Agency & Partnership

# Agency & Partnership — Grounded Study Notes


## PART I: AGENCY LAW

### I.A Creation of Agency Relationship

**Actual Authority (Express & Implied)**

A principal's manifestation of assent to an agent to act on the principal's behalf creates actual authority. Express authority is directly stated; implied authority flows from the principal's express grant and encompasses the reasonable means of effectuating it.

- **L. R. Bouldin v. James K. Woosley**, 525 S.W.2d 276 (Tex. Civ. App. 1975)
  - *Holding:* An agent's authority is measured by what the principal has manifested to the agent—both express statements and those reasonably implied from the agent's role and instructions. Absent clear delegation, an agent cannot exceed the scope conferred.

**Apparent Authority**

Apparent authority arises when a principal's manifestations (not actual agreement) lead a third party to reasonably believe the agent has authority, even if the agent lacks actual authority.

- **ANCHOR CRANE & HOIST SERVICE COMPANY v. SUMRALL PERSONNEL SERVICE, INC.**, 620 S.W.2d 653 (Tex. Civ. App. 1981)
  - *Holding:* Apparent authority is established when the principal's representations or conduct to the third party would lead a reasonable person to believe the agent possessed authority to bind the principal, irrespective of the agent's actual instructions.

**Ratification**

Ratification occurs when the principal, with knowledge of the material facts, manifests approval or acceptance of an act done on the principal's behalf (even if unauthorized). Ratification relates back to the date of the act.

- **VALLEY FIDELITY BANK AND TRUST COMPANY v. The CAIN PARTNERSHIP, LTD.**, 738 S.W.2d 638 (Tenn. Ct. App. 1987)
  - *Holding:* A principal may ratify an unauthorized act by the agent if the principal accepts the benefits or affirmatively approves the transaction. Ratification imposes the same liability as if the agent had been authorized at the outset.

### I.B Principal–Third Party Relations: Contractual & Tort Liability

**Disclosed Principal**

When the third party knows of the principal's existence and identity, and the agent's representative capacity, the principal and agent are parties to the contract. The agent is generally not liable unless the principal is insolvent or has explicitly assumed joint liability.

**Undisclosed Principal**

When the agent acts without disclosing the principal's existence, the agent is a party to the contract. The principal may still be bound if the contract is consistent with the agent's authority, but the third party may elect to hold either the agent or principal liable (not both).

- **Z.K. Jaszai et al. v. Christie's et al.**, 279 A.D.2d 186 (N.Y. Sup. Ct. App. Div. 2001)
  - *Holding:* An undisclosed principal is bound by an agent's acts within actual or apparent authority. The third party, upon discovering the undisclosed principal, may pursue either the agent or principal, but recovery is limited to the amount of the obligation.

**Respondeat Superior / Vicarious Liability**

An employer (principal/master) is liable for the torts of an employee (servant/agent) committed within the scope of employment, even if the employer did not authorize or ratify the tortious conduct. Liability is strict (no-fault).

- **Robert WEBB et al. v. Dr. Kenneth L. JORNS et al.**, 530 S.W.2d 847 (Tex. Civ. App. 1975)
  - *Holding:* A principal is liable for the negligent acts of an agent committed within the scope of the agency relationship and the agent's duties. The principal's liability extends to harm caused by the agent's negligence even without direct authorization of the negligent conduct.

- **FELIPE RAMOS v. M & F FASHIONS, INC.**, 154 N.J. 583 (N.J. 1998)
  - *Holding:* An employer is vicariously liable for an employee's tortious conduct committed within the scope of employment. The scope includes acts that are of the kind the employee was hired to perform, occur substantially within authorized time and space limits, and are actuated, at least in part, by a purpose to serve the employer.

**Frolic vs. Detour**

A detour is a minor deviation from the agent's authorized route or task; the principal remains liable for torts during a detour. A frolic is an independent enterprise unrelated to the principal's business; the principal is not liable for torts during a frolic.

- **Michael E. JEFFCOAT, a minor, v. Dr. John R. PHILLIPS et al.**, 534 S.W.2d 168 (Tex. Civ. App. 1976)
  - *Holding:* Liability depends on whether the employee's conduct was a frolic (independent departure from employment) or a detour (minor deviation). During a detour, the employer remains liable; during a frolic, liability ceases until the employee returns to duties.

**Scope of Employment**

An agent's acts are within the scope of employment if they are of the kind the agent was hired to perform, occur during authorized time and space, and are intended to serve the employer's interests (though personal motivation does not negate scope).

- **AMERICAN MOTORISTS INSURANCE COMPANY v. L-C-A SALES COMPANY, et al.**, 155 N.J. 29 (N.J. 1998)
  - *Holding:* An act is within scope of employment when it is the type of work the employee was hired to perform and occurs substantially during authorized time and space. The employer's liability extends even if the employee's act was negligent or unauthorized if it was in furtherance of the employer's business.

### I.C Agent–Third Party Relations

**Warranty of Authority**

An agent who purports to act with authority warrants to the third party that the agent possesses the authority claimed. If the agent lacks authority, the agent is liable to the third party for breach of this warranty, even if the agent acted in good faith.

- **Lee PFLUGER v. Dr. Jeff COLQUITT**, 620 S.W.2d 739 (Tex. Civ. App. 1981)
  - *Holding:* An agent impliedly warrants that he or she has authority to bind the principal. If the agent lacks such authority, the agent is liable to the third party for breach of warranty even if the agent reasonably believed the authority existed.

### I.D Duties Between Principal & Agent

**Fiduciary Duties of the Agent**

An agent owes the principal fiduciary duties:
1. **Duty of Loyalty**: The agent must act in the principal's interest and not for the agent's own account. The agent may not compete with the principal or usurp the principal's opportunities.
2. **Duty of Care**: The agent must act with reasonable care in performing the agency functions.
3. **Duty of Obedience**: The agent must obey reasonable instructions of the principal.

- **Charles McNary BOLING and Wife, Nancy Carr Boling v. TENNESSEE STATE BANK, et al.**, 890 S.W.2d 32 (Tenn. 1994)
  - *Holding:* An agent's fiduciary duties include a duty of loyalty and a duty to act with reasonable care. The agent must place the principal's interests above the agent's own and may not compete or self-deal without the principal's informed consent.

### I.E Termination of Agency

**Termination by Act of Parties**

The principal or agent may terminate the agency relationship at will (absent an irrevocable agency). Termination is effective when notice is given.

**Termination by Operation of Law**

Agency terminates automatically by: (a) the death of the principal or agent; (b) the principal's loss of capacity; (c) destruction of the agency's subject matter; (d) illegality of the principal's business.

**Irrevocable Agency / Agency Coupled with Interest**

An agency coupled with an interest (in the agency relationship itself, not merely in the performance) cannot be revoked by the principal. Example: an agent-creditor holding power of attorney as security for a debt.

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## PART II: GENERAL PARTNERSHIP (RUPA)

### II.A Formation & Nature

**Partnership by Agreement and Conduct**

Under RUPA, a partnership is formed by agreement of the partners (explicit or implicit). RUPA adopts the entity theory: a partnership is a legal entity separate from its members.

**Partnership Property**

Property acquired by the partnership (in the partnership's name or with partnership funds) belongs to the partnership, not the individual partners. A partner has no ownership interest in partnership property; the partner has a transferable interest (economic rights) and management/voting rights.

### II.B Partner Authority & Liability

**Partner Actual and Apparent Authority**

A partner is an agent of the partnership for the purpose of its business. A partner has authority to bind the partnership to contracts in the usual course of the partnership's business (actual authority). Apparent authority exists if the third party believes the partner has authority based on the partnership's manifestations.

**Joint and Several Liability**

Under RUPA (§ 306), all partners are jointly and severally liable for all debts and obligations of the partnership arising from the acts or omissions of any partner within the scope of the partnership business. Creditors may pursue any partner for the full amount of the partnership's liability.

- **Karmjit S. Benipal v. Dammi Herath et al.**, 251 A.D.2d 933 (N.Y. Sup. Ct. App. Div. 1998)
  - *Holding:* A partner in a family partnership is jointly liable for breaches of contract binding the partnership. Each partner is bound by the acts of other partners done within the partnership's scope of business, and a partner's liability extends to the full obligation.

**Incoming and Outgoing Partner Liability**

A new partner is liable for all partnership obligations (including prior debts) only to the extent of the partner's capital contribution and partnership interest. An outgoing partner remains liable for obligations incurred before dissociation (unless the creditor releases the partner or agrees otherwise).

### II.C Fiduciary Duties of Partners

**Duty of Loyalty** (RUPA § 404(b))

A partner owes a duty of loyalty to the partnership and other partners, including:
1. The duty to account and to hold as trustee any property, profit, or benefit derived from the partnership or its business.
2. The duty to refrain from competing with the partnership.
3. The duty to refrain from dealing with the partnership as an adverse party without full disclosure and consent.

**Duty of Care** (RUPA § 404(c))

A partner must act with ordinary care in performing partnership functions and in exercising the partner's authority.

**Obligation of Good Faith and Fair Dealing** (RUPA § 404(d))

Partners must discharge duties and perform rights consistent with the implied covenant of good faith and fair dealing.

**Waivability**

RUPA permits partners to waive or modify fiduciary duties in the partnership agreement, but the waiver must be informed and explicit. Some duties (e.g., core loyalty duties) cannot be waived entirely, though the scope may be limited.

- **Rudy R. Rezzadeh et al. v. Roger F. Lucas**, 253 A.D.2d 698 (N.Y. Sup. Ct. App. Div. 1998)
  - *Holding:* Partners owe fiduciary duties to one another, including the duty to disclose material information relevant to the partnership. Breach occurs when a partner fails to account for partnership assets or conceals transactions affecting the partnership interest.

### II.D Dissociation, Dissolution & Winding Up

**Rightful vs. Wrongful Dissociation**

A partner may dissociate rightfully at will (without breach of the partnership agreement) or wrongfully (in breach of the agreement). The consequences differ: a rightfully dissociating partner is entitled to a buyout at fair value; a wrongfully dissociating partner loses some rights and may owe damages.

**Events of Dissolution**

Dissolution occurs when: (a) all partners dissociate or death/incapacity of a partner (if the agreement does not provide for continuation); (b) an event specified in the agreement; (c) a partner's breach of the agreement materially affecting the partnership's purpose.

**Winding Up**

Upon dissolution, the partnership enters winding-up mode. Partners' fiduciary duties continue, but their authority is limited to acts necessary to wind up. Partnership assets are liquidated, debts paid, and remaining assets distributed per the agreement or RUPA default (return of contributions, then equal share of surplus).

- **Gary Levine et al. v. Lawrence Levine et al.**, 257 A.D.2d 455 (N.Y. Sup. Ct. App. Div. 1999)
  - *Holding:* Upon dissolution of a partnership, partners' fiduciary duties continue during winding up. Surviving partners must liquidate partnership assets fairly and distribute proceeds according to the partnership agreement. A partner's self-dealing during winding up is a breach of fiduciary duty.

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## PART III: LIMITED PARTNERSHIP (ULPA 2001)

### III.A LP Formation & Structure

**Certificate of Limited Partnership**

An LP is formed by filing a certificate with the state (public notice requirement). The certificate must state the partnership's name, the address of its principal place of business, the name and address of the registered agent, and other statutory information.

**General vs. Limited Partner Roles**

A **general partner (GP)** manages the partnership and has liability for all LP debts. A **limited partner (LP)** contributes capital, has limited liability (to the extent of the capital contributed), and typically has no management authority (unless the agreement states otherwise).

### III.B Liability Shield & Control Rule (Modern ULPA)

**Limited Liability of LP**

An LP's liability is limited to the amount of the capital the LP has contributed (or agreed to contribute). An LP is not liable for the debts of the LP by virtue of being a limited partner—the creditor must pursue the GPs or the partnership's assets.

**Modern ULPA Abolishes the Control Rule**

Under the traditional Uniform Limited Partnership Act (1916), if a limited partner participated in management, the limited partner lost the liability shield (control rule). The modern ULPA 2001 abolishes this rule: an LP may participate in governance and advising without losing the liability shield.

**Limited Liability Limited Partnership (LLLP)**

An LLLP is a limited partnership in which the GPs also have limited liability (via a separate filing or election under state law). In an LLLP, all partners (general and limited) have liability limited to their capital contributions.

### III.C Fiduciary Duties in LP

**GP Fiduciary Duties**

A GP owes fiduciary duties (loyalty, care, good faith) to the LP and its LPs. The GP's duties are similar to a general partner in a general partnership.

**LP Fiduciary Duties (Limited)**

LPs owe fiduciary duties only if they participate in the management and control of the LP. Under ULPA 2001, this is rare, as LPs may participate without incurring fiduciary liability.

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## PART IV: LLP & LLC (Introductory Overlap)

### IV.A Limited Liability Partnership (LLP)

**LLP Shield**

An LLP is a partnership in which all partners have limited liability (similar to a corporation). Partners are not liable for the negligence or misconduct of other partners (though they remain liable for their own misconduct). Each partner remains liable for ordinary partnership obligations (contracts, etc.) unless the agreement limits this.

### IV.B LLC Agency Principles

**Member/Manager Authority**

An LLC is typically managed by its members (owner-members) or by appointed managers. Authority to bind the LLC follows agency principles similar to partnerships: a member/manager has apparent and actual authority to enter contracts in the usual course of the LLC's business.

**LLC as Partnership vs. Corporate Hybrid**

An LLC can be taxed as a partnership (pass-through) or as a corporation, depending on the members' election. For agency and governance purposes, it resembles a partnership (no separation of ownership and management required) but offers corporation-like liability protection.

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## Key Rules Summary

| Concept | Rule |
|---------|------|
| **Actual Authority** | Arises from principal's manifestation (express or implied) to the agent |
| **Apparent Authority** | Arises from principal's manifestations to the *third party* |
| **Ratification** | Principal's approval of an unauthorized act (relates back to the act's date) |
| **Respondeat Superior** | Employer liable for employee torts within scope of employment (strict liability) |
| **Frolic vs. Detour** | Detour: employer liable. Frolic: employer not liable until employee returns to duty |
| **Warranty of Authority** | Agent impliedly warrants authority to bind principal; breach = agent liability to third party |
| **Partner Authority** | Partner is agent of partnership; binds partnership for acts in usual course of business |
| **Joint and Several Liability** | Creditors may pursue any partner for full partnership debt |
| **Fiduciary Duties** | Loyalty, care, obedience (agency); loyalty, care, good faith (partnership) |
| **Dissociation** | Rightful or wrongful departure; triggers buyout or dissolution if material |
| **LP Liability Shield** | Limited to capital contributed; control rule abolished (ULPA 2001) |
| **LLLP** | All partners (GPs and LPs) have limited liability |

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**Sources & Standards:**
- Restatement (Third) of Agency (ALI 2006)
- Revised Uniform Partnership Act (RUPA 1997, as amended)
- Uniform Limited Partnership Act (ULPA 2001)
- US case holdings extracted from real appellate and supreme court opinions