentionally or carelessly caused such belief A:
principal &new or should ha)e &nown of such a belief and that it may induce others to
change their positions" but did not ta&e reasonable steps to notify them of the facts and
+$, Third party reasonably relied to his detriment upon the authority of the purported agent
Landlord &no#s that tenant6s 78 year3old son acts as door!an so!e afternoons for tips. The landlord
thin&s it6s c(te and does not say anything to the $oy. -oy sells so!e f(rnit(re fro! the lo$$y to a
passer$y. .asser$y co!es to pic& (p f(rnit(re. Is there apparent a(thority for the $oy to sell the
f(rnit(re9 May$e:!ay$e not. stoppel co!es into play.
C! Lia$ility of 0ndisclosed .rincipal
a! (ormerly9called 5inherent agency power"7 this arises when:
the principal has placed the agent in a position to mislead the third party!
b! Liability is imposed when:
to protect the interests of innocent third persons!
Dou will frequently see the initials 1 and 0 in agency questions!
2f 1 hires 0 to employ a caterer for one day at a price not to exceed >C@" and 0 hires C for >E@" 1 may be held
liable" e)en if C does not &now that 1 exists!
0 general building contractor contacts the local business manager of a ma#or glass manufacturer about the manufacture and
installation of glass walls for a new office building! The manager informs the contractor that he has se)eral panes from a
canceled order sitting in a sal)age yard a)ailable for a significant discount" but only if the contractor pays in cash! The
contractor agrees but soon finds the glass is defecti)e! 2f the contractor sues the manufacturer for damages" will the court
find that the manager acted with authority to bind the manufacturer?
2t is unclear that manager has express authority! 4ut if the manager typically sold glass" than he has implied authority!
Fowe)er" since it is within scope of the employment to sell glass as a glass manufacturer" manager has apparent
authority! =ust the fact that the manager wor&s on the premises creates a reasonable assumption of apparent authority!
6o manager has apparent authority in the least" absent actual authority! The only wrin&le here is the sale of glass for cash"
and whether it should ha)e alerted the buyer that this was not typical to sell glass!
Carrie wants to return a pair of shoes to 6amantha’s 6wan&y 6hoe 6tore on :odeo 'ri)e! The salesperson" Charlotte"
agrees to return the shoes for cash" e)en though the owner’s policy" which is printed on the receipt" is only to return shoes
for credit! The owner" 6amantha" calls Carrie later to tell her the mista&e and notify her that her credit card will be charged
again for the amount! 6amantha offers her store credit! 2s 6amantha bound by Charlotte’s actions?
Ho actual authority here" but quite the contrary on the receipt saying no refunds! There might be apparent authority here if
Carey can show that salespeople ha)e discretion to gi)e refunds! Carey could assert that 6amantha is estopped from
denying authority if other stores ha)e similar practices . o)erriding their written policy! (ailing that" Carey would probably
-. Ratification (OL III.-)
! :atification happens when a principal:
:etroacti)ely grants authority for his agent’s earlier action!
3ara bought Lee’s 8)idence boo& for him" and after the fact he tells her than& you" but tries to renege when her credit
card bill comes!
0gent buys a building saying that he is Trump’s agent when he is not! 0gent later goes to Trump and offers him a deal
on the building" to which Trump agrees! Trump has ratified 0gent’s actions" ma&ing it an enforceable contract as though
0gent was always wor&ing for Trump!
$! R(les a$o(t Ratification
a! 1rincipal must ha)e been in existence and had capacity to enter into the agreement
b! 1erson ratifies by manifesting assent that the act shall affect person’s legal relations or conduct such as accepting
c! Ance ratified" it has the effect as if it were originally done by the agent
/! Li!itations on Ratification
a! :atification is not effecti)e if the ratification occurs after:
+, %anifestation of intention to withdraw from transaction by the third party
+$, %aterial change in the circumstances that would ma&e it inequitable to bind the third party
If Agent contracts to sell .rincipal6s ho(se to -(yer #itho(t .rincipal6s a(thority) and the ho(se is
destroyed $y fire) .rincipal6s later ratification of Agent6s act #ill not $ind -(yer. (*o#ever) if -(yer still
#ishes to proceed) the changed circ(!stances #ill not prevent his doing so.)
?! More R(les A$o(t Ratification:
a! 0 principal may not:
1artly ratify an act; ratification of any part of the act or contract is deemed to constitute ratification of the whole
b! 0ct must ha)e been performed on behalf of the principal and the principal must &now all material facts regarding
c! :atification must ha)e same formalities that would ha)e been required to gi)e authoriBation! 2n the sale of real
estate" same formalities requirement means ratification must be in writing" #ust as original authoriBation would ha)e
been" due to statute of frauds!
1aul writes no)els! 1aul’s wife ma&es a deal with 1aul’s publisher for him to write children’s boo&s! The contract
that his wife negotiates has some random foolish terms included in it! 4efore writing" 1aul recei)es a chec&! 2f 1aul
cashes the chec& thin&ing it is for his next adult no)el" he has no reason to &now the terms of the deal! 0 principal
can’t ratify a contract without &nowing the specific terms of that deal
C! Retroactive ffect of Ratification
a! <enerally" a ratified transaction:
is gi)en retroacti)e effect
b! 2f the principal lac&s capacity when the transaction too& place:
is effecti)e only from the date of the ratification
Ane who was a minor at the time of the transaction may ratify upon reaching the age of ma#ority" but the ratification
is effecti)e only from the time of the ratification!
<reen" an attorney for 'allas" used his power of attorney to purchase an annuity for the benefit of (lo" a nurse who had
ta&en care of 'allas when all else had failed! The power of attorney explicitly did not authoriBe gifts! Fowe)er" 'allas" with
all her faculties intact" had orally appro)ed the transaction! Will that oral directi)e act as a )alid ratification?
2f no writing is required" then assuming 'allas &new all the material facts of transaction and had ability to ratify the
directi)e" then the oral directi)e is effecti)e! Fowe)er" if a writing was originally required to amend power of attorney"
then oral directi)e is not )alid!
IV. AGENCY: VICARIOUS LIABILITY OF PRINCIPAL FOR ACTS OF OTHERS
A. Tort Lia$ility (OL I;.A.)
! Respondeat Superior
a! Respondeat superior is the doctrine that imposes:
)icarious liability upon a principal for the torts his agent committed in the course of agency
b! The liability of the employer is:
in addition to" not instead of" employee’s liability!
$! Scope of !ploy!ent
a! 0n employee acts within the scope of employment when:
performing tas&s assigned by the employer or engaging in a course of conduct sub#ect to employer’s conduct
b! 0n employee’s act is outside the scope of employment when:
it occurs within an independent course of conduct not intended by the employee to ser)e any purpose of the
c! 0n employer may still be liable when:
the employee disobeys his master’s orders while acting within scope of employment
/! Intentional Torts
a! 0n employer may be held liable for his employee’s intentional torts if:
the de)iation from authoriBed route is a slight detour" rather than a frolic . a substantially de)iation from the course
0 bouncer may throw someone out of a club! 2ntentional tort" but within scope of employment" so owner will still be
2f employee commits assault and purpose is to )ent anger or totally unrelated to #ob" outside the scope of
employment and employer is not liable!
-. Other Agents (OL I;.-.)
! Independent "ontractors
a! <enerally" principal is not responsible for tortious conduct of an independent contractor!
b! Fowe)er" there is a continuum here whereby the actor is a non9employee agent but some control is
exerted o)er the actor! 2f the tort occurs within the scope of the limited control" the principal will be liable!
1rincipal hires Landscaper to plant his yard" but dictates what materials may be used to support a tree! Landscaper
follows these instructions" and the tree subsequently falls on a passerby! 8)en though Landscaper is an
independent contractor" this is the area where 1rincipal exercised control" so 1rincipal will still be responsible for
1rincipal hires Landscaper to plant his yard! Landscaper finds a coconut on the ground and proceeds to plays catch
with a friend using it! While doing so" the coconut hits a passerby! 0s there was no control exercised by the 1rincipal
in this situation" there will be no liability on his part!
c! 8xceptions as to when the 1rincipal is not responsible for independent contractors acting outside of principal’s
+, inherently dangerous acti)ities
+$, nondelegable public duty
+/, negligent selection of contractor
d! Inherently /angero(s Activities
4lasting or demolition wor& are inherently dangerous acti)ities!
e! <ondelega$le /(ty
The duty of ordinary care owed by a landlord to a tenant for areas under the landlord’s exclusi)e control may not be
satisfied merely by the careful selection of an independent contractor!
+, /angero(s /isrepair
+a, Where the employer’s premises are in a state of dangerous disrepair and an independent contractor is
employed to correct the situation, the ris& of harm due to the disrepair cannot be delegated to an independent
contractor by the owners of the premises!
f! <egligent *iring
+, 2f principal hires independent contractor negligently" then principal is going to be responsible
$! Apparent Agency
a! 0pparent agency occurs when an independent contractor is hired:
but circumstances are such that principal is )icariously liable for the tortious conduct of the independent contractor
b! 0pparent agency requires:
+, manifestation by principal and
+$, reasonable reliance by the third party that the person who committed the tort was the employer*ser)ant of the
/octors at hospitals are generally independent contractors or operate independently. 0nder traditional
agency principals) the hospital #o(ld not $e lia$le for the doctor6s torts. *o#ever) (nder apparent
agency) the hospital !ight $e lia$le if patients !a&e a reasona$le ass(!ption that the doctor is an
e!ployee of the hospital.
3e)in wor&s as a stoc&er at the local 0I1 mar&et! Fe erroneously belie)es a group of teenagers are attempting to steal some
extremely expensi)e cuts of meat! 0fter telling the teenagers to stop" he grabs the two teenagers and slams them into the glass
meat case" causing se)ere physical in#ury to both! Will 0I1 be liable for 3e)in’s actions?
3e)in is an employee so he is an agent of 0I1! Fis actions appear to fall within the scope of his employment when he
battered the teenagers to ser)e his employer so 0I1 would be liable! 2t doesn’t matter if 0I1 has ne)er authoriBed the
V. DUTIES, RIGHTS AND REMEDIES OF PRINCIPAL,
AGENT AND THIRD PARTIES
A. /(ties of .rincipal to Agent (OL ;.A.)
! 0bsent an agreement to the contrary" the principal is obligated to his agent to:
a! compensate the agent for ser)ices rendered
b! reimburse the agent for reasonable expenses incurred by the agent in scope of agency
c! indemnify and exonerate the agent for any liability that results from his good faith performance of his duties
d! cooperate with the agent in the performance of his duties
e! exercise due care toward the agent
0 law firm partner as&s you" an associate" to fly from Los 0ngeles to Hew Dor& to meet with a client! An the way bac&"
your 0merican 0irlines flight is delayed se)eral hours! 2n order to get bac& in time for an afternoon hearing in court" you
purchase a tic&et on a -nited 0irlines flight that is boarding! 2s the law firm required to reimburse the associate for the
extra plane tic&et?
Des" it is reasonable that the firm is going to reimburse the agent!
The <reat 6tar 6team 6hip Line’s ship" the 6!6! 6hining 6tar" was hit by a tidal wa)e in the 1acific Acean" causing a
number of shipping containers owned by %ega9%art 6tores to fall off and be lost at sea! %ega9%art brought suit for the
loss of the merchandise" and <reat 6tar" in turn" sought indemnification from 1earlstone 2n)estments" the owner of the
ship! Was <reat 6tar’s action proper?
Des" 1earlstone is the principal and as the principal" it has to indemnify the agent" <reat 6tar" for the harm or in#ury
they suffered during the course of employment!
-. /(ties of Agent to .rincipal (OL I;.-.)
'uties begin when the agency relationship is created and terminate when the agency relationship is
terminated! Fowe)er" the agent’s duty with respect to confidential information acquired during the relationship
continues e)en after the agency relationship is terminated!
! /(ty of "are
a! 0bsent an agreement to the contrary" the agent is obligated to show a duty of care to the principal" with a duty to:
+, perform the contract and render ser)ices with reasonable care
+$, obey the principal in all reasonable directions" outside illegal or unethical orders
+/, act with the care" competence" and diligence normally exercised by agents in similar circumstances"
and if the agent is possessed of a higher le)el of s&ill to exercise that le)el of s&ill;
+?, indemnify the principal against the loss caused by the agent’s wrongful beha)ior or failure to act with
$! /(ty of Loyalty
a! Self /ealing
+, agent who acts for his own benefit instead of that of principal is said to be self9dealing
+$, agent must prefer the interests of the principal to his own or others in acting for the principal
b! 0s(rpation of -(siness Opport(nity
+, 0 business opportunity is:
one that is so closely related to the business that it could be deemed incidental to the business
+$, The only exception is when the employer &nows about the opportunity and consents!
A ne# associate6s la# fir! sends that associate to loo& for ne# office space for the fir!. The associate
finds so!e great) (nderval(ed space that #o(ld $e great for the $(siness his spo(se is starting. If the
associate arranges for his spo(se to (se the space for her ne# $(siness) the associate has (s(rped a
/! Other /(ties
a! duty of confidentiality . agent may not use confidential information obtained from the principal to the detriment of
the principal" e)en if the information is not obtained through his agency
b! duty to account . agent has duty to account for money or property recei)ed for the principal and to &eep the
principal’s assets separate from his own assets
c! duty of candor . agent must fully disclose to the principal any rele)ant facts to a transaction that he reasonably
belie)es the principal might want to &now
d! duty not to compete" which falls under duty of loyalty
?! /(al Agency R(le
a! when an agent acts for more than one principal in negotiations between multiple principals" the transaction is
)oidable by either principal" unless both principals are fully informed of the representation and consent
". The Agent6s /(ties and O$ligations to Third .arties (OL ;.".)
! Liability to a third party:
a compensated agent may be held liable for damages to the principal that result from the agent’s breach of duties!
Liability to a third party depends on whether the principal was disclosed
$! 2f the third party &nows of the principal’s existence and identity at the time of the transaction +a disclosed principal,:
then the agent will not ha)e personal liability under contract unless it says specifically that he is liable
/! 2f the principal is partially disclosed" or left unidentified:
at the time of transaction" then the agent is presumed to be party to contract
the contract specifically says the agent is not liable
?! The third party may sue:
sue either the principal or the agent
BAR EXAM APPLICATION
0pplicants might be as&ed to answer questions based upon facts similar to the following:
0t a meeting of the board of directors of 4uildco" a corporation that operates a commercial warehouse" the board passed a
resolution stating that the president of the corporation may not enter into any contract o)er > million without the express prior
appro)al of the board of directors! 1res" the president of 4uildco" attended the meeting! Two months later" 1res proposed to
the board that 4uildco purchase a for&lift" an essential item for the business" from 4eta! 0lthough the board passed a resolution
disappro)ing the proposed purchase" 1res" without the board’s &nowledge" signed a contract as president of 4uildco to
purchase a for&lift from 4eta for >$"@@@! 4eta had no &nowledge of the board’s disappro)al! 0fter learning of the contract with
4eta" the board repudiated it!
Can 4eta reco)er damages from 4uildco?
0pplicants must consider whether there is actual or apparent authority" including a third party’s reasonable belief!
2f 4eta can reco)er from 4uildco" does 4uildco ha)e a cause of action against 1res?
0pplicants must examine the relationship between an agent and principal" including an agent’s liability to a principal!
An agent can bind a principal. It’s clear that Pres was an agent of Buildco, and if he had actual authority, the contract
would be enforceable. Pres did not have express authority to enter into contract because the Board pass a resolution
restricting his ability. owever, the court !ay find the existence of apparent authority because by hiring Pres and
!a"ing hi! President, Buildco has !ade a !anifestation to other third parties that Pres has the power to enter into
transactions on behalf of the corporation. President of corporations can usually !a"e such decisions, and it is
reasonable for a third party to assu!e that Pres would have had ability to purchase a #$%%% for"lift, an essential
business ite! for the business, even though the board has passed a resolution prohibiting the purchase. Absent
contrary "nowledge on the part of Beta, Buildco will be bound to the contract as Pres had apparent authority to bind
the! and can be sued for breach. Beta can recover da!ages fro! Buildco. Agents have certain duties, including the
duty of care to their principal. Buildco has a cause of action against the Pres as the Pres violated duty of care and
candor when he entered into transaction with Beta despite explicit disapproval fro! the board. e failed to obey the
board’s instructions when he !ade the purchase of the for"lift, and thus, explicitly violated his duty of care as an
BAR EXAM APPLICATION
0pplicants might be as&ed to consider a scenario similar to the following:
'ealer agreed to deli)er an 6-J to :ich’s home following :ich’s purchase! 'ealer does not usually deli)er )ehicles but" after
:ich offered to pay >KC to the dri)er" 'ealer agreed to ha)e 6ales" a full9time salesperson employed by 'ealer" deli)er the
6-J to :ich’s house! 0t the end of a normal wor&day" 'ealer ga)e 6ales directions to :ich’s house and told him 5'ri)e straight
to :ich’s house" no detours! 'ri)e carefully and no speeding! 2 don’t want any dents in that 6-J!7 An the way to :ich’s house"
6ales stopped to )isit (riend" who was in the middle of mo)ing! 4ecause the mo)ers had not shown up" (riend offered 6ales
>$@@ to transport 5a few loads7 in the 6-J and 6ales agreed! This too& se)eral hours and 6ales was running late! 2n his rush to
:ich’s house" 6ales negligently ran o)er 1ed" who was crossing the street causing serious in#uries! When 'ealer learned that
6ales had used the 6-J to help (riend mo)e" he demanded the >$@@ (riend had paid 6ales!
Can 1ed reco)er from 'ealer for 6ales’s negligence?
%ust 6ales gi)e 'ealer the >$@@ he earned helping (riend mo)e?
0pplicants must consider the issues of )icarious liability of a principal for an agent’s negligence and of the fiduciary duties
agents owe to the principal!
Yes, Ped can recover from Dealer for Sale’s negligence. Agent can bind a principal for tortious conduct that occurs within
scope of employment. t is clear that Sale’s is an agent for Dealer, who is the principal as this is an employer!employee
relationship. "herefore, dealer is liable for torts committed by Sale’s during course of employment. "he tortious conduct
occurred when Dealer as#ed Sale’s to deliver an S$% to Rich’s home after Rich’s purchase of the S$%. &hen Sales hit Ped,
he was within scope of his duties, even though he had ta#en a detour earlier to help his friend. Dealer can then ma#e a claim
against Sale’s for his negligent driving. 'owever, Dealer would be able to recover the ()** that Sale’s earned from helping his
+riend move. An agent has fiduciary duty of loyalty to his principal. An agent cannot receive a material benefit from a third
party by use of his possession or sub,ect matter of agency. "he S$% is the sub,ect matter of agency and Sale’s used it to gain
()** when he helped his friend move. Sale’s violated his duty and has to give the ()** to dealer.
VI. GENERAL PARTNERSHIPS
A. General (OL I.-)
! 0 general partnership is:
an association of two or more persons to carry on as co9owners of a business for profit! <eneral partners ha)e unlimited
a! The definition of person includes:
+/, associations; and
+?, other partnerships!
a! 0 general partnership is based on an:
agreement between the partners; there are no particular formalities or statutory requirements for formation
/! .artnership v. =oint ;ent(re
a! #oint )enture is an association contemplating a single transaction or related series of transactions" as compared with
a general partnership which is generally said to be carrying on a business
-. Tests for General .artnership
! The &ey test of whether a general partnership has been formed is the intent of the parties to enter into a relationship" no
matter what it is called
$! Things to "onsider>loo& at:
a! express agreement is the best indicia
b! absent express agreement" implied e)idence such as sharing of profits +and losses,
c! sharing management practices of the entity
d! amount and type of ser)ices rendered by the parties
e! record title to any real or personal property
/! Sharing of .rofits
a! The receipt of a share of profits:
of a business is prima facie e)idence that he is partner in the business
b! 6haring of profits creates a rebuttable presumption of partnership! Can share profits and not ha)e a partnership in
the following scenarios:
+, recei)ing commission as an employee or contractor
+$, landlords might recei)e percentage of sales as part of rent
+/, payment of a loan or interest on loan does not ma&e anyone a partner
-ella and d#ard agree to give =aco$ 7:? of the profits. This loo&s !ore li&e a partnership #ith =aco$.
-ella and d#ard agree to pay =aco$ @7? an ho(r. This loo&s less li&e a partnership #ith =aco$.
?! "o!!on .roperty
a! #oint tenancy" tenancy in common" tenancy by entirety" on their own" do not create partnership
C! .artnership $y stoppel
a! 1artnership by estoppel is found by:
imposing liability on one who has let it appear that he is in a general partnership
b! When a person" by words or conduct, represents himself to be a general partner" he is liable to:
anyone who enters into a transaction with the partnership based upon reasonable reliance of the general
E! Agency "reated $y *olding O(t
a! When a person has been represented to be a general partner:
if someone " that person has power to bind the partnership!
VII. RELATIONSHIP BETWEEN PARTNERS AND THIRD PARTIES
A. .o#ers (OL II.A.)
! 0 general partner is:
both a principal and an agent of the general partnership for the purpose of its business
$! 0 general partner who acts for the apparent purpose of carrying on the ordinary course of the general partnership’s
acti)ities can bind the general partnership" unless:
a! the <1 does not ha)e authority to act in that particular matter and
b! the person with whom he is dealing &nows" has recei)ed notification or otherwise has notice that he lac&s authority
/! Apparent A(thority
a! 0 partner may ha)e apparent a(thority to bind partnership if:
his still acting in ordinary course of business and the person with whom he is dealing ma&es a reasonable
assumption based on nature and course of business" custom in similar partnerships! This excludes acts not in
ordinary course of business!
?! State!ent of .artnership A(thority
a! 0 general partnership may file a statement of general partnership authority" which can create a presumption that
third parties &now what the actual authority is!
b! Fowe)er" if a third party does not actually &now about the statement of authority" they are not bound by it!
1aul was an equal partner in the :unny (aucet 4ar and <rill" an unincorporated business located about two hours away from
his home in 'utchess County! When the cost of dri)ing to the business began to outstrip his share of profits" 1aul decided to
sell the establishment to the hotel from which the partnership rented the space! The other partners" who li)ed nearby"
ob#ected! 2s 1aul’s action binding?
0ny partner has authority to bind the partnership if his action is inside the ordinary course of business! Typically" selling
business is outside the ordinary course of business and a purchaser would ha)e reason to &now that so it is unli&ely that the
sale is binding! Fowe)er" if the title was on 1aul’s name" there is an argument that there may be reasonable reliance on it by
the purchaser" so 1aul may ha)e had apparent authority to sell! 8)en if sale is not binding" buyer would ha)e cause of action
against 1aul for breach!
-. Lia$ility (OL II.".)
! <at(re of Lia$ility
a! 0ll general partners are:
#ointly and se)erally liable for all obligations of the general partnerships
b! 0n action may be brought:
against the general partnership and any or all of the general partners in the same action or in separate actions
$! 2tent of Lia$ility
a! 8ach partner is:
indi)idually liable for the entire amount of the partnership’s obligation
b! 0 partner is entitled to:
+, indemnification by the partnership for any payments he ma&es on its behalf
+$, if partnership is unable to indemnify" he is entitled to contribution from his copartners and may see& it through
c! 0n inco!ing general partner:
is not liable for obligations incurred before admission
VIII. RELATIONSHIP BETWEEN PARTNERS
A. .artnership Agree!ent (OL III.A)
! :elations among partners are go)erned by partnership agreements! -10 operates as gap filler!
$! The partnership agreement may not:
a! )ary rights and duties with respect to filing of certain statements
b! unreasonably restrict a partner’s right to access the partnership’s boo&s and records
c! eliminate duty of loyalty
d! unreasonably reduce duty of care
e! eliminate obligation of good faith and fair dealing
f! )ary the power to dissociate as a partner" )ary the right of court to expel a partner" )ary requirement to win up the
partnership business in certain cases" )ary law applications to LL1s" restrict rights of third parties
-. "ontri$(tions) .rofits) and Losses (OL III.-.)
! .artner6s "ontri$(tions and Shares
a! <eneral :ule for 1rofits and Losses:
each partner is entitled to share equally in the general partnership profits and each general partner must contribute
toward the losses sustained by the general partnership" in proportion to his share in the profits!
b! Fowe)er" general partners may agree to share the profits other than equally" and would then share the losses in
the same ratio" unless specifically agreed otherwise!
4ella" 8dward" and =acob are in)ol)ed in a partnership and ha)e no agreement as to profits and losses! 4y default"
4ella" 8dward" and =acob will each ta&e */ of the profits and */ of the losses" e)en if they put in different
$! Rights of a General .artner
a! Right to "o!pensation
+, general partner is not entitled to compensation for acting as a partner in the general partnership business"
except reasonable compensation for his ser)ices in winding up the general partnership affairs!
b! Right to Inde!nity
+, a partnership must reimburse a partner for payments made and indemnify a general partner for liabilities
incurred by him in the ordinary course of partnership’s business or for the preser)ation of its business or
c! Manage!ent and "ontrol
+, all partners ha)e equal rights unless otherwise stated in the agreement!
+$, Ardinary matters:
decided by a ma#ority )ote
+/, The consent of all general partners is required to:
sell" lease" exchange" or dispose of all" or substantially all <1 property other than in the usual and
regular course of business
d! .roperty Rights of a General .artner
+, property rights of a general partner are his transferable interest in the general partnership and his right to
participate in management! becomes property of the partnership!
/! Rights in a .artnership
a! Two Kinds of Rights:
+, economic . freely transferable
+a, partner’s share in profit and losses
+b, right to recei)e distributions
+$, management rights . not freely transferable
+a, right to )ote!
1atsy and 1aul #ointly operate the 1I1 'eli in 6anta %onica together! When the deli runs into credit problems with their
main meat supplier" 1atsy agrees to pledge "@@@ shares of a company she owns as collateral! The supplier agrees to use
the shares as collateral" but only if they are put in the name of the partnership! 6e)eral years later" and well after the
liquidity crisis" 1atsy sells her share of the deli and wants to sell her stoc& shares so that she can open a restaurant in
1asadena! 1aul ob#ects" claiming that the stoc& belongs to the partnership! Who owns the shares?
-nless there is specific agreement to the contrary" any shares put into the partnership belongs to the partnership and
becomes partnership property! There is no indi)idual interest in partnership property! 1atsy cannot reco)er her shares
from the partnership!
b! Transfer of General .artnership Interest
+, interest is bro&en down into two pieces . economic and management
+$, 0 partner can freely transfer:
economic interest i!e! interest in personal property
+/, 2f economic rights are transferred:
partner retains management and )oting rights and still has duties of general partner
+?, 6uch a transfer does not entitle the transferee" in the absence of a contrary agreement" to:
+a, participate in the management or conduct of the <1 or
+b, require access to the information concerning the partnership transactions" or to inspect or copy the
general partnership boo&s and records
+C, The only right of the transferee is:
right to recei)e distributions which would ha)e been paid to the transferor
+, 0 #udgment creditor of a general partner or the transferee can sub#ect the transferable interest to the general
partner or the transferee to a charging order!
". /(ties (OL III.".)
! /(ty of "are
a! 8ach <1 owes partnership duty of care in the conduct and winding up of partnership business! This means
refraining form grossly negligent or rec&less conduct" intentional conduct or )iolation of the law!
$! /(ty of Loyalty
a! 0 general partner’s duty of loyalty consists of:
+, /(ty <ot to "o!pete
+a, 0 partner may not exploit a $(siness opport(nity:
, that comes to the partner in his capacity as a partner in the partnership A:
$, where there is an expectation that an opportunity is one which the partnership would be interested
+b, To ta&e ad)antage" a partner must:
present the opportunity to the partnership for re#ection! 2f the partnership re#ects opportunity" partner may
pursue it indi)idually
2f a partner in a law firm recei)es a referral fee" the fee belongs to the partnership!
0 law professor owns a restaurant or writes a no)el! The professor has not breached a duty to compete!
+$, /(ty to Acco(nt
+a, 'uty to account to the <1 and hold as trustee for the general partnership property" property or benefit the
<1 recei)es in the conduct of winding up the <1 business or from general use of the property
+/, /(ty to Refrain fro! Adverse /ealings
+a, <1 must not deal with the general partnership in the conduct or winding up of the <1 business as or on
behalf of a party with an interest that is ad)erse to the <1
/! Good +aith and +air /ealing
a! 0 partner must discharge his duties to the partnership and other partners and exercise rights consistently with the
obligation of good faith and fair dealing
0 partner has the right to disassociate" but cannot exercise such a right in order to self9deal and subsequently harm
?! /(ty to Aeep -oo&s and Right to Infor!ation
a! The boo&s must be complete and accurate" and e)ery <1 has a right to access" inspect and copy boo&s and
records during business hours
/. Actions (OL III./.)
! S(its $y .artnership Against .artners
a! 0 <1 may bring an action against the partnership or <1 for )iolation of duties" causing harm to partnership" and
see& legal or equitable relief
. <e# Me!$ers (OL III..)
! To become a partner:
Ho person can become a partner without consent of all partners
$! Hew member:
Hew partner’s liability for obligation and torts arising before #oining is only the new partner’s contribution to the general
1auline became suspicious of how 1atric& was handling the finances of their lace curtain distribution business! When
1auline as&ed to &now if they were ma&ing money and where all the re)enues went" 1atric& handed 1auline a copy of
the most recent ban& statement! Was that an adequate accounting?
2n a general partnership" partners are required to &eep boo&s and records in the C8A office! 8)ery partner has the
right to access" inspect" copy boo&s and records during business hours! The boo&s must be complete and accurate!
2t seems li&e 1atric& was responsible for this #ob and did not perform with due care! %erely handing 1auline the most
recent statement is not accurate accounting of the business!
1ar&er and 1i&e agreed to #ointly lease and manage the Fotel 4entley for the term of $@ years! 'uring that period of
time" 1i&e entered into separate dealings for real estate contiguous to the hotel! 0lthough the hotel was modestly
profitable" 1i&e was able to generate huge profits on the other properties because of the significant traffic the hotel
generated! 1ar&er subsequently filed an action against 1i&e" saying his other businesses were improper! Fow would a
8ach partner in a <1 owes a duty of loyalty and duty not to compete to the partnership! 1artners are liable for
exploiting a business opportunity when they pursue opportunities without see&ing and recei)ing consent from the
other general partners! 2f the opportunities were connected to the hotel’s line of business or if 1i&e recei)ed them as
a result of being general partner" then he is liable for exploiting a business opportunity and )iolating his duty of loyalty
to the partnership! 6o 1i&e would be liable to the partnership for the profits!
IX. PARTNERSHIP PROPERTY
A. General .artnership .roperty (OL I;.A)
! .roperty S($se,(ently Ac,(ired
a! 1roperty acquired by a <1 is property of the <1 and not of the general partners indi)idually! They cannot claim or
transfer the property!
When somebody lea)es a partnership or dissociation! 2t has been referred to as withdrawal pre)iously!
A. /issociation of General .artner (OL ;.A.)
! .o#er to /issociate
a! 0 <1 has power to dissociate at any time by express will!
$! When Can Dou 'issociate:
a! 0 general partner is dissociated upon the occurrence of the following e)ents:
+, notice to withdraw
+$, e)ent agreed upon in the partnership agreement
+/, expulsion pursuant to partnership agreement
+?, expulsion with unanimous consent of the other partners if
+a, it would be unlawful to continue the general partnership’s business with the <1
+b, there has been transfer of all the <1’s transferable interest or a court order charging the interest
+c, <1 has been dissol)ed and business is winding up
+C, the person’s expulsion by #udicial order due to wrongful conduct" material breach or other conduct
+E, person’s ban&ruptcy or similar circumstances
+K, death" incapacity" distribution of trust partner’s or estate partner’s transferable interest
/! 'rongf(l /issociation
a! 0 general partner’s dissociation is wrongful if it:
+, is in breach of an express pro)ision of the agreement A:
+$, in the case of a partnership for a definite term" occurs before the expiration of the term or completion
of the underta&ing
b! 0 partner who wrongfully dissociates is:
liable to the partnership and to the other partners for damage caused by disassociation
-. ffects of General .artner6s /issociation (OL ;.-.)
! ffect on .artner6s Rights and /(ties
a! -pon a general partner’s dissociation:
+, the <1’s right to participate in management and conduct of business terminates as well as duty of loyalty to
+$, duty of loyalty and care continue only with regard to matters arising and e)ents occurring before the <1’s
$! /issociated .artner6s .o#er to -ind .artnership
a! 0 general partner can still bind a partnership for t#o years after dissociation if:
+, the other party reasonably belie)es that disassociated partner was still a <1; and
+$, the other party did not ha)e notice or is deemed not to ha)e &nowledge or notice
/! "ontin(ing O$ligations of /issociating .artner
a! (or pre9dissociation debts:
liable for any debt before he left
b! (or post9dissociation debts:
not liable for new debt
if the creditor enters into the general partnership within two years after the disassociation and
+a, reasonably belie)ed that the disassociated partner was then a partner
+b, the other party did not ha)e notice or &nowledge of the disassociation
c! 0 dissociated partner may also see& indemnification or contribution for debts incurred!
". -(yo(t of /issociated .artner6s Interest (OL ;.".)
! 2f a general partner is dissociated from an 5at9will7 general partnership:
the <1 must purchase the disassociated partner’s interest for a buyout price
$! The $(yo(t price is:
if not set by agreement" the amount that would ha)e been distributable to the disassociating general partner’ upon
winding up of the general partnership’s disassociation! The higher of the price of assets or liquidation )alue of the
partnership A: amount the partnership could be sold for minus any damages caused by partner for withdrawal
a! (or 5at will7 partnerships:
buyout price at the time of the disassociation
b! 0 general partner who wrongfully dissociates before the expiration of a definite term or completion of a particular
underta&ing is not entitled to payment of the buyout price until:
+, damages are deducted from buyout price
+$, not entitled to the money until completion of underta&ing or expiration of term
Ho undue hardship to partnership to pay out
XI. DISSOLUTION AND WINDING UP
A. In General (OL ;I.A)
! The dissol(tion of a general partnership is:
does not mean dissol)ing! change in the relation of the partners caused by any partner ceasing to be associated in the
carrying on" as distinguished from the winding up" of the business! 2t is beginning of termination!
$! 'inding (p is:
process of settling <1 affairs
/! Ter!ination is:
point at which the general partnership affairs are wound up
-. /issol(tion (OL ;I.-)
! "a(ses of /issol(tion
a! Mandatory /issol(tion
+, 0 partnership is dissol)ed and its affairs must be wound up upon the occurrence of any of the following e)ents:
+a, in a partnership at will:
by express will to dissol)e and wind up business when a ma#ority of general partners )ote for dissolution
+b, in a partnership for a definite term:
then it ends when the term or underta&ing is completed unless ma#ority want to continue
+c, When the last general partner dissociates:
the partnership can )ote to continue by ma#ority )ote or it will be dissol)ed
+d, e)ent agreed upon in the partnership agreement
+e, e)ent that ma&es it unlawful for all or substantially all of the <1 to continue
If general partners are partners in a li,(or store $(siness and the govern!ent instit(tes prohi$ition)
the vent(re $eco!es illegal and the general partnership #o(ld $e dissolved.
b! .er!issive /issol(tion
+, 0 general partnership may be dissol)ed at any time:
upon the express will of all the partners to wind up the business
+$, 0 partnership may also be dissol)ed:
+a, if someone applies to the court and shows 0HD A( TF8 (ALLAW2H<:
, economic purpose is frustrated
$, <1 has engaged in conduct that ma&es it not reasonably practical to carry on the <1
/, it is not otherwise reasonably practical to carry on the <1 in conformity with the partnership
Fabitual drun&enness" extra)agance" or gambling of partners might support such a decree!
1hil operated a small widget business by himself until he too& 1hoenix on as a C@L partner in order to gain the necessary
capital for expansion! The two famously disagreed on #ust about e)erything" and 1hil decided he wanted to end the business!
6oon thereafter" 1hoenix filed a court action" see&ing a #udicial sale" so that he could buy out 1hil! The court denied
1hoenix’s motion" saying that the goodwill of the business belonged to 1hil" and ordered 1hil to merely pay the cash )alue of
1hoenix’s share! 2f 1hoenix appeals" what result is li&ely?
2n order to dissol)e partnership" ma#ority of partnership must agree! C@ percent is not ma#ority! 6o 1hoenix cannot
show that! 2f he can show that it not possible to continue business" then he can petition to dissol)e howe)er" not
getting along is not 5frustration of economic purpose7 or reasonably practical enough! 0ssuming at9will" 1hoenix does
ha)e right to dissociate! Fe would be entitled to greater of half of the liquidation )alue or going concern )alue without
1hoenix as partner! Court order seems to enforce this by ha)ing 1hil pay 1hoenix the cash )alue of his share of
business! 2f liquidation )alue is used" goodwill is not a appropriate measure! 4ut if going concern is used" goodwill
should be included but the decrease in the )alue of business by 1hoenix disassociating would be deduced!
0ssuming these measures are implementing" 1hoenix will lose on appeal!
$! ffect of /issol(tion on A(thority of General .artner
a! Other General .artners
+, Ance dissolution is started" the business needs to be wrapped up! The <1 can only engage in acts that are
appropriate towards winding ip business or incur liabilities!
/! "ontin(ance After /issol(tion
a! it is possible to )ote to continue the partnership but this would ha)e to be unanimous )ote of the partners
Two partners run an online casino as 4etFere general partnership! Congress passes legislation ma&ing the site unlawful for -!6!
customers! Could the partners 5cure7 by re)amping as a free gambling site that sold ad)ertising?
2f it is illegal to carry on business" <1 is dissol)ed and it mo)es on to winding up phase! Fowe)er" all partners can elect
to carry on the business! 2f it is legal to carry on free gambling" then both partners can continue business so there will be
no winding up or termination!
". 'inding 0p (OL ;I.")
! Right to 'ind 0p
a! <1’s sole purpose is to wind up business until all acti)ity is complete
0 ca&e ba&ery" in winding up" can fill all existing orders" sell in)entory and equipment" collect amounts due and pay
amounts due" but cannot ta&e on new business!
/. /istri$(tion of Assets (OL ;I./)
! Order of /istri$(tion
a! The general partnership must apply its assets in the following order:
+, outside: discharge obligations to creditors" including general partners who are creditors
+$, inside: and then any surplus to distributions in cash to the general partners according to their relati)e rights
a! 2f any partner fails to contribute the full amount that the partner is obligated to contribute" all the other partners must
contribute" in the proportion in which the partners share losses" the additional amount necessary to satisfy the
partnership obligations for which they are personally liable!
b! a partner may reco)er from the other partners any contributions the partner ma&es in excess of the partner’s share
of the obligations
c! each partner must contribute in the same percentage as losses are shared!
1axton and 1resley are equal partners in (un9Time Jideo" ha)ing bought out their former third partner 1ablo last year!
:ealiBing that the )ideo rental business is unli&ely to be lucrati)e going forward" the two decide to shut down! 0t the time
they shut down" the business owes >$"@@@ in rent; >$"@@@ for )ideos it had purchased in the past six months; >$"@@@
remaining on buying out 1ablo; and >$"@@@ on a six9year9old business loan! The business has only >E"@@@ remaining! Fow
will the debts be settled?
Autside creditors are paid first! >$@@@ for the business loan" >$@@@ in rent" >$@@@ in )ideos it had purchased! 0ssuming"
1axton and 1resley are C@9C@ equal partners" they each need to pay >@@@ to the partnership for 1ablo! 1axton and
1resley are also liable to 1ablo" who has a claim against the partnership! Hote that the six9year loan creditor may also
ha)e a claim against 1ablo" if the loan was underta&en when 1ablo was a partner! Fe can e)en collect the money from
XII. LIMITED PARTNERSHIPS
A. "reation of Li!ited .artnerships (OL ;II.-)
! General "haracteristics
a! 0 limited partnership consists of:
+, 0n organiBation that has one or more general partner who manages the business and personally liable for
+$, Ane or more limited partner" who contribute capital and share in profits" but ta&e no part in management and
their only liability is their contribution
b! While limited partners ha)e limited liability:
the limited partnership is distinct from its partners and ha)e perpetual duration
a! 0 limited partnership is formed by:
(ile a certificate of limited partnership with the state
+, the name of the limited partnership;
+a, The name must include the words 5limited partnership7 or 5L17 or 5L!1!7
+$, the address of the designated office; and
+/, the name and address of the initial agent for ser)ice of process!
b! The partners must also enter into a limited partnership agreement!
+, The limited partnership is go)erned by a limited partnership agreement! To the extent the limited partnership
agreement does not otherwise pro)ide" relations among the partners and between the partnership and the
partners is go)erned by the Limited 1artnership 0ct!
-. Manage!ent of Li!ited .artnerships (OL ;II./)
! 8ach general partner has equal rights in management and conduct of the limited partnership’s acti)ities and any matter
relating to the limited partnership’s acti)ities may be decided by a ma#ority of the general partners
$! The consent of all partners is required to:
a! amend the partnership agreement; and
b! sell" lease" exchange or otherwise dispose of all or substantially all of the limited partnership’s
property other than in the usual or regular course of business
/! The partnership agreement may pro)ide for the creation of classes of general partners or limited partners and shall
define the rights" powers" and duties of those classes" including rights" powers" and duties senior to other classes of
general partners or limited partners! The partnership agreement may also pro)ide to all or to specified classes of
general partners or limited partners the right to )ote separately or with all or any class of the general partners on any
(our college classmates decide to form a consulting firm! The cost of starting the firm is >@@"@@@" and each contributes in
the following manner: 0li gi)es >/@"@@@; 4lair gi)es >@"@@@; Carlos gi)es >$@"@@@; and 'anielle gi)es >?@"@@@! The
agreement says that 4lair and Carlos are to recei)e management fees of >C@"@@@ per year as the general partners of the
firm" but is otherwise silent as to the distribution of profits! Fow will profits be allocated?
This is different from <1 where one person" one share! 2n limited partnerships" profits are allocated in accordance with
the contributions! This means that if partners ha)e contributed different amounts" they will share profits in proportion to
their contributions! 0 will get /@L of profits; 4lair will get @ percent profits; Carlos will get $@ percent; 'anielle will get ?@
". Li!ited .artners (OL ;II.+)
! Lia$ilities and Li!itations
a! "ontrol of the -(siness
+, <enerally" a limited partner is not liable for:
beyond the amount they contribute!
-nless he ta&es part in control of the business" in which case" he may be )icariously liable
+$, The limited partner will be held liable as a general partner only to:
someone who transacts business with the limited partnership with actual &nowledge of the limited
partner’s participation in control and with a reasonable belief" based upon the limited partner’s
conduct that the limited partner is a general partner at time of transaction
+/, 0 limited partner does not participate in the control of the business solely by:
a contractor" agent" employee of the limited partnership or of a general partner or an officer" director or
shareholder of a corporate general partner" member or manager or officer of the LLC that is general partner"
limited partner of a partnership that is a general partner A: trustee" officer" ad)iser" shareholder" beneficiary"
of an estate or trust that is a general partner
+b, consulting with and ad)ising general partner with respect to the business
b! Mista&en Stat(s
+, 0 person who erroneously" but in good faith" belie)es himself a limited partner is not liable as a general partner
if" on learning his mista&e:
he causes an amended certificate to be executed and filed and withdraws from future equity
participation in the enterprise
he is liable as a general partner to any third party who has transacted business with the enterprise"
if the third party belie)ed in good faith that he was a general partner
1ascal is the general partner in a small import*export business he runs with his wife" 1auline! 1auline" whose family owns
significant real estate throughout the state" holds a limited partnership sta&e in the business! A)er the years" 1auline has
tended to the paperwor& duties of the business" such as responding to correspondence" ordering supplies" and paying the
bills! When 1ascal is away on o)erseas trips to )isit clients" 1auline tends to the partnership’s business! 0 trade creditor
has since attempted to attach 1auline’s rights to the family property on the grounds that she is more than a mere limited
partner! Will the creditor succeed? Would the outcome be different if 1ascal and 1auline deposited their profits from both
businesses into a #oint chec&ing account? 2f 1auline recei)ed a salary" would that change the outcome?
<enerally" a limited partner is only liable for their contributions to the limited partnership! The limited partner will be held
liable as a general partner only if someone transacts business with the limited partnership with actual &nowledge of the
limited partner’s participation in control and with a reasonable belief" based upon the limited partner’s conduct" that the
limited partner is a general partner at time of transaction
2t is not clear that the creditor &new of 1auline’s role and whether her role amounted to control gi)en most of her tas&s
were clerical! 2n addition" it is also not clear if the creditor had notice or &new that she was a limited partner! Therefore" he
is not entitled to a reasonable belief that she was a general partner! This analysis does not change e)en if profits are
shared and 1auline recei)ed a salary due to the safe harbors in place! The only issue is control and creditor’s &nowledge
and reasonable belief!
$! Rights and .o#ers
a! "ontrol of Li!ited .artnership
+, a limited partner does not ha)e the right or power as a limited partner to act for or bind the limited partnership
b! <e# Li!ited .artners
+, 0 person becomes a limited partner:
+a, as pro)ided in the partnership agreement
as a result of a con)ersion or merger or
+b, with the consent of all partners
/! /(ties and O$ligations
a! (iduciary 'uty:
0 limited partner has HA (2'-C20:D '-TD TA L2%2T8' 10:T8:6F21 A: 0HD ATF8: 10:TH8:
b! <ood (aith and (air 'ealing:
Fowe)er" a limited partner must discharge the duties to the partnership and other partners and exercise his rights
consistent with the obligation of good faith and fair dealing!
/. General .artners (OL ;II.G)
! 0 general partner in a limited partnership has most of the same rights" duties" and powers and is sub#ect to the same
restrictions and liabilities as a partner in a general partnership!
0n indi)idual who would otherwise play the role of a general partner can obtain limited liability by creating a corporation and
ha)ing that entity act as a general partner while the indi)idual is an officer +and often a shareholder and director, in the
new corporation! 4y forming a new entity" the indi)idual creates a shield between himself and any partnership liability!
. Transfer of .artnership Interests (OL ;II.*)
! Transferability of a limited partner’s interest in a limited partnership and the rights and obligations of a transferee are
similar to that of a general partnership in that the only interest of a partner that is transferable is the partner’s
transferable interest i!e! partner’s right to distributions" which is personal property!
$! Transferability allowed:
of economic interest and does not cause partner’s disassociation or cause dissolution
/! 8)en though only economic interest:
they do not ha)e the right to ma&e the transferee a new limited partner! That can only be done by agreement or )ote of
other limited partner
?! transferee is only entitled to distributions and not entitled to management of partnership or access to boo&s or records!
Lee and 3ara form a limited partnership to sell used law textboo&s o)er the 2nternet! Lee is the general partner; 3ara is the
limited partner! 3ara contributes >@"@@@ for her interest! The business fails" owing >$$"@@@ to )endors and their landlord! Will
both Lee and 3ara be liable for the shortfall?
Lee is personally liable for >$$@@@ as the general partner! 0ssuming 3ara has not participated in control of the partnership"
she does not ha)e personal liability" 6he loses >@"@@@ but is not personally liable!
+. /istri$(tions (OL ;II.I)
! Right to /istri$(tions
a! 1rofits and losses are allocated:
among the partners allocated as pro)ided in the agreement or absent that" as pro)ided and in absence of that"
according to contributions
$! Li!itations on /istri$(tions
a! 0 person cannot recei)e a distribution from a limited partnership that would:
the L1 unable to pay debts as they become due
+$, if L1’s assets less than liabilities" plus any amount needed to satisfy the rights of partners that are superior to
those other partners recei)ing distributions" then any distribution can be reco)ered!
b! 2f so" distribution can be reco)ered!
c! a general partner who consents to this distribution or recei)es the distribution improperly is personally liable for the
amount of the distribution
G. /issociation of Li!ited .artner (OL ;II.=)
! 0 limited partner does not ha)e a right to dissociate:
before the termination of the limited partnership
$! 0 limited partner is dissociated upon the occurrence of the following e)ents:
a! notice to the limited partnership of a person’s express will to withdraw as a limited partner;
b! an e)ent agreed upon in the partnership agreement;
c! the person’s expulsion as a limited partner pursuant to the partnership agreement;
d! the person’s expulsion as a limited partner by unanimous consent of the other partners if:
+, unlawful to continue limited partnership with person as limited partner
+$, transfer of all of the limited partner’s transferable interest or a court order charging the interest
+/, the limited partner is a corporation that has filed a certificate of dissolution" or an LLC that has been dissol)ed
e! the person’s expulsion by #udicial order because:
+, person engaged in wrongful conduct that ad)ersely and materially affected L1’s acti)ities
+$, person willfully committed a material breach of the partnership agreement or obligation of good faith and fair
dealing or engaged in conduct that ma&es it not reasonably practicable to carry on acti)ities with the person as
/! ffect of /issociation
a! -pon a person’s dissociation:
contrary to <1" the person does not ha)e any further right in limited partnership and does not ha)e right to recei)e
payment! 4ut does not discharge person from obligations to the limited partnership incurred while a limited partner!
b! The right to recei)e payment accrues only at the end or the winding up of the partnership!
! 0 limited partnership is dissol)ed and its acti)ities wound up upon the occurrence of any of the following:
a! e)ent in agreement occurs
b! consent of all general partners and limited partners owning a ma#ority of the rights to recei)e distributions at the
time of the conset
c! end of the underta&ing
$! 2f there is no remaining general partner" dissolution occurs unless" within M@ days:
+, at least one person is admitted as a general partner; and
+$, the limited partners owning a ma#ority of distribution rights as limited partners consent to continue the acti)ities
of the limited partnership!
/! 'issolution will also occur M@ days after the dissociation of the limited partnership’s last limited partner" unless the
limited partnership admits at least one new limited partner!
I. .riority of Lia$ilities 0pon /issol(tion
! The priority of liabilities of a limited partnership is substantially similar to those of a general partnership!
$! 2n winding up the limited partnership’s acti)ities:
assets of the L1" including any contributions required to be made" are applied to satisfy the obligations to creditors"
including any partners who are creditors
/! 0ny surplus remaining:
allocated to partners in the same way they share distributions
?! 2f the limited partnership’s assets are insufficient to satisfy all of its obligations:
then the general partner’s need to contribute to satisfy the obligations
XIII. LIMITED LIABILITY PARTNERSHIPS
A. General (OL ;III.A)
! LL1s are general partnerships for all purposes except liability!
$! When a general partnership registers as an LL1:
all the partners gain protection from liability for obligations of the partnership and of other partners" although they remain
liable for their own negligence and the negligent super)ision of others!
-. +or!ation (OL ;III.-)
! The name:
must identify as LL1 and must file registration with secretary of state
$! Anly accountants" lawyers or architects! 'issol)ed upon death" resignation" expulsion or ban&ruptcy of a partner
XIV. LIMITED LIABILITY COMPANIES
A. General (OL IB.A.)
! professionals may not form LLCs" must form 1Cs or LL1s
$! most flexible entity
/! taxed li&e a partnership but members ha)e limited liability as though they were s*h in corporation
?! member managed or manager managed
-. +or!ation (OL IB.-.)
! To form an LLC:
one or more persons must file 0A2 with secretary of state" pay filing fee" identify the business as an LLC" name an
address of agent for ser)ice of process" decide whether member9managed or manager managed
$! The articles of organiBation must state:
a! whether the LLC will be member9managed or manager9managed;
b! the name of the LLC" which must contain the abbre)iation LLC; and
c! the name and address of the initial agent for ser)ice of process!
". O#nership and Governance of LL" Affairs (OL IB./.)
! Operating Agree!ent
a! members should enter into operating agreement" whether written or oral! 4ut failure to do so is not a defect in
formation of the LLC
b! Aperating agreements control most aspects of the LLC’s business and management unless illegal
c! The LLC’s members ha)e the power to adopt" alter" amend" or repeal the operating agreement and the articles of
organiBation" or a written operating agreement may prescribe the manner in which the alteration" amendment" or
repeal is to ta&e place!
$! Me!$ers and Managers
a! The responsibilities of the indi)iduals differs depending:
upon whether it is member9managed or manager9managed
b! -nless otherwise stated in the operating agreement:
managers ma&e decision by ma#ority )ote
c! 0 member may transfer his interest in the LLC:
only to the extent of member’s right to recei)e profits and losses! The transferee will not ha)e management rights
unless he becomes a member with consent of all the partners
/. Rights) /(ties) and O$ligations of Me!$ers) Managers) and Officers (OL IB..)
a! members are not entitled to remuneration" may be indemnified by agreement and ha)e the right to access" inspect
and copy records
b! %embers in a member9managed LLC ha)e apparent authority to bind the LLC!
c! 2n a manager9managed LLC" they ha)e no authority to bind the LLC!
$! Managers and Officers
a! 8ach manager is an agent of the LLC for purposes of its business or affairs and the act of any manager for
apparently carrying on in the usual way the business or affairs of the LLC binds the LLC" unless:
+, manager does not ha)e actual authority
+$, and the person does not &now and does not ha)e reason to &now that the manager lac&s the authority
b! %anagers owe fiduciary duties to the LLC and to its:
members in the same way that partners do to partnerships
+, The fiduciary duties owed are:
duty of care and duty of loyalty
c! These may only be modified:
by operating agreement" but they cannot be eliminated
. Lia$ility of Me!$ers) Managers) and Officers (OL IB.+.)
a! :egardless of whether an LLC is member9managed or manager9managed:
members of the LLC are not personally liable for debts" obligations or liability of the LLC solely by being a member
b! 0 member is sub#ect to liability upon:
piercing of the LLC )eil
+, This might occur in the case of:
fraud or the LLC not acting independently as a business
c! (ailure to hold meetings of members or managers" or failure to obser)e formalities pertaining to meetings" is not a
factor in establishing liability unless required by the operating agreement!
d! 6ituations where this occurs most often include:
comingling funds or undercapitaliBation" combined with fraud or in#ustice
e! %embers may agree:
to be obligated personally for debts
+, Liability also occurs where there has been a wrongful distribution +lea)es LLC insol)ent,:
members may be liable for the amount they recei)ed
$! Managers and Officers
a! Ho manager or officer of an LLC is personally liable for the obligations of the LLC solely by reason of being a manager
or officer of the LLC unless it accrues due to their own negligence or tort!
b! %anagers must apply the same duty of care as:
+, duty of care that an ordinary prudent person in li&e position would exercise
+$, in a manner that person reasonably belie)es would be in best interest of the LLC
c! 2f an LLC is member9managed" the members will" of course" ta&e on the potential liability for any wrongful acts or
breach of duty of managers when acting in that role! Fowe)er" if the LLC is manager9managed" the members will
essentially ha)e the same limited liability as limited partners in a limited partnership!
+. "ontri$(tions (OL IB.G.)
! The same as limited partnership
G. /issociation (OL IB.*.)
! The articles of organiBation or operating agreement may pro)ide that a member may withdraw" resign" or retire from an
LLC at the time or happening of an e)ent specified in the operating agreement" or that a member does not ha)e such a
$! 0part from any restriction on the right to withdraw:
a member may withdraw by pro)iding notice to the LLC of intent to withdraw
/! 0 withdrawn member is not entitled to:
payment for interest until company is dissol)ed and wound up
?! When a member withdraws:
he is no longer a holder of economic interest or any other fiduciary duties
C! 2f the withdrawal is in )iolation of the operating agreement:
then the LLC can offset any amount owed to the withdrawn member for any damages incurred due to his breach of
! 0n LLC must be dissol)ed and its affairs wound up upon the occurrence of the earliest of:
a! the time specified in the articles of organiBation" or happening of e)ents specified in the articles of organiBation or
written operating agreement
b! by a )ote of the members
c! by entry of decree of #udicial dissolution
$! =udicial dissolution can ta&e place:
a! if not practicable to carry on the business and for protection of rights or interests of members
b! business has been abandoned
c! internal dissent and management deadloc&ed
d! fraud" mismanagement or abuse of authority
BAR EXAM APPLICATION
0pplicants might be as&ed a question that requires them to consider general partnership liability similar to the following:
<rapeco" a general partnership" owns )ineyards on 4lac&acre! The general partners of <rapeco are =oe" 1eter" and %i&e! Ane
day" =oe strayed on to Whiteacre" the land ad#acent to 4lac&acre" &noc&ing down C@ )aluable trees! 0ssume that there is no
dispute o)er whether =oe has trespassed!
0re <rapeco and the two other partners liable for damages as a result of =oe’s trespass?
2ssues that applicants must consider are partnership liability for the wrongful acts or omissions of partners" and partner liability
for obligations of a partnership!
0pplicants might be as&ed to answer a question based on facts similar to those in the following problem:
=ane" %ary" and =en" the general partners of Candyco" a general partnership" agreed to sell some sto)e coo&ers! Without the
&nowledge of the other partners" =ane entered into a contract with =ohn to find a buyer for the sto)e coo&ers at a minimum
price of >?@@"@@@" with =ohn recei)ing a >E@"@@@ commission! =ane signed the contract on behalf of Candyco! =ohn &nows that
=ane is a partner in Candyco" but does not &now that Candyco’s partnership agreement prohibits any partner from entering into
a contract that will require a payment of >$@"@@@ or more without the appro)al of the other partners!
2f =ohn finds an acceptable buyer for the sto)e coo&ers" will Candyco be successful in asserting a defense if =ohn brings an
action to enforce his contract with Candyco" based on the pro)ision in the partnership agreement requiring the appro)al of all
partners for contracts in excess of >$@"@@@?
2ssues that applicants must consider are the authority of a partner to bind a partnership" and the effect that express limitations
of that authority ha)e upon transactions with third parties!
A partnership is liable for the wrongdoings of a partner if the wrongdoing is committed in the course of business. So if -oe
strayed into another’s property because he thought it belonged to .lac#acre, then the partnership is liable. f -oe went to
sabotage to help his own company, then partnership is still liable. f it can be shown that trespass had no connection to
/rapeco, then perhaps the partnership will not be liable but that is unli#ely here. Partners are ,ointly and severally liable and so
if the partnership is liable, both Peter and 0i#e are liable as general partners of /rapeco for -oe’s wrongdoing. 1ven if they are
both liable, they have the right to see# indemnification from the partnership. n addition, partnership can re2uire contribution
from -oe since it was his wrongful act that caused the liability. f neither /rapeco nor -oe have any money, then Peter and
0i#e would have to pay.
A partner is both an agent and principal of a partnership and can bind the partnership unless there is an e3press limitation.
-ane did not have actual authority to bind 4andyco since there is prohibition on contracts in e3cess of ()*,***. .ut the
partnership may be bound by the apparent authority of the partner if it is reasonable for the third party to assume that the
partner had such authority based on the nature of partnership business and the third party had no actual #nowledge of the
limitation. Since the sale of coo#ers was in ordinary course of business and -ohn had #nowledge that -ane was a partner in
4andyco but had no #nowledge that she did not have authority to enter into a contract with him over ()*,*** without approval
of the other partners, the assumption that -ane had authority to bind the partnership was reasonable. 'owever, if sale of
coo#ers was outside the course of business or was a sale of substantially all assets, then approval of all partners would be
necessary, and not be reasonable to assume that -ane had authority. Since no such facts are given, it is reasonable to
conclude that -ane had apparent authority and the contract would be enforceable. 1ven if 4andyco sells the coo#ers, -ohn
may still be entitled to compensation on a 2uantum!merit analysis. Also, although 4andyco will be bound, they would have
claim against -ane for violating the e3press limitation in the partnership agreement.
This action might not be possible to undo. Are you sure you want to continue?