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Business Associations I


Principles of Agency
· What is an Agent?
o Definitions
 Agency—the fiduciary relation which results from the manifestation of
consent by one person to another that the other shall act on his behalf and
subject to his control, and consent by the other so to act
· Essential elements
o Consent that the person will be subject to the control of the
 Either express or implied
o Control of one person over the other—usually the key issue
to determine whether there is an agency relationship
 It is not essential that the right of control be
exercised, so long as the right actually exists
o Acting on behalf of the principal
 Principal—the one for whom action is to be taken
 Agent—the one who is to act
o General rule
 The principal is liable for the acts of the agent so long as the agent is
acting with authority
· Is there a principal/agent relationship?
· Is the agent acting within his authority?
· This language is used for contract, not tort
o Special rules
 A travel agent is a special agent of the traveler for the purposes of that one
transaction between the parties and all usual duties go with this
 A real estate agent is primarily the agent of the party who first employs
 An independent insurance agent is the agent of the insured, not of the
insurance company, and the insured can sue him for breach of contract,
 Proof of the agency relationship cannot be shown by the statements of the
agent alone
· Whoever makes the allegation that an agency relationship exists
has the burden of proving the relationship
· A party who deals with an agent is held to a duty of reasonable
investigation regarding that agent’s authority
o Buyer-Seller relationships
 If a person buys from another with the intention of turning around and
selling it to someone else, there is not an agency relationship—it is a
buyer-seller relationship
· Whether the buyer fixes his resale price
· Whether title passes from seller to buyer
· Whether the buyer is acting primarily for the benefit of the seller or
for his own benefit
· How the parties have labeled the relationship (relevant but not
· The amount of control reserved to the seller
· Whether the buyer has an independent business
· Whether the buyer gets to negotiate the quantity he buys
· Whether the buyer always gets all of the seller’s goods
· The extent to which a middle man is free to negotiate for himself
with the end buyer
 Only when a manufacturer controls the day-to-day or operative details of
the dealer’s business is an agency relationship potentially created
o Distinguished from trusts
 A trust cannot be terminated at the will of the donor, but an agency
relationship can be terminated at the will of either party
 A person can be both an agent and a trustee
 When the donor party retains control of the property, an agency
relationship is created, not a trust
 A trustee has title to the trust property, but an agent does not have title to
the property of his principal
 A trustee is not subject to the control of the beneficiary, but an agent is
subject to the control of his principal
 An agency is created by the consent of the principal and the agent, but a
trust may be created without the knowledge or consent of the beneficiary
or of the trustee
· General Versus Special Agents
o General rules
 The third party has the duty to obtain information of the nature of the
agent’s authority
 The third party must ascertain the nature and authority of the agent and he
cannot rely solely on the statement of the agent
o Definitions
 General agent—an agent authorized to conduct a series of transactions
involving a continuity of service
· Broader apparent authority than the special agent
· More inherent agency powers than the special agent
 Special agent—an agent authorized to conduct a single transaction or a
finite series of transactions not involving continuity of service
o Rules for special agents
 A special agent can bind an undisclosed principal only to contracts made
within the scope of his authority
 A special agent for an undisclosed principal has no power to bind his
principal, by contract or conveyances, which he is not authorized to make
· The agent’s only departure from his authority is
o In not disclosing his principal, or
o In having an improper motive, or
o In being negligent in determining the facts upon which his
authority is based, or
o In making misrepresentations (if he had the authority to
make representations)
· The agent is given possession of goods or commercial documents
with authority to deal with them (like the bona fide purchaser for
value rule in property—the bfp wins over the principal)

o General agents
 Can bind the principal through his representations/misrepresentations if he
is authorized to make representations
 Has full power to bind the insurer to the agent’s contract of insurance or to
issue policies or to accept risks
· Soliciting agents are special agents and do not have this power
 Powers are coextensive with the business entrusted to him, and his
fraudulent act is that of the company’s as well
· A special agent’s fraud will be based on vicarious liability, not
agency theory
· Sub-Agents
o Definitions
 Person appointed by an agent empowered to do so to perform functions
undertaken by the agent for the principal, but for whose conduct the agent
agrees with the principal to be primarily responsible
 Person whom the agent delegates as his agent to perform an act for the
principal which the agent has been empowered to perform through his
own representative
o Examples
 Real estate broker operating under an exclusive listing contract with the
seller of the property stands in an agency relationship with the seller and
the authority given to the broker by the listing agreement will generally
include the implied authority to appoint a salesperson as a sub-agent to
perform the task assigned to the broker by the listing agent
 When you hire a general contractor, it is implied that he will hire
subcontractors, which are sub-agents whom he has the implied authority to
hire on your behalf
o Patterns of intent possible with sub-agency
 P could intend that A2 is acting independently of A1 and directly under the
control of P, despite the fact that A1 hired A2
· A2 is really a co-agent and not a sub-agent
 A2 could be acting under A1’s control only, and A1 is responsible for his
· A2 is then an agent of both A1 and P and A1 would be liable to P for
A2’s actions, and both A1 and P would be liable to third parties for
A2’s actions
· This is the definition of sub-agent under the Restatement
 A2 could be strictly A1’s agent if P never manifested any intention to A1 to
appoint either a sub-agent or a co-agent
· P is then generally not responsible for the acts of A2

Vicarious Liability
· Introduction
o General rule
 A master is subject to liability for the torts of his servants committed while
acting in the scope of their employment
o Justifications for vicarious liability
 Compensatory—deep pocket theory, to ensure that the victim will be fully
compensated and the master more likely has the ability to pay
 Fairness—since the servant is generally furthering the business of the
master, it is generally foreseeable as the inevitable result of doing business
and is seen as a business expense, based on the privilege of doing business
 Loss spreading—risk distribution theory, the employer is in the best
position to insure itself against the losses from tortious conduct
 Efficiency—will avoid the necessity for detailed and costly judicial
analysis into whether the employer was negligent in hiring, etc. of his
employees, encouraging careful choice of employees
· Employee Versus Independent Contractor
o Definitions
 Master—a principal who employs an agent to perform service in his
affairs and who controls or has the right to control the physical conduct of
the other in the performance of the service
 Servant—an agent employed by a master to perform service in his affairs
whose physical conduct in the performance of the service is controlled or
is subject to the right to control by the master
 Independent contractor—a person who contracts with another to do
something for him but who is not controlled by the other, nor subject to
the other’s right to control with respect to his physical conduct in the
performance of the undertaking; he may or may not be an agent
o Factors to determine if someone acting for another is a servant or an independent
 Extent of control which by the agreement the master may exercise over the
details of the work and the degree of supervision
· The more control over the details, the more likely he is a servant
· Key test is whether the employer has the right of control and
supervision over the work of the alleged employee, and the right to
direct the manner in which the work is done, as well as the result
which is to be accomplished—not the actual interference but the
right to do so
· ICs are not subject to the control of the employer except as to the
results or product of his work
 Whether or not the one employed is engaged in a distinct occupation or
· The more specialized and distinct, the more likely he is an IC
 The kind of occupation with reference to whether in the locality the work
is usually done under the direction of the employer or by a specialist
without supervision
 The skill required in a particular occupation
· The more specialized/skilled, the more likely he is an IC
 Whether the employer or the workman supplies the tools and place of
work for the person doing the work
· ICs supply their own tools
 The length of time for which the person is employed
· The longer the time, the more likely he is an employee
 The method of payment, whether by time or by job
· ICs are paid by the job and employees are paid by time
 Whether or not the work is part of the regular business of the employer
· If regular business, more likely to be an employee
 Belief of the parties
· Not determinative except that it indicates an assumption of control
by one party and submission in the other
· Custom in the community is also important
 Whether it furthers the principal’s business or the other’s business
· ICs have their own business
o Special situation: doctors in hospitals
 Where a hospital holds itself out to the public as providing a given service
and where the hospital enters into a contractual agreement with one or
more physicians to direct and provide the service and where the patient
engages the services of the hospital without regard to the identity of a
particular physician, and where as a matter of fact the patient is relying on
the hospital to deliver the desired health care and treatment, the doctrine of
respondeat superior applies and the hospital is vicariously liable for the
damages proximately resulting from the negligence of any physicians
 Traditional analysis would result in the physicians being independent
contractors, but in these cases the courts move to an apparent authority
· Limitations on the Independent Contractor Exception
o Negligent Selection
 General rule is that no vicarious liability attaches when a physician is an
independent contractor and not an employee or servant of the hospital if
the patient goes to the hospital specifically for the services of this doctor
· Hospital has no right of control
· Patient picks the doctor
· The doctor is not an employee
 Doctrine of corporate responsibility for the quality of medical care has
been adopted by many courts—a hospital owes a duty to its patients to
exercise reasonable care in the selection of its medical staff and in
granting specialized privileges and to periodically monitor and review
their competency
· This is not a vicarious liability theory—it is a negligence theory

o The Borrowed Servant Doctrine

 Issue—there are two potential masters and the courts will only hold one of
them liable
 General rule—borrowing master, not the loaning master, is liable for the
negligent acts of the loaned servant if the loaned servant becomes a
servant of the borrowing master
· The master with the primary right of control at the time of the
negligent act is the one who will be held vicariously liable
· Crucial question is which employer had the right to control the
particular act giving rise to the injury
· Orders of the borrowing employer must be commands and not
requests if the worker is to be found to be a loaned servant
 Tests to determine when an employee becomes a borrowed servant
· Right of control test (majority)
o Assumes to place the responsibility for the servant’s
negligence on the employer having the right to control the
servant’s actions at the time the negligent act occurred
 Both have a degree of control, but it is based on
who has the control at the time of the act
 The special employer has the power to detail how
the job is done
 Sometimes the courts will look to what caused the
· Whose business test (minority)
o At the time of the negligent act, which employer’s business
was being done or furthered
 The problem is that both employers’ businesses are
being furthered
 Focus on the act itself and see whose business is
being furthered the most—question of fact
 Factors to examine in determining whether the employee is a loaned
servant (making the borrowing master, not the loaning master, liable if
anything goes wrong)
· Did the employee consent, actually or implicitly, to work for a
special employer
· Whose was the work he was performing at the time of the injury
· Whose was the right to control the details of the work being
· For whose benefit primarily was the work being done
 Dual liability approach (minority view)—both the borrowing employer
and the loaning employer may be held liable in tort to the third party who
sustains injuries caused by the negligence of the loaned employee when
the loaning employer retains broad control over the loaned employee and
the borrowing employer has control over the details of the loaned
employee’s work
o Non-Delegable Duty
 General rule
· The master is not subject to liability for the torts of his servants
acting outside the scope of their employment, unless:
o The master intended the conduct or the consequences
o The master was negligent or reckless
o The conduct violated a non-delegable duty of the master
o The servant purported to act or to speak on behalf of the
principal and there was reliance upon apparent authority or
he was aided in accomplishing the tort by the exercise of
the agency relation
 Inherent danger exception
· In general, the employer of an IC is not liable for physical harm
caused by the acts or omissions of the IC, but there are exceptions
in special situations where the employer is in the best position to
identify, minimize, and administer the risks involved in the
contractor’s activities
· One who employs an IC to do work involving a special danger to
others which the employer knows or has reason to know to be
inherent in or normal to the work, or which he contemplates or has
reason to contemplate when making the contract, is subject to
liability for physical harm caused to such others by the IC’s failure
to take reasonable precautions against the danger
· This exception is not limited to generally hazardous work—it is
sufficient that the work involve a risk recognizable in advance of
physical harm to others which is inherent in the work itself or
normally to be expected in the ordinary course of the usual or
prescribed way of doing it, or that the employer has special reason
to contemplate such a risk under the particular circumstances under
which the work is to be done
· If the employer takes all reasonable precautions, he may be
excused from liability—if he does do so, though, he runs the risk
of losing the IC relationship because he has too much control
 Peculiar risk doctrine
· Employer is subject to liability caused by the actions of its ICs if
the employer fails to exercise reasonable care in preventing the risk
that arises out of the character of the work or out of the place
where it is to be done
· Look to the conduct of other businesses, past history, insurance and
its coverage, etc.
· Scope of Employment
o In General
 General rule
· An employer is no longer liable for the negligent acts of its
employees if the employees have diverted from the employer’s
business until the employees are once again doing the employer’s
o Detours are generally okay, but frolics are not—time and
distance aspect
 Scope of Employment—General Statement
· Conduct of a servant is within the scope of employment if, but
only if
o It is the kind he is employed to perform,
o It occurs substantially within the authorized time and space
o It is actuated at least in part by a purpose to serve the
master, and
o If force is intentionally used by the servant against another,
the use of force is not unexpectable by the master
· Conduct of a servant is not within the scope of employment if it is
different in kind from that authorized, far beyond the authorized
time or space limits, or too little actuated by a purpose to serve the
 Kind of Conduct within Scope of Employment
· To be within the scope of employment, conduct must be of the
same general nature as that authorized, or incidental to the conduct
· In determining whether the conduct, although not authorized, is
nevertheless so similar to or incidental to the conduct authorized as
to be within the scope of employment, the following matters are to
be considered
o Whether the act is one commonly done by such servants
o The time, place, and purpose of the act
o The previous relations between the master and servant
o The extent to which the business of the master is
apportioned between different servants
o Whether the act is outside the enterprise of the master, or, if
in the enterprise, has not been entrusted to any servant
o Whether or not the master has reason to expect that such an
act will be done
o The similarity in quality of the act done to the act
o Whether the instrumentality of the harm that is done has
been furnished by the master to the servant
o The extent o departure from the normal method of
accomplishing an authorized result
o Whether the act is seriously criminal
 Forbidden Acts
· An act, although forbidden or done in a forbidden manner, may be
within the scope of employment
· A master is liable for the negligence of his servant if at the time of
the negligent act the servant is acting within the scope of his
employment, and this liability applies even in instances where the
servant, while disobeying his master’s orders, injures a third party
o Intentional Torts
 General rule
· A servant may be acting within the scope of his employment when
he commits an intentional tort, although it is less likely that it will
fall into the scope of employment than a negligent tort
 Factors to consider
· Extent of the wrong
o An employer is more likely to anticipate minor crimes than
major ones
· Foreseeability of the conduct
o Some courts apply this rule
o An employer is liable for the intentional torts of his
employees if they were reasonably foreseeable or
 Drunk sailor case
o Limited to torts which can be fairly said to be characteristic
of the enterprise
· Whether the servant’s purpose was to serve the master
o A master may be liable for the intentional torts of his
servants if the torts are done, at least in part, with a purpose
to serve the master
 Drunken boatswain who orders sailor around and
beats him up
 Sexual misconduct is obviously not to serve the

o Punitive Damages
 Approaches to liability of the employer
· Always fault rule—recovery is permitted against an employer
whenever he is liable for the same conduct in compensatory
· Complicity rule—punitive damages can be properly awarded
against a master or other principal because of an act by an agent if,
but only if
o The principal or a managerial agent authorized the doing
and the manner of the act, or
o The agent was unfit and the principal or managerial agent
was reckless in employing or retaining him, or
o The agent was employed in a managerial capacity and was
acting within the scope of his employment, or
o The principal or a managerial agent of the principal ratified
or approved the act
· Some fault rule—before an employer may be held vicariously
liable for punitive damages under the doctrine of respondeat
superior, there must be some fault on his part; although the
misconduct of the employee must be willful and wanton, it is not
necessary that the fault of the employer, independent of his
employee’s conduct, also be willful and wanton—it is sufficient
that the plaintiff allege some fault on the part of the employer
which foreseeably contributed to the plaintiff’s injury to make the
employer vicariously liable for punitive damages
· No fault rule—a few states prohibit vicarious punitive damages
· Statutory Inroads on the Common Law Definition of Employee
o Right of Control test—common law test
 Used by ERISA
 General characteristics of employers
· Select and engage the employee
· Pay the wages
· Power of dismissal
· Power and control over the employee’s conduct
o Economic Realities test—employees are those who as a matter of economic
reality are dependent on the business to which they render service
 Used by FLSA and SSA
o Hybrid test—right of control and economic realities—it is the economic realities
of the relationship viewed in light of the common law principles of agency and
the right of the employer to control the employee that are determinative
 Used by Title VII
o Relative Nature of the Work test—in determining the existence of an employee-
employer relationship, one examines the nature of the claimant’s work in relation
to the regular business of the employer, focusing on
 The nature of the claimant’s work
· Skills required to do the work
· The degree to which the work constitutes a separate calling or
· The extent to which the work might be expected to carry its own
accident burden
 The relation of that work to the alleged employer’s regular business
· Whether the claimant’s work is continuous or intermittent
· Whether the duration of the claimant’s work is sufficient to amount
to the hiring of continuous services as distinguished from the
contracting for completion of a particular job

Bases of Authority
· Express Authority
o Definition—expressed either orally or in writing (some require a writing like
powers of attorney)
o Equal dignity rule—if the underlying contract is required to be in writing, then the
authority to do it must also be in writing
· Implied Authority
o Definition—the authority that an has and/or needs in order to carry out express
authority (a recognition that we can never say everything that we intend)
 Actual authority that is circumstantially proven from the facts and
circumstances attending the transaction in question and may be implied
from the words used, from customs, and from relations of the parties
 If there is no express authority, then there is no implied authority
o Secret limitations on authority
 If not communicated to the third party, will not be binding on the third
party—true with implied/inherent authority and apparent authority
o Examples
 Attorney’s authority to negotiate with opposing counsel (not to settle)
 Presidents of corporations
 Managers of stores
· Apparent Authority and Estoppel
o Definition—the authority that the agent has because the principal has done or
taken some action that leads a reasonable third party to believe that the agent had
that authority
 A type of circumstantial authority—not actual
 The principal is only liable to those third parties who have no notice of the
secret limitations on the agent’s authority and who are relying in good
faith on the apparent authority
 Can never have apparent authority when the principal is wholly
 The principal’s manifestation is given to the third party, either directly or
indirectly, by words or acts, and not given to the agent, as with express
o Acts to Focus on to Determine Apparent Authority
 If the principal created the appearance of authority by providing business
cards, office space, etc.
 Principal neglects to inform the third party that the agent no longer has the
authority and the principal’s actions in the past create a course of conduct
 The actual words of the principal may give the agent apparent authority
beyond what he originally intended—“give him what he wants and I will
 Failure of the principal to do something when a reasonably prudent person
would do something—failing to take back POA papers
o Differences between apparent authority and estoppel
 Don’t have to show a change of position with apparent authority
 Apparent authority is real authority and will get you expectation damages
for a breach of contract
 In an apparent authority situation, the principal has rights to enforce the
contract, but not in an estoppel situation
 Courts may not find enough for apparent authority and still be able to use
estoppel argument
· Inherent Agency Power/Inherent Authority
o Definition—the authority that an agent has simply because of the position that he
occupies, based on what this type of agent usually does
 Designed to protect innocent third parties
 A third party must reasonably believe that an agent of this type would
have this type of authority based on customary practice
 Based on what agents of this kind can typically do
 A term used in the restatement to indicate the power of an agent which is
derived not from authority, apparent authority, or estoppel, but solely from
the agency relation itself and exists solely for the protection of persons
harmed by or dealing with a servant or other agent
o Acts of Manager Appearing to be Owner
 An undisclosed principal who entrusts an agent with the management of
his business is subject to liability to third persons with whom the agent
enters into transactions usual to such businesses and on the principal’s
account, although contrary to the direction of the principal
o Unauthorized Acts of General Agents
 A general agent for a disclosed or partially disclosed principal subjects his
principal to liability for acts done on his account which usually
accompany or are incidental to transactions which the agent is authorized
to conduct, if although they are forbidden by the principal, the other party
reasonably believes that the agent is authorized to do them and has no
notice that he is not so authorized
· The Equal Dignity Rule
o If the underlying contract has to be in writing, then the agent’s authority to
negotiate the contract has to be in writing as well
o The act creating the agency shall be executed with the same formality (and need
have no more) as the law prescribes for the execution of the act for which the
agency shall be created
· Ratification and Adoption
o Definitions
 Ratification—the affirmance by a person of a prior act which did not bind
him but which was done or professedly done on his account whereby the
act as to some or all persons is given effect as if originally authorized by
· Relates back to the time the unauthorized act occurred and is
sufficient to create the relationship of principal and agent
· Requires the principal to have knowledge of all the material facts
and an intent to ratify
· Cannot later be revoked or recalled—it is binding
· When an agent exceeds his authority, a principal is not bound
unless he ratifies the act committed
· When this conflicts with the equal dignity rule, the equal dignity
rule wins
 Affirmance—either
· A manifestation of an election by one on whose account an
unauthorized act has been done, to treat the act as authorized, or
o Express conduct
· Conduct by him justifiable only if there were such an election
o Implied conduct—when the principal takes a position
inconsistent with non-affirmation, with full knowledge of
the material facts
o What Acts Can be Ratified
 An act which, when done, could have been authorized by a purported
principal, or if an act of service by an intended principal, can be ratified if,
at the time of affirmance, he could authorize such an act
 An act which, when done, the purported or intended principal could not
have authorized, he cannot ratify, except an act affirmed by a legal
representative whose appointment relates back to or before the time of
such act
o Purporting to Act as Agent as a Requisite for Ratification
 Ratification does not result from the affirmance of a transaction with a
third person unless the one acting purported to be acting for the ratifier
· Cannot have ratification if the principal is wholly undisclosed
 An act of service not involving a transaction with a third person is subject
to ratification if, but only if, the one doing the act intends or purports to
perform it as the servant of another
o Who Can Affirm
 To become effective as ratification, the affirmance must be by the person
identified as the principal at the time of the original act, or, if no person
was then identified, by the one for whom the agent intended to act
o Adoption
 When a corporation comes into existence, it can treat the actions of the
promoter of its own, but this is technically not ratification because the
principal did not exist at the time the acts were done
o Methods and Formalities of Affirmance
 Except as below, affirmance can be established by any conduct of the
purported principal manifesting that he consents to be a party to the
transaction, or by conduct justifiable only if there is ratification
 Where formalities are requisite for the authorization of an act, its
affirmance must be by the same formality in order to constitute a
ratification (the equal dignity rule)
 The affirmance may be made by an agent authorized to do so
o Failure to Act as Affirmance
 An affirmance of an unauthorized transaction can be inferred from a
failure to repudiate it

o Effect of Ratification; In General

 The liabilities resulting from ratification are the same as those resulting
from authorization if, between the time when the original act was
performed and when it was affirmed, there have been no change in the
capacity of the principal or third party or in the legality of authorizing or
performing the original act
o Relation Back in Time and Place
 The liabilities of the parties to a ratified act or contract are determined in
accordance with the laws governing the act or contract at the time and
place it was done or made
 Whether the conduct of the purported principal is an affirmance depends
upon the law at the time and place when and where the principal consents
or acts

Termination of Agency and Notice

· Termination of Authority
o There is no specific requirement to do anything specific to terminate an agency
relationship—a principal has an absolute right to terminate the agency
relationship at any time
 All you have to do is tell the agent it’s over, but this may only terminate
express authority
 Telling just the agent does not terminate apparent authority
 May have to give notice to third parties
· Actual notice to those third parties with whom the agent has had
· Constructive notice to everyone else—posting in the newspaper
 Authority of an agent terminates according to the terms of any agreement
the principal and agent may have entered into during the agency
· A principal is privileged to discharge before the time fixed by the
contract of employment an agent that has committed such a
violation of duty that his conduct constitutes a material breach of
the contract
 If the termination of the agency relationship breaches a contract, then the
non-breaching party has the right to seek damages
o Requirement of notice
 When the agent as begun to deal with a third person, the agent’s apparent
authority cannot be terminated unless the third person has notice of the
 Similar notice of termination is required when the principal has entrusted
the agent with a writing which manifests the agent’s authority and which is
meant to be shown to the third party
o Death or Incapacity of the Principal
 Death revokes agency even if the agent does not know that the principal is
dead—anything the agent does after the death of the principal is without
authority, either express or apparent
 General rule is that incapacity also revokes agency
· There is a question whether temporary incapacity revokes agency
or not
· Irrevocable Agency
o General rule
 Agency coupled with an interest is not revocable
· Requires security and consideration
o Security—agency power is granted to the agent as security
for the protection of the agent or a third person
o Consideration—the agent gives consideration for the
agency power
o Definition
 An agency coupled with an interest exists when the agent has a vested
interest in the subject matter of the agency and is given authority to
exercise a power over the subject matter—this cannot be revoked
o Examples
 Interest in profits is not enough—any kind of monetary compensation is
not enough
 Interest in land is enough to create this
 Right to manage building in which A rents a floor is given to A as a means
of preserving his interest in the building
· A had a power (to manage the building) coupled with an interest
(the 20 year lease) and the agency is not revocable

o Termination of Irrevocable Agency

 Not terminated by:
· Revocation by the principal
· Surrender of the power by the agent if he holds it for another
· Death or incapacity of either the principal or the agent
 Terminated only by surrender by the agent (if capable) or if its terms
become illegal, or if the terms are met
· Notice and Knowledge
o General rule
 The principal will be charged with the knowledge of the agent
 Except when
· The agent is not acting on the principal’s behalf
· The agent has been defrauded into not telling the principal or has
been deceived into believing that the principal already knows
o Imputed knowledge
 A principal will not be liable on the basis of imputed knowledge unless the
knowledge attributed to him is that of a person who can reasonably be
identified as his agent
o Agent acting adversely to the principal
 Knowledge and misconduct of an agent will not be imputed to a principal
if an agent if an agent is secretly acting adversely to a principal and
entirely for his own or another’s purpose
 Not all activity by the agent which results in some personal benefits to him
is considered adverse to the interests of the principal
 A principal will be held to the knowledge of an agent who acts adversely
to the principal if
· The agent entered into negotiations within the scope of his powers
and the person with whom he deals reasonably believes him to be
authorized to conduct the transaction, or
· Before he has changed his position, the principal knowingly retains
a benefit through the act of the agent, which otherwise he would
not have received
 If the agent is a sole actor (the sole representative of the principal), the
principal will be charged with the agent’s knowledge if the principal
benefits, even if the agent is entirely adverse

The Relationship between Principal, Agent, and Third Parties

· Duties of Agent to Principal
o The Agent as a Fiduciary
 Agency relationship is one founded on trust and reliance
 Principal’s fiduciary duties
· Compensation of agent for the agent’s duties
· Reimbursement for advances made by the agent on behalf of the
· Duty of reasonable care to prevent injury to the agent
· Duty to deal fairly and in good faith with the agent
· Duty to follow social legislation
 Agent’s fiduciary duties
· Duty to use reasonable care and skill that a regular agent of that
type would do
· Duty to disclose all information
· Duty to engage in good conduct
· Obey the reasonable instructions of the principal
· Duty to keep and render the accounts
· Duty to act with the highest degree of faith and loyalty
o Duty not to compete
o Duty not to act for an adverse party
o Duty not to use the principal’s confidential information
o Duty to keep the principal’s property separate
o Duty of Care
 Agent has a duty to act with the care, skill, and diligence the fiduciary
rendering that kind of service would reasonably be expected to use
· Duty to promptly communicate all information
· Duty to disclose material dangers known to the agent
o Duty of Loyalty
 Secret Commissions
· Includes the duty to not put himself in such a position where his
interests may conflict with the interests of the principal
· Duty to act solely for the benefit of the principal on matters within
the scope of his agency
· Cannot accept secret commissions because the agent is taking
advantage of his position and acting on his own behalf—makes no
difference if the principal actually suffered damages
· Agent has to forfeit his commissions to the principal
 Appropriating Customers
· An agent is under a fiduciary duty not to use or disclose trade
secrets of his employer
· An agent also has a duty not to appropriate customers of his
employer even in the absence of a non-competition agreement
 Self-Dealing
· Agent has the duty to refrain from self-dealing until the agency
relationship is terminated
· Duties of Principal to Agent
o An agent may recover any expenditures necessarily incurred in the transaction of
his principal’s affairs
o An agent compelled to defend a baseless suit grounded upon acts performed in his
principal’s business may recover from the principal the expenses of his defense
o An agent has the right to indemnification
o Contracts
 Agents are entitled to recover commissions on a sale only when his efforts
can be shown to be the procuring cause if the contract doesn’t say when
the agent gets the commissions
 Where the principal enters into a nonexclusive representation agreement
with the agent, he is not precluded from competing with the agent
personally or through another agent
o Types of exclusive representation agreements
 An exclusive right to sell—confers on the agent the sole right to sell in a
certain geographical area—the agent gets commissions no matter who
sells the items, even the principal
 An exclusive agency—the principal is prohibited only from employing
other agents to sell the goods of property—he can sell them himself and
not be liable to the agent for commissions

· Liability of Agent to Third Party

o General rule
 Principal is liable for the acts of the agent whether he is disclosed,
partially disclosed, or undisclosed (assuming that the third party has found
out about the principal)
 An agent is not liable to the third party for acts which are within the scope
of his authority (if the agent is outside the scope of his authority, he will be
liable to the principal unless the principal knew he was acting without
· Agent is liable under K law for acts done for wholly undisclosed
principals because the agent’s name is on the K
· If agent says he is acting on behalf of a principal but is not, the
agent is liable based on
o Breach of warranty of authority—contract action, where the
agent mistakenly believed he had authority
o Fraud or misrepresentation—tort action, where the agent
knew he had no authority
· Agent making a K on behalf of the principal (if disclosed) is not
liable for nonperformance of the K
 An agent incurs personal liability regardless of disclosure of the principal
when the agent contracts in his own name rather than on behalf of the
o Disclosure of Principals
 Definitions
· Disclosed principal—the other party knows both that the agent is
acting for a principal and the principal’s identity
· Partially disclosed principal—the other party knows that the agent
is acting for a principal, but has no notice of the principal’s identity
· Wholly undisclosed principal—the other party has no notice that
the agent is acting for a principal
 Disclosed principal—a person making or purporting to make a K with
another as agent for a disclosed principal does not become party to the K
 Partially disclosed principal—a person purporting to make a K with
another as agent for a partially disclosed principal is a party to the K
 Undisclosed principal—an agent purporting to act upon his own account,
but in fact making a K on account of an undisclosed principal, is a party to
the K
· Both the principal and the agent are liable in the last two situations
o Agent who warrants authority
 A person who purports to make a K, conveyance, or representation on
behalf of another who has full capacity but whom he has no power to bind,
thereby becomes subject to liability to the other party upon an implied
warranty of authority, unless he has manifested that he does not make such
warranty, or the other party knows that the agent is not authorized
o Unauthorized acts of general agents
 A general agent for an undisclosed principal authorized to conduct
transactions subjects his principal to liability for acts done on his account,
if usual or necessary in such transactions, although forbidden by the
principal to do them
o Third party can sue both the agent and the principal and get judgments against
both, but can only get satisfaction from one


Principles of Partnership
· Definition
o Partnership Defined (UPA § 6)
 Association of 2 or more people who carry on as co-owners a business for
 Factors
· 2 or more people acting together
· Contribution of money—as opposed to a loan
o Contribution of services can be the capital contribution if
the agreement says so
· How decisions are made—control
· Sharing of profits—prima facie evidence that it is a partnership
· Sharing of losses
· Intent of the parties to do those things that look and act like a
· Right to review the books and records
· Entitlement to get accounting of activity
 Things that do not make a partnership
· Joint tenancy, tenancy in common, joint property
· Sharing of gross returns
· Repayment of debts, payment of wages
· Sharing of profits as compensation for services does not make you
a partner
o Partner Agent of Partnership as to Partnership Business (UPA § 9)
 Every partner is an agent of the partnership for the purpose of its business
and he binds the business unless he had no authority and the third party
knew he had no authority
o Nature of partner’s liability (UPA § 15)
 All partners are liable in tort and in contract jointly for everything
chargeable to the partnership
 If the liability is from the wrongful act or breach of trust by a partner, then
the partners are jointly and severally liable
· The Uniform Partnership Act
o Enacted to regulate the rights and duties of partners against third parties more
precisely than at common law
o UPA applies in the absence of an agreement to the contrary (the partnership
· Entity Versus Aggregate Theories
o Entity—sees the partnership as a separate entity that can sue and be sued
o Aggregate—bases everything on the separate partners (still do this for taxes)

Rights and Duties of Partners

· Relations Between Parties
o Rules Determining Rights and Duties of Partners (UPA § 18)
 Each gets his contribution repaid (whether it was by capital or advances)
and shares equally in profits after all debts paid, and must contribute to the
losses according to his share in the profits
 Partners are entitled to indemnification from the other partners
 Partners get interest on any advances they make to the partnership from
the date it was made
· An advance is anything in excess of the agreed-upon capital
 Partner gets interest on his capital contribution from the date it was to be
 Each has equal management rights
 No compensation for acting in the business except for winding up
· Unless the partnership agreement says so
· No right to get more money upon dissolution just because you did
more either
 No one can become a member of the partnership without all of their
 Majority gets to decide differences for ordinary matters, but all must
consent to a change from the agreement
· Status quo wins if all do not consent to a major change
o Partnership Books (UPA § 19)
 To be kept at PPOB and all have the right to access them
o Duty of Partners to Render Information (UPA § 20)
 Partners have to give true and full info to any partner or his legal
o Partner Accountable as Fiduciary (UPA § 21)
 Partners must account to the partnership for any benefit and act in a
fiduciary manner toward the partnership and the other partners
 Partners remain fiduciaries until they are no longer partners
o Right to an Account (UPA § 22)
 Every partner has the right to an accounting of the affairs
· If he is wrongly excluded
· As part of the agreement
· As provided by § 21
· Whenever it is just and reasonable

· The Partner’s Right to Indemnity

o General rule:
 The partnership must indemnify every partner in respect of payments
made and personal liabilities reasonably incurred by him in the ordinary
and proper conduct of his business or for the preservation of his business
or property
 Only for the ordinary and proper conduct in the course of business
 Have to show fraud in order to not have to indemnify your partner
o Wrongful Acts
 Partnership Bound by Partner’s Wrongful Act (UPA § 13)
· If a partner, acting in the normal course of business, commits a
wrongful act that injures a third party, then the partnership is liable
to the third party to the same extent that the partner is
 Partnership Bound by Partner’s Breach of Trust (UPA § 14)
· Partnerships is bound if a partner misuses a third person’s money
within the scope of his apparent authority, or if the partnership
misuses the money
· Relations of Partners to Third Parties
o Ordinary course of business—consider factors
 Character of the business (external view)
 Manner in which it is usual to carry on the business (external view)
 Manner this particular business has been carried on (internal view)
 Going to come down to knowledge  level of knowledge/notice the
partner has will shape whether they are bound
· Third parties can bind the partnership
· But the point is whether it’s in the ordinary course of business  if
it’s not, should raise some red flags
o Intentional torts
 Never a part of the ordinary course of business of a partnership
 Therefore the partnership is not liable for a partner’s intentional torts
· Partnership Property
o Definitions
 Partnership property—all property originally brought into the partnership,
or subsequently acquired by purchase or otherwise, on account of the
partnership, is partnership property
· Property acquired with partnership funds is partnership property
unless another intention is shown
· Any estate in real property may be acquired in the partnership
· A conveyance to a partnership in the partnership’s name without
words of inheritance passes the entire estate to the grantor unless a
contrary intention appears
o Extent of Property Rights of a Partnership
 The property rights of a partner are
· His rights in specific partnership property
o The right to possess or use it for partnership purposes, but
not for other purposes without the consent of the other
o Co-owners of this property hold as tenants in partnership
o Cannot be encumbered for personal debts, but can be for
partnership debts
o Stays with the partnership—it is not assignable except as a
whole, and stays when a partner dies unless he’s the last
one and then it goes to his heirs
· His interest in the partnership
o Share of the profits, surpluses and losses—this is personal
o Can be assigned
· His right to participate in the management of the partnership
o Partnership Interest
 Conveyance of your interest in the partnership does not dissolve it, nor can
the assignee participate in the management of the partnership (unless there
is an agreement)
· Assignee just gets the rights to the profits
 Assignee gets full value of his interest upon dissolution of the partnership
o New Partner Liability
 When a new partner is admitted to an existing partnership, he is liable for
all obligations of the partnership arising before his admission, except that
this liability can only be satisfied out of partnership property (he is not
personally liable)

Dissolution, Winding Up, and Termination

· In General
o Definitions
 Dissolution
· The change in relation of the partners caused by any partner
ceasing to be associated with the other partners
· Partnership is not terminated by dissolution
 Termination—the point in time when all partnership affairs are wound up
 Winding up—the time between dissolution and termination
o Causes of dissolution
 Without violation of the agreement
· End of a term or undertaking specified in the agreement
· Express will of any partner when no definite term is specified
· Express will of all of the partners, either before or after the term
· By the expulsion of any partner from the business if there is a
power to do this in the agreement
 In contravention of the agreement
· By express will of any partner at any time—you always have the
power but not necessarily the right
o Dissolution by Court
 On application by a partner to the court, the court shall decree a
dissolution if:
· Partner has been declared a lunatic in any judicial proceeding
· Partner is incapable of performing his part of the agreement
· Partner has been guilty of such conduct that prejudices the carrying
on of the business
· Partner willfully or persistently breaches the agreement or is not
reasonably practical to carry on the business with
· Partnership can only be carried on at a loss
o Effect of Dissolution on Partner’s Authority
 Dissolution terminates all authority to act for the partnership except for
winding up
· Rights of Partners on Dissolution
o Contribution
 Each partner is liable for his share of any liability created by any partner in
the partnership
 You may have to pay extra to one of the partners
o Power to bind the partnership upon dissolution
 Only to the extent that the partner is winding up the affairs of the
o Existing liability
 Dissolution does not discharge any partner from existing liability unless he
has an agreement with the creditor
o Rules for Distribution in settling accounts after dissolution
 Liabilities ranked in order of payment as follows
· Those owed to creditors not partners
· Those owed to partners other than for capital or profits (partners as
· Capital contributions
· Profits
· Continuation Agreements
o Liabilities of Persons Continuing the Business in Certain Cases
 If one or more of the partners is replaced or is gone, and the departing
partner has assigned his rights, and the business continues, then the
creditors of the first partnership become the creditors of the new
 Same rule applies when there is only one partner left and he continues the
business as a sole proprietorship
 Same rule applies if the retiring or dead partner did not assign his rights
but the business continues with his consent
 Any change in membership dissolves the partnership and creates a new
· The property of the old partnership becomes the property of the
partnership continuing the business
o Rights of retiring partners of estates of deceased partners when the business is
 When a partner dies or retires and the business is continued without
settlement of accounts between the departing partner and the partner(s)
continuing the business, then he may have the value of his interest at the
date of dissolution ascertained and shall receive as an ordinary creditor the
value of his interest in the dissolved partnership with interest or in lieu of
interest, the profits attributed to the use of his right in the property of the
dissolved partnership
· Post-Dissolution Problems
o When one partner renews a note made to a partnership after dissolution, the note
is seen as a personal debt to him, and not to the other partners—the old note has
been satisfied by the new one
o Partners continue to be liable for any debts created while they were partners
unless there is an agreement with the other partners and the creditors that the old
partner will no longer be liable
 Novation
 Partners whose obligations have been assumed are not liable if the creditor
shows his assent like a change in the nature of the payment of such


In General
· Definition
o A partnership composed of one or more people who control the business and who
are personally liable for partnership debts (the general partners), and one or more
people who contribute capital and share profits but who cannot manage the
business and who are liable only for the amount of their contribution
· Liability to Third Parties
o Limited partner is not liable for the obligations of a limited partnership unless he
is also a general partner or participates in the control of the business (but then
only liable to persons who transact business with him reasonably believing he is a
general partner)

o Limited partner is not participating in the control of the business by:

 Contracting or being a shareholder or agent or employee
 Consulting
 Guaranteeing loans
 Attending meetings
 Voting on stuff like
· Dissolution or winding up
· Sale of assets
· Incurrence of indebtedness
· Change of business nature
· Admission or removal of GP or LP
· Changing partnership agreement
· Business matters
 Winding up
· Formation of Limited Partnership
o By statute
o Requires certificate in writing and filed appropriately—not formed until this is
o If you do it wrong according to the statute, the LP will be liable as GP to third
parties who didn’t know it was a LP
· People who thought they were a limited partner
o If you make a contribution believing that you are a LP and not a GP, you do not
assume the liability if you
 Cause appropriate certificate to be filed
 Withdraw from future equity participation in the business by filing a
o A person who made such contributions is liable as a GP to any third party who
transacted business with them before the withdrawal or filing of certificate
showing that he is not a GP, but only if the third party believed in good faith that
he was a GP at the time of the transaction

Limited Partnerships with Corporate General Partners

· General rule
o If a limited partner is an officer of the corporation that was the general partner, the
limited partner does not become a general partner (per exception in RULPA §


· Incorporators
o One or more people may act as incorporator by delivering the articles of
incorporation to the secretary of state for filing
· Articles of Incorporations
o Must include
 Name, number of shares, address, and name and address of incorporators
o May include
 Directors, bylaws, etc.
· Incorporation
o Corp is formed upon filing of the articles unless delay is specified
· Liability for Preincorporation Transactions
o Everyone purporting to act as or on behalf of a corporation, knowing there was no
corporation under this Act, is jointly and severally liable for all liabilities created

Existence of Corporation
· Doctrine of de facto corporation gives the officer limited liability and is used when there
are elements showing
o Existence of laws authorizing incorporation
o Effort in good faith to incorporate under existing laws
o Actual use or exercise of corporate powers
· Doctrine of estoppel is used when the third party thought it was dealing with a
corporation and gives the officers limited liability
· Promoters are liable for their actions unless they have an agreement saying that they are
not liable
· Alter Ego Doctrine—whether a parent company is liable for its subsidiary’s liabilities
o Must show that the parent and subsidiary act as a single economic entity
 Whether the corporation was adequately capitalized for the corporate
 Whether the corporation was solvent
 Whether dividends were paid, corporate records were kept, officers and
directors functioned properly, and other corporate formalities were
 Whether the dominant shareholder siphoned corporate funds
 Whether in general the corporation simply functioned as a façade for the
corporate shareholder
o Must show that an overall element of injustice or unfairness is present
· Corporate veil
o General rule
 Courts will disregard the corporate form or pierce the corporate veil
whenever necessary to prevent fraud or to achieve equity
· Can do this to a parent corporation as well as to a human owner
· This holds the owner responsible despite legislature saying there is
limited liability
o When the corporate veil will be pierced
 Such unity of interest and ownership that the separate personalities of the
corporation and the individual no longer exist, AND
· The failure to maintain adequate corporate records and to comply
with corporate formalities
· The commingling of funds or assets
· Undercapitalization
· One corporation treating the assets of another corporation as its
 Such that adherence to the fiction of separate corporate existence would
sanction a fraud or promote injustice
· Must show unjust enrichment—some wrong beyond a creditor’s
inability to collect

In General
· Definitions
o Limited Liability Company as Legal Entity
 A LLC is a legal entity distinct from its members
o Organization
 By one or more persons
 By delivery of articles to the Secretary of State
 Begins when the articles are filed
· Intent—to permit individuals to operate a business entity somewhere between a
partnership and a corporation and still maintain limited liability for the members of the
o All of the corporate structure without the limitations (don’t have to have board of
o All of the freedom of a partnership without the liability
· The LLC constitutes a separate legal entity that cannot represent itself in court, but must
act through its agents


In General
· A candidate or other member of an unincorporated political association or committee is
not personally liable simply by virtue of his membership
o Unless he actually authorized, assented to, or ratified the obligation
· Unless you are in a state that allows you to sue an unincorporated association, you cannot
sue it because it is a nonentity
· Members suing the association
o Old common law rule—a member of an unincorporated association cannot sue the
association for the negligence of another member
 Suing other members is like suing yourself because of the co-principal
o New rule—unincorporated associations are amenable to suits by their members,
subject to the principals of comparative fault
· Third parties suing
o At common law and in the majority of jurisdictions today, an unincorporated
association is not a legal entity, so cannot sue or be sued, so the agent is
personally liable because you cannot be an agent for a nonexistent entity