Agency & Partnership
Professor Raymond J. Wyrsch
Christopher S. Lee
A. Intro & Background
B. Rights and Duties Between Principal and Agent
C. Vicarious Tort Liability
1. Relationship – Control
2. Activity – Scope of Employment
D. Contract Liability
1. Actual Authority
2. Apparent Authority
3. Inherent Authority
E. Agent’s Fraudulent Acts
1. Employer’s Liability
2. Exculpatory Clause
F. The Undisclosed Principal
G. Agent’s Liability
1. Authorized Transactions
2. Unauthorized Transactions
1. Nature and Form
I. Termination of Authority
1. Acts of Parties
2. Operation of Law
3. Notice of 3rd Parties
A. Nature and Creation of Partnerships
3. UPA & RUPA
B. Partners’ Property Rights and Creditors’ Rights – KEY
1. Partner’s Property Rights
2. Partnership Creditors
3. Individual Partners Creditors
C. Dissolution and Termination
a) Causes and Effect
b) Continuation of Business
a) Winding Up and Liquidation
Nature – Enterprise Liability
Focus - Responsibility
1. Relationship – Control; Greater control = Great risk of liability
2. Activity – Nexus; Cannot hold employer liable for all employee acts
1. Agency v. Sale – Simple buyer/seller relationships, no agency.
2. Agency v. Debtor/Creditor – Simple lender, no agency.
3. Agency v. Bailment – Control indicates agency.
4. Agency v. Escrow – Control indicates agency
5. Ambiguous Principal – See health insurance coverage cases.
Relationship: Principal v. Agent
1. Fiduciary – Contractual
2. Subject to Agreement – Occasionally formal; Performance K.
3. Otherwise Implied – C/L; ERISA
1. To Indemnify
2. To Compensate
3. Duty of Care
4. To Treat Fairly, and in Good Faith
Agent’s Duties – Biggest Area of Litigation
Real World Practice – Employer rarely sues employee, may sue agent.
1. To Perform
a) With Reasonable Care
b) To Follow Instructions
2. Duties of Loyalty – Must have Principal’s best interest at ALL times.
a) No Self-Dealing
b) Cannot Compete – During Relation (possibly after)
c) Cannot Preempt Opportunities
d) Duty to Disclose Conflicts
(1) Can’t misuse trade secrets.
(2) May use generally acquired knowledge.
3. To Indemnify if Loss Because of Breach – Rarely occurs
a) Remedy, not Duty
b) Based on Tradition
c) Constructive Court Test
4. Sources of Agent Duties
2. No Fault
1. Benefit – Risk Absorption
2. Loss Spreading – Risk Destruction
3. Safety – Risk Prevention
4. Just and Equitable – Victim Compensation
Approach – 2 Part Test
1. Relationship (Control) – Master-Servant Rule
2. Activity – Scope of Employment
Torts – Fault Approach; Negligence or Intentional
VC – Strict Liability; Employer is completely innocent; Exception to tort system
1. Control – Servant v. Independent Contractor; 12-factor test
2. Factors – No controls over Independent Contractors
b. Distinct Work
3. Exceptions (to exceptions)
b. Inherently Dangerous Activity
c. Nondelegable Duty – Public Carrier
d. Financial Irresponsibility
e. Apparent Relation – Franchise cases
4. Other Situation
a. Joint Enterprise – social trip v. profit motive
b. Unincorporated Associations – National Guard case
5. Independent Contractor Exemption
a. No Control = No Liability
b. See Prosser on Torts; R2d Agency p. 158
Activity - Nexus
1. Scope of Employment
Must show actions of servant were within the scope of employment.
Nexus between conduct and business
2. Negligent Acts
a. Deviations – Ellicott City Fire case
i. Substantial – Frolic
ii. Slight – Detour
b. Purely Personal Acts
c. Going/Coming Rule – to and from work; outside of time/place; but use of cell phones and home computers blurs lines
3. Intentional Torts – Key – Purpose
a. Motive – Traditional Rule, must have active role
b. Foreseeability – Modern trend
c. Characteristics of the Business
d. Strict Liability
e. Implied Contract
Exceptions to Independent Contractor’s Vicarious Liability (engulfing the Rule)
1. Own Negligence – Failure to Supervise, Perform Background Check
2. Inherently Dangerous
3. Non-Delegable Duty
4. Financial Irresponsibility – In some Jurisdictions
5. Apparent Relation – Outward appearances – Holiday Inn case
6. Expensive/Realistic Assessment – Removes all titles, labels, and categories. Then decides who is most responsible.
1. Relation – Principal-Agent
2. Activity – Scope of Authority – Narrow
1. Representative – On Behalf Of
3. Independent Firm/Individual – Corp, P/S can also be agent
1. Scope of Authority
a. Look at Factors
b. Establish Nexus to Business at Hand
c. Actions must Fall within Scope of Employment
d. Blurs with Control Issue
i. Kind of Work - Motive
ii. Time & Place - Foreseeability
iii. Purpose – Characteristics of Business
f. Detour – Slight – Within Scope of Employment
g. Frolic – Substantive – Outside of Scope of Employment
h. CTs – Personal conduct considered minor deviation to be expected on the job.
2. Actual – Principal-Agent
ii. Power of Attorney
ii. Past Conduct
v. Delegation – Hiring of sub-agent?
vii. GENERAL RULE – No Implied Authority. Look to intent of Parties
3. Apparent (Texaco Case)
a. GENERAL RULE – Would 3rd person reasonably believe agent had authority to perform?
b. Key – Manifestation between principal & 3rd party
d. 3rd Party
g. Conduct, Past Dealings
i. Innocent Spouse Theory
j. Contract Law
k. Also – Duty to Inquire
4. Estoppel – Koos Bros. Furniture Case
a. Tort Law
b. Compensation for Loss
c. Action – Change in position which leads to loss
d. NOTE Technical Distinction with Apparent Authority
e. Plead both (in the alternative) to cover bases
g. Prevents D/Principal from claiming lack of authority
h. Procedural Roadblock.
Applied v. Actual v. Apparent Authority
Apparent equivalent to Estoppel
5. Inherent (Sawmill Case, Gas Station Case)
a. General Agents
b. Usual or Incidental to Transaction
c. Reasonable Reliance
d. Doesn’t expand what’s under Apparent Authority
e. Applies in Undisclosed Principal cases
f. Applies in Fraud Cases
6. Intentional Tort Liability
a. C/L – No Business Purpose - No Liability
b. Modern – Within Scope, Foreseeable – Liability
iii. Purpose – Not serving Employer’s Purpose
d. Foreseeability = Liability
e. Character/Nature of the Business
f. Enterprise Liability Test/Policy Analysis
iv. Balancing Factors
g. Work Precipitating Causes – If work creates situation
h. Strict Liability/Implied Contract – Rare, but changing (ambulance case, hospital service)
i. Theft – Intentional Tort
i. Generally argue: Time, Place, and Purpose
ii. Also argue: Foreseeability, Implied Contract, Failure to perform background investigation
7. Vicarious Liability Focus
a. Actual Authority
8. Punitive Damages Rare
9. Presumption of authority – May be rebutted by D/Employer
a. Uniqueness of Situation
b. Cost of Transaction
e. Land Purchase
Agent’s Fraud (Grease Monkey case) – Contract & Tort Liability
2. Intermix of Contract v. Tort Liability
1. Narrow v. Broad
2. Tort – Scope of Employment
a. Apparent Authority
6. Time, Place Purpose
a. Master Intends Conduct
b. Employer Negligent in Hiring/Oversight
c. Non-Delegable Duty
d. Servant Purports to act on Principal’s behalf & Apparent Authority
Exculpatory Clauses – Damages v. Rescission
Employer can protect self with clauses;
but if past conduct known, may be liable
1. Insurance, Marketing Representatives
2. Puts 3rd Persons on notice that the signed document represents the final agreement. Remarks made by agent are not reliable.
3. Contract Issue
a. Reasonable Disclosure
4. Protection from Damages Suit
a. Rescission Action
b. Employers not permitted to benefit from fraudulent transactions.
5. Rules of Interpretation
a. Clauses, terms, words
b. Real Meaning
6. Exception to Exculpatory Rules
b. Knowledge and Encouragement
c. Accepts Benefits
d. Inadequate Supervision
Lingering Apparent Authority
Principal must notify all parties, customers, others about termination of agency relationship.
Duty to Inquire v. Reasonable Reliance
Undisclosed Principal – Principal may sue, with limits
a. Real Estate
c. Closely Held Businesses – Sole Proprietor incorporates, and then dissolves corp., leaving 3rd Party with a loss
2. Limitations – Cannot Enforce
b. Personal Service
d. Knowledge v. Mere Suspicion; Kelly Asphalt shows mere suspicion not enough; knowledge must be demonstrated
3. Principal’s Liabilities – Fairness to 3rd Parties
a. Authorized Transactions
i. Election Doctrine; Must sue agent or principal, can’t sue both.
ii. Majority – Decision locks in liability
iii. Minority – Grinder case
b. Unauthorized Transactions – Unusual Settings
i. Apparent Authority – Expanded view
ii. Inherent Authority – Broad view
c. Majority - Suit must include K + Principal – 2 Bites at the Apple Rule; BUT if only one part sued, then recovery only permits 1 Bite at the apple.
d. Grinder/Minority – Holds original Principal liable
4. 3rd Party Rights/Liabilities
a. Law of Assignments
b. No lawsuit permitted if agent claims no representation
c. 3rd Party Principal buys through agent where seller normally wouldn’t sell to 3rd party
d. Performance of Personal Services – Accounting, Legal
Liability of Agent – Contract Law
1. Disclosed Principal
a. Agent not liable
i. Assumes liability
ii. Signature/Implied Acceptance
2. Agent Liable
a. Partially Disclosed Principal – Use of Trade Name
b. Undisclosed Principal
Implied Warranty of Authority
1. Implied Warranty of Authority – Agent has implied warranty of authority to enter into contract, even though agent not a party to the contract.
2. Limitations – Express Exclusion
1. Unincorporated Association
a. See Little League club example; Telephone Assn. Case
b. Promoters are subject to liability
2. Preincorporation Transactions
Extent of Duty to 3rd Persons
Public Notice = Constructive Notice to all 3rd Parties (Seascape Case)
Non-Existent Principal – No Liability (Oregon Telephone Case)
One ratification gives agent apparent authority for future transactions.
Employer must have full knowledge of Agent’s conduct to ratify.
1. Tidy up an existing problem.
2. Solidify agreement that was originally defective.
Pattern of Application
1. Principal’s Conduct – Affirmance – After the Fact
i. Accepts Benefits
iii. Failure to Object/Punish Wrong/Silence
iv. Other Conduct Showing Acceptance
1. Objective Standard
2. Relation of Parties
i. Accept Benefits
ii. Retain Employee – after harassment charge
d. Special Circumstances
i. “Willfully Ignorant” – Imputed Knowledge
ii. Assumes Risk of Lack of Knowledge
2. Principal’s Knowledge – Must know the facts and circumstances
b. Imputed – Possible if action failed.
Termination of Authority – Important to Principal, Ends Liability
Concept and Effect
By Act of Parties
1. Expiration of Term
2. Accomplishment of Objective
3. Mutual Agreement
4. Unilateral Act
a. Power v. Right
i. Always has power to terminate
ii. May not have right to terminate
b. Irrevocable – Power Coupled with Interest; Exception
c. Fixed Term – Principal almost always has power to end relationship. May not always have the legal right.
d. No Fixed Term – Either party may end relationship; both legal power and legal right.
ii. Employer Contract
v. Agency & Employment Laws Converge
5. Termination By Operation of Law – Timing Issue
a. Death of Principal
b. Incapacity of Principal – Durable Power of Attorney
NOTE: Brief Incapacity DOES NOT Terminate Agency
c. Principal Declares Bankruptcy
d. War Declared – Very RARE
6. Effect on 3rd Persons – Lingering Apparent Authority
a. Must notify 3rd Parties of end of Agency relationship
b. Public and Direct Notice(s)
7. Employment Contracts
a. Strict Employer/Employee Relationship
b. Contract Theory Analysis
c. Implied Duty of Good Faith and Dealing
d. Power to Terminate; Subject to Liability
e. Tort Action
i. Wrongful Discharge; Possible Remedy
ii. Whistleblower Discharge
8. Quantum Merit – Century Supply Co. Case
a. Value of Payment of Expenses
b. Fair or Just Compensation
c. Reasonable Compensation OR Reasonable Opportunity to Avail.
a. Inform all known clients and customers
b. Advertise in newspapers
2. Compared with Other Businesses
3. Aggregate v. Entity Theories
a. Taxation – Aggregate Theory – Partnership is NOT an entity
b. RUPA – Partnership is an Entity
4. General v. Limited Partnerships
5. Uniform Partnership Act v. Revised UPA
Mandatory on P/S v. Gap Filling, Unless otherwise agreed to
1. Formal v. Informal
2. Intentional v. Unintentional
3. Early Approach
4. Today – Whether certain parties should be considered partners; See Ungrateful Brother case.
Litmus Test - Sharing of Net Income (Gross – Expenses)
Creates Rebuttable Presumption of Partner Status
b. Sharing Management/Control
c. Joint Ownership
d. Other Indicia
e. Partner v. Creditor/Employee/Supplier/Manager
Property Rights & Creditors Rights
1. Partnership Property v. Partner’s Property
2. Specific Partnership Property
a. Co-Owners – Co-Tenancy
Aggregate Theory - Undivided Interest in Property
c. Equal Use
d. UPA – Partners own Property
e. RUPA – Partnership owns Property
3. Entity Theory – Right to Possess and Use Property
a. Not Assignable
b. Not Attachable
c. Can only transfer interest in P/S, not assets of P/S
4. Interest in Partnership – UPA & RUPA – Interest Only
b. Profits & Surplus
a. Bought Into
b. Acquired with Partnership Funds
c. Intent of the Parties – Guiding Light
a. How was Property Purchased?
b. Accounting/Books – Listed as Asset?
c. Taxes Paid
d. Funds Used to Operate and Maintain
e. Use and Possession
1. Partnership Assets
2. Partner’s Assets
3. Majority Rule - Can go after personal property (individual assets) to receive credit.
4. Minority Rule & RUPA – Individual assets only AFTER partnership assets exhausted.
1. Partner’s Assets
2. Aggregate Theory – Can go after Partnership Property
3. UPA – Can’t go after Partnership Property
4. UPA Compromise – Partnership’s Assets
a. Assignment of Interest
b. Charging Order
5. RUPA – Generally Follows UPA
Secured creditor can pull P/S assets out of bankruptcy proceeding, sell assets, and recoup monies owed.
Courts have wide discretion with Charging Orders.
Dissolution & Termination
UPA – Any change in relation of partners.
1. Shows Vulnerability of Partnerships
2. Aggregate Theory
3. Impacts Continuted Operation of Business
1. Dissolution à P/S Continues (On Exam)
2. Winding Up à P/S Liquidates (Not on Exam)
2. Grounds for – Proper v. Wrongful
a. Term – Time Period
b. Undertaking – Goal Achieved
c. Express will with no definite term
d. Unlawful Event
f. Court Decree
ii. Guilty of Conduct Prejudicing
iii. Breach of Partnership
iv. Partnership only Losing Money
a. Continuation – Agreements
Other Class Notes
1. Behalf of
Marriage doesn’t create Agency relationship
Licensee v. Agent
Officers are Agents
Boards of Directors are not Agents
Parent/Subsidiary – 2 Arguments, use BOTH
1. Mere Instrumentality – Pierce the Corporate veil.
2. Agency where subsidiary acting on corporation’s behalf.
Indemnification does not apply to independent contractors.
Tort Law – Unholy Trio of Defenses
1. Fellow-Servant Rule – Principal not responsible for actions of servants.
2. Contributory Negligence
3. Assumption of Risk
2. Freedom to Contract
Stealing v. Clients Choice to Follow
Numerous Grey Areas
SC – Must demonstrate valuable information that can be protected.
1. If you leave firm and clients go after your departure, OK
2. Law firms cannot require restriction agreements
Acceptable Clauses – Must protect legitimate business interests
1. Customer Lists
2. Property Interests
3. Reasonableness: Time and Space
No Ongoing Relationship
Mutual Right of Control
Usually Not Work-Related
Usually group of individuals involved in common purpose – Libby v. Perry
Active Participants Liable
Non-Active Participants not Liable
C/L – Associations not liable
Old Rule: Each party responsible for other’s actions.
New Rule: Not responsible for other’s actions. Business or Non-Business
Coming & Going Rule
Old Rule – If employee injures someone while traveling to/from work, no liability
Exception – If boss tells you to pick something up on way to/from work
Exception – Vehicle required for work. Scope of Employment.
Future – Rule may change
Written Power of Attorney (King v. Bankerd)
Actual, Express Authority
Did Attorney act without authority?
Breach of Trust
CT – Looks beyond POA and reviews letter showing no interest in disposing of property.
Professor Raymond J. Wyrsch
Exam Notes by
Christopher S. Lee
I. Scope of Employment
a. An agent is only authorized to employ those means for the purpose usual to the business. The purchaser cannot safely assume that the agent has authority to make extraordinary guaranty or warranty.
b. A principal cannot be bound by the unauthorized acts of an agent.
c. The owner of a car is not liable for injuries caused by the negligence of an agent unless the agent was engaged in the owner’s business and acting within the scope of employment.
d. A bookkeeper is not considered to have implied authority to use a car as a traveling salesman.
e. The acts of the employee must be authorized to assign liability to the principal. Unauthorized acts do not impute liability on a principal.
II. Smoking/Scope of Employment
a. The act of smoking is a matter purely personal to the servant.
b. The master is not liable for damage caused by a servant’s smoking when temporarily off duty, or not in the general course of employment.
c. Some cases hold a master liable if smoking creates an unreasonable danger to a 3rd person’s property.
d. Negligence can be imputed to the bailee if damage is caused.
e. Negligence can be imputed to the master if the servant has a propensity to smoke – ratification of a servant’s habit.
III. Scope of Employment/Vicarious Liability
a. Reasonable for the Jury to believe.
b. Was the deviation substantial enough to constitute an abandonment of employment?
c. Resumption of duties = Doing Employer’s business.
d. Accidents occurring within the normal spatial bounds of employment are considered vicarious liability.
e. Examine the specific times set for scope of employment.
f. Examine the specific acts set for scope of employment.
g. An employer does not have the duty to supervise an employee whose actions are outside the scope of employment.
h. In furtherance of the principal’s interest.
IV. Trade Secrets
a. There is an implied contract between an employer and employee that after the service, use of information gained while in service will not be used to the detriment of the former employer.
b. Fraud - See Hydro Level v. American Society of Mech. Engineers
a. Expressed intention of the parties.
b. Consideration of words and acts.
c. Silence by Principal indicates acceptance.
d. Agency v. Contract
i. School is considered a contractual relationship.
ii. Students buy education. Not master/servant.
VI. Undisclosed Principal
a. Authority and Permission.
b. If an agent fails to disclose a principal, the 3rd party may hold the principal liable.
VII. Apparent Authority – Franchises, Dealership Cases – Texaco
a. See Crinkley v. Holiday Inn Case - Appearance
b. Arises when agent is placed in a position that a person of ordinary prudence believes the agent is authorized.
c. The principal is liable for the acts of an agent and apparent agent for breach of warranty.
d. Apparent authority can be created through words or conduct leading the 3rd person to reasonably believe the principal consents to the actions.
VIII. Agency Termination
a. Requires proper notice.
b. Contrast agency with supplier relationship.
c. Fixed commissions indicate agency relationship.
d. Allows Principal to end potential for liability.
IX. Ambiguous Principal
a. See Clapp – Mall Case
b. See Cargill and Simpson Cases – Creditor/Debtor v. Agency Relationship
c. See Norby – Insurance Coverage
d. See Ripani – Actual Authority over loan
a. Associations cannot create Agency relationship. Individual must be liable.
b. See Libby Case
c. See Oregon Telephone note case
XI. Independent Contractor v. Employee
a. Independent Contractor v. Servant.
b. Control of actions.
c. Scope of employment.
d. Time, actions.
e. Payment and withholding.
f. Borrowed Servant
i. Principal is not responsible for actions of a borrowed servant.
ii. The master’s responsibilities cannot extend beyond the limits of the master’s work.
XII. Agent’s Duty
b. Disclosure of agency and identity of principal.
a. Express or inferred.
b. Occurs when principal has knowledge of material facts of unauthorized transactions, and fails to disaffirm.
c. Equivalent to an original authorization and confirms what was originally unauthorized.
d. Actions must be in furtherance of employment.
e. Employer must ratify employee’s actions.
f. Agent ratifying contract without agreement or authority from principal will be bound.
XIV. Worker’s Compensation
a. Must be made by entitled party, or legal agent, not by volunteer.
b. Ratification validating unauthorized act authorizes transaction.
c. Claim filed on widow’s behalf, without authority, is invalid.
d. Principal must give authority to agent to ratify act.
XV. Partnership Formation
a. Not limited to agreement to share profits.
b. Consider ownership of title, real and personal assets.
XVI. Partnership Property
a. Consider Use of Property.
b. Consider Intent of Partners use of property.
c. Was the property acquired with the intent of use by the partnership?
XVII. Existence of a Partnership
a. Nature and contribution of each of the parties.
b. Share of the profits indicates partner status.
c. Wages of employee, rent to landlord is not considered partner status.
d. Degree of management of the enterprise.
e. Sharing of both profits and losses.
f. In termination, each partner should be repaid contributions, allocated by interest in the partnership.
a. Contrasted to Joint Venture – See sharing of profits, management.
b. Contrast partnership assets v. activities.
c. Where the property is kept for a partnership, no single partner can sell the property.
d. One partner cannot bind the partnership to a contract unless it is within the scope of the partnership dealings, or falls within the ordinary business transactions of the partnership.
e. One partner is presumed to act for all other partners if it is a decision within the scope of the business of the partnership.
f. One partner cannot benefit at the expensive of the partnership.
XIX. See Also Cases
a. Senor v. Bangor Mills – “Grey area” case
b. Coker – Apartment conversion liability case.
© CHRISTOPHER S. LEE 2001