AGENCY _ PARTNERSHIP Prof. Cohen Spring 2009 Brendan by yantingting


									                                    AGENCY & PARTNERSHIP
                                         Prof. Cohen
                                         Spring 2009
                                       Brendan Radke


Building Blocks of Agency
   - Agency Focuses on multi-party relationships – there are at least three parties involved.
   - Agency Triangle:
          o Principal: someone on whose behalf the agent is to act
          o Agent: acts
                 On behalf of the principal
                         When you’re in possession of property for purposes that aren’t
                            your own, you’re doing it on behalf of someone else.
                        A leasee / leasor, or bailee / bailor relationship is an example
                            where there is not “on behalf of” possession of a piece of
                 Subject to the principal’s control
                        An example of a relationship that isn’t subject to control is that of
                            a trustee / beneficiary… the beneficiary holds equitable title to
                            the assets, but does not control how those assets are managed.
                        This is perhaps the “weakest” of the three prongs – some courts,
                            like in Carrier (below), really ignore it… but others require specific
                            proof of it to establishes agency.
                        In the Hunter Mining case, we see that even substantial control
                            doesn’t necessarily lead to agency… it is control of profit that will
                            be most important. A seller exercising control over a buyer /
                            distributor will not be deemed a principal by trying to protect its
                 By mutual consent (consent of both principal and agent)
                        An agency relationship must be voluntary.
                        An example of an involuntary relationship would be a
                            guardianship. The court, not you, establishes the relationship.
                        Consent is not about knowing that it’s an agency relationship – it’s
                            about agreeing to the aspects of the relationship.
          o Third Party: interacts with the agent in some way that entitles him to some sort
            of claim on the Principal – usually a contract, or tort.
Why Do We Need Agency?
   -   Agency law reduces transaction costs. Makes possible transactions that wouldn’t occur.
   -   Organizational Agency: Principals use agents because they have skills or knowledge that
       principal doesn’t have.
   -   Transactional Agency: If it’s not possible or the Principal to interact with a third party,
       agency make the transaction possible.
Collusion Problem
   -   Any two of the parties in the agency triangle could collude against the third. This risk of
       collusion comes up again and again as policy justification for various rules in agency.
   -   Principal and Agent collusion:
           o The P enters into a contract with a TP through an A. The contract ends up cost
               the P money. He can the A can agree to say that the A wasn’t authorized to make
               the contract, and thus the P isn’t liable.
           o The Judgment Proof Problem: a related issue – a principal who is engaging in a
               dangerous activity could otherwise shield himself from liability by hiring an
               insolvent agent to do his work. Agency law addresses this through vicarious
   -   Agent and Third Party Collusion
           o Agents could collude with third parties against the principal, as wel.
   -   Principal and Third Party Collusion
           o Suppose an agent is working on commission, with a job to find a third-party
               buyer for the principal. He finds a buyer, but the third party and the principal
               collude to cut him out of the deal by engaging in the transaction on their own.
Carrier v. McLlarky (NH 1997)
   -   A contractor (A) agreed to return a woman’s (P) broken water heater and try to get a
       factory rebate.
   -   This case illustrates the on behalf of prong of agency – if you’re taking property for
       purposes other than your own, you’re doing it on behalf of someone else.
   -   Also, control: she did not explicitly control his attempt to return the heater, but she
       could have. Control follows ownership. The choice not to exercise control doesn’t mean
       there wasn’t any.
   -   This case is found for the defendant because a breach is not established – the defendant
       did not guarantee a rebate, only that he would try.
Gratuitous Agency
   -   You can have gratuitous agency. This is a very important distinction between agency
       and contract law, in which you cannot have gratuitous contracts. An agreement which
       could not be enforced under contract law might be enforceable under agency law.
   -   The Carrier case is an example of this – he agreed to return the heater for free.
   -   The Violette case (below) is another example of gratuitous agency.
Violette v. Shoup (Cal. App. 1993)
   -   Violette (P?) is a neighbor of Shoup (A?). He asks him for advice about tax shelter, and
       Shoup recommends an investor who subsequent loses him money. He sues Shoup,
       saying Shoup had a duty of care as an “agent.”
   -   The court says that no agency relationship was created. Why? “Friendly Intentions” are
       not enough.
   -   How to reconcile Violette and Carrier?
         o A few possibilities:
                  Courts are sometimes outcome-driven. Here, a finding of agency would
                    seem inequitable, considering this was just a friendly conversation
                    between neighbors.
                  The principal in Carrier was in more vulnerable a position: She had no
                    knowledge of heaters or how to return them. Violette, arguably, was a
                    sophisticated person who was not in such a vulnerable position.
                  An asset was given in Carrier: This is necessary to find an agency
                    relationship (think of an attorney and a client), but perhaps it evokes a
                    lower standard, since the giving of the asset evidences the agency.
Third Restatement Definition of Agency § 1.01
   -   Agency is the fiduciary relationship that arises when one person (principal) manifests
       assent to another person (agent) that agent shall act on principal’s behalf and subject to
       principal’s control, and the agent manifests assent or otherwise consents so to act.
Duty of Care of Agent
   -   Subject to any agreement with the P, an A has a duty to the P to act with care,
       competence, and diligence normally exercised by an agent in similar circumstances
   -   Special skills or knowledge are taken into account. If an agent claims to possess special
       skills or knowledge, the agent has a duty to act with care, competence, and diligence
       normally exercised by agents with such skill or knowledge.
Clapp v. JMK / Skewer, Inc. (Ill. App. 1985)
   -   A suit against the owner of a shopping mall for food poisoning by one of its tenants.
   -   The mall exercised considerable control over its tenants, and made a cut of their
   -   But agency is not found. Why?
   -   True agency requires that an agent’s function be carrying out the principal’s affairs.
MD & Associates and Paul D. Hogg v. Sears, Roebuck & Co (Mo. App. 1988)
   -   Was Fraley the agent of Hogg (plaintiff, landlord of defendant Sears) in picking up his
   -   At issue is whether timely notice was sent in order to extend a lease.
   -   Hogg never saw the notice, because Fraley had lost it… but because Fraley received it,
       Hogg is deemed to have seen it.
   -   This is an instance of implied agency through conduct (see below). She had actual
       authority based upon a course of conduct of picking up his mail.
   -   Although it may seems as though Sears is unfairly “taking advantage” of this relationship
       – after all, they have never met nor heard of Fraley, yet accept her name on the mailing
       receipt – but we want people in Sears’ position to be able to rely on agency, to reduce
       transaction costs. We don’t want cheating on behalf of principals.
Hunter Mining Laboratories v. Management Assistance, Inc. (Nev. 1988)
   -   Hunter Mining Labs is suing MAI on the basis that Hubco and Data Doctors, two licensed
       distributors of MAI equipment, did not fulfill an obligation to them.
   -   So were Hubco and DD agents of MAI? No, says court. Question of agency relationship
       vs. sales relationship
           o The control principle of agency doesn’t mean that an agency relationship exists
               every time one party has a contractual right to control some aspect of another
               party’s business.
           o This was just a buyer / seller relationship… Hubco and DD were not acting
               primarily for the benefit of MAI in this undertaking.
           o Setting of price might be deemed important – MAI was not controlling the price
               in these cases.
Sales v. Agency
   -   If an entity is a independent business, reselling an item for its own profit, it won’t be
       seen as an agent of the remote (first) seller.
   -   The “on behalf of” prong will not be satisfied.
   -   A “straw man” or “shell” sales entity might be seen as an agent. The Cargill case is an
       example of how much control might be required in order to have a finding of agency.
Jenson Farms v. Cargill, Inc. (Minn. 1981)
   -   Was Cargill the principal of Warren based upon the substantial financing and control it
       exercised over it? Warren’s creditors sought damages against Cargill, a huge agri-
   -   See pp. 9-10 of the Class Notes for professor’s theory of the case.
   -   This is a debtor / creditor situation. Warren was largely financed by Cargill. This case
       demonstrates that when a debtor goes under, a creditor who exercises too much
       control can be viewed as a principal.
   -   Restatement (Second) § 14(o): Security Holder becoming a principal
           o A creditor who assumes control of his debtor’s business for the mutual benefit of
                himself and his debtor may become a principal with liability.
           o Comment A: exercising veto power does not make you a principal in of itself…
                but if you take over management of the debtor’s business, wither in person or
                through an agent, and direct what contracts may or may not be made, you may
                become a principal.
   -   Page 32, casebook: facts that court used to establish Cargill as a principal. Considerable
           o Warren was not allowed to act on its own. A lot of these, in isolation, do not
                seem unlike a typical creditor / debtor relationship – for instance, the right to
                come on the premises… but in sum total they went beyond the normal
                relationship. Control, veto power… directing where new contracts go tips the
   -   Side note: Why not use apparent agency here, based on the fact that Cargill’s name
       appeared on items sent to the farmers? They don’t argue it here, but it’s quite plausible
       that Cargill would have gotten itself on the hook by putting its name on
   -   Second half of the analysis: Cargill as Buyer from Warren
          o Cargill was really using Warren as a means to get grain from the farmers… In that
            respect, Warren was really acting primarily for Cargill’s benefit, of course
            keeping in mind that Cargill was also completely financing them.
          o Restatement (Second) § 14(k): one who contracts to acquire property from a
            third person and convey it to another is the agent of the other only if it is agreed
            that he is to act primarily for the benefit of the other and not for himself.
Debtor / Creditor v. Principal / Agent
   -   Many creditors feared that the application of § 14(o) would make lending much riskier,
       in that it exposed creditors to liability as principals. But this has not occurred.
   -   In some ways, in the debtor / creditor situation the “control” prong can subsume the
       “on behalf of” prong. That is, it didn’t appear that Warren was acting on behalf of
       Cargill, or primarily for Cargill’s benefit, but there was such control that agency was
The Ambiguous Principal
   -   There can be difficulty in identifying the principal when the facts seem neutral on just
       who the agent is acting for.
Thayer v. Pacific Electric Railway (Cal. 1961)
   -   Whose agent was the Railway employee when he wrote on a bill of lading that there
       were damages to certain shipped property?
   -   This matters because the writing, acknowledging the damage, could be deemed to be
       “notice” of the damage, timely filed, in order to properly make the claim.
   -   But in order to be notice, it had to be from the plaintiff (whose property was damaged).
       And in order to be from the plaintiff, the employee would have to be deemed his agent
       when making the writing.
   -   The court finds that it was permissible to find that the employee became the plaintiff’s
       agent for the purpose of writing the notice on the bill of lading.
           o What about dual agency? Couldn’t the RR argue that their employee couldn’t be
               two agents at once (conflict of interest)?
           o Restatement (Second) § 14(L): if you conduct a transaction between two people,
               you may be an agent of both, or only one, or the agent of the other… you can
               switch over.
                   Comment: there is an inference that an employee remains the agent of
                      the employer. But this can be overcome.
   -   Bottom line of this case: You can have an agency relationship for ten seconds with a
       person that is employed by someone else!
Insurance and Agency
   -   There are two arguably irreconcilable cases dealing with insurance.
   -   The question really breaks down to, who is the employer, administering the plan, an
       agent of? The employee, or the insurer? One court finds the former, another the
   -   The court in the Kilbourn case find that the interest of the employer are more aligned
       with those of the employee… but is this true? Wouldn’t the employer want to save
   -   Reconciling these cases: Kilbourn is about coverage. Norby is about the receipt of notice.
       Perhaps courts are more amenable to findings agency of the insurer for purpose of
       receiving items, but not so much for issues of coverage. We’re worried about employers
       being too generous with their interpretations of coverage. There is a far greater risk of
       collusion in the Kilbourn case than in the Norby notice instance.
           o A second way of reconciling these cases would be to look at the result – in the
               Kilbourn case, the employee can go after the employer for the bad advice.
           o In Norby, a finding for the insurer arguably would have given it a windfall. The
               mistake allowed it to deny coverage, whereas in the Kilbourn case the employee
               would have been indemnified anyway, so the result wasn’t inequitable.
Kilbourn v. Henderson (Oh. App. 1989)
   -    The question in this case is whether an administrator of a company’s health plan can be
       considered an agent of the insurer. The administrator told a man he would be
       reimbursed for seeking medical treatment for alcoholism, but then was denied
       coverage. He claims to have acted in reliance on this.
   -   Here, the court says no. Administering a health plan does not make you an agent of the
       insurer. The administrator was not acting on behalf of CAN.
Norby v. Banker’s Life (Minn. 1975)
   -   Hoffman Brothers failed to forward Norby’s insurance forms to Bankers Life for to sign
       up his child for coverage. Banker’s Life therefore denied a claim when the child needed
   -   Norby claimed that Hoffman was the agent of the insurance company for the purpose of
       accepting the forms. The trial court found for Norby!
   -   To the extent that the employer, with the consent of the insurer, performs the functions
       of the insurer, it may properly be considered the insurer’s agent.
   -   It is unreasonable and inequitable to frustrate the employee’s expectations because of
       an employer’s negligence in administering the insurance agreement.
   -   These are at least four-party situations…
   -   Immediate Principal: the agent who hires the subagent
   -   Remote Principal: the principal of the immediate principal.
   -   The remote principal also has some level of relationship with the subagent, since he
       either implicitly or explicitly must consent to the subagent.
   -   Consequences of Subagency:
           o Tort: RP is vicariously liable to a Third Party (TP) for torts of the Subagent (SA)
           o Contract: RP liable for authorized contracts made by SA
           o Indemnity: PR liable to SA for indemnity.
           o Payment: the RP has no duty to pay the SA if the Intermediate Principal doesn’t
               pay the SA! This one is the exception… perhaps it’s an intuition of courts that the
               RP shouldn’t interfere between the SA and the IP.

   - Summary: Duty to indemnify, Duty of Defense, Duty of Care, Duty of Fair
      Dealing and Good Faith,
Rights and Duties Between a Principal and Agent
   -   A large part of this issue is flushing out what agency law adds to contractual law, since
       most of these cases are contractual.
Admiral Oriental Line v. US (2d. Cir. 1936)
   -   Admiral Oriental is the subagent, hired to man the US’s boat.
   -   Atlantic is the Immediate Principal
   -   US is the remote principal.
   -   A typhoon causes a total loss. The cargo owners bring suit against Admiral and Atlantic
       for the damage to their cargo.
   -   Why is subagency important to this case?
           o Agents get reimbursed for their expenses. Contractors do not. This is simply
               default – of course, you can contract for indemnification outside of agency.
   -   Atlantic is found to be an agent. They satisfy the three-prong test.
           o They were shipping something for the US, with the US’s ship
           o And there was an express contract giving the US a lot of control.
   -   Why do we want to impose something beyond the contract?
           o Perhaps we want to place the burden of risk on the party most able to bear it:
               the principal.
                     For instance, it was the US’s choice to sail during typhoon season.
           o Putting the burden on the principal allows them to contract out of it these
   -   Also, perhaps we are concerned with a risk of collusion between the principal and
       immediate principal against the subagent, or the principal and a third party to run up
   -   Indemnity: if the agent doesn’t do something in good faith, or are negligent, then
       they’ll be liable. Otherwise, they’ll be indemnified.
           o But even if they are negligent, if they are following the orders of the P in good
               faith, they’ll still be indemnified. “Exception to the Exception.”
Duty of Principal to Indemnify Agent:
   -   Third Restatement § 8.14: Principal has a duty to indemnify an agent
           o In accordance with any terms of any contract between them, and
           o Unless otherwise agreed,
                    When the agent make a payment
                           Within the scope of the agent’s actual authority, or
                           That is beneficial to the P, unless agent act officiously [in good
                              faith] in making payment [believing itself to be authorized] or
                    When the agent suffers a loss that fairly should be borne by the P in light
                      of their relationship.
   -   A danger of the duty to indemnify: once indemnity is known to the agent, there is a risk
       of his running up costs against the Principal.
           o So we indemnify only for reasonable expenses.
   -   In regards to torts, the agent can be indemnified for torts it commits if
           o His conduct was within his actual authority, and
           o He was unaware that the conduct was tortious.
   -   No duty to indemnify exist for:
           o Payments made or expenses incurred that are neither within the agent’s actual
               authority nor of benefit to the principal
           o Losses resulting from agent’s negligence or from acts outside the agent’s actual
           o Losses resulting from the agent’s knowing commission of a tort or illegal act.
   -   Protection against third-party claims:
           o Duty to Defend: Providing or paying for a defense including reasonable
               attorney’s fees and other costs of litigation, and
           o Paying for liability.
           o To invoke this, agent must give the P reasonable notice of the claim, allow the P
               to manage the defense, and cooperate with the P in the defense.
                    If the A fails to notify the P, the P is not responsible for the cost of
                    Will be responsible for A’s liability only if A has made a reasonable
Duty of Care
   -   An employer is subject to the common law duty of care toward its employees.
   -   Employer must maintain safe working conditions – it cannot delegate away ultimate
       responsibility for working conditions.
   -   Fellow Servant Rule: exempts the employer for vicarious liability for torts of one
       employee against another. Those who contract to undertake employment for another
       takes upon himself the natural and ordinary risks of the performance of such services.
           o The idea is that self-regulation by employees will bring more safety than
              indemnification by employers.
           o Worker’s Compensation has changed the picture a bit – you pay premiums to an
              insurer to cover injuries, which are paid on a schedule.
Duty of Fair Dealing, Good Faith
   -   Restatement (Third) § 8.15: Principal has a duty to deal with the agent fairly and in good
       faith, including a duty to provide agent with information about risk of physical harm or
       pecuniary loss that the P knows, has reason to know, or should know are present in the
       agent’s work but unknown to the agent.
   -   Although the employer and employee’s interest should generally align, there are times
       when they might diverge.
           o For instance, management knows the company is going under, and thus would
                have incentive to shift responsibility to the agent, leave them holding the bag.
           o Or, management could be working against the company’s interest…
Taylor v. Cordis Corp (S.D. Miss. 1986)
   -   The agent is a sales rep who claims that the principal, his employer on whose behalf he
       sells, knew of flaws in the design of the product that cause his reputation as a salesman
       harm when the flaws ended up causing the merchandise to be returned, etc.
   -   The court here does not find a violation of the duty of good faith.
           o There is a duty to provide agent with any information which might subject the
                agent to physical or pecuniary loss in dealing with the product.
           o But the court feels that Cordis acted reasonably in its efforts to indemnify the
           o The duty to inform the agent attached only when the company knew the
                specific product defects posed a threat of harm to consumers and to the
                reputation of its sales staff.

Duties of Agent to Principal
  - Summary: Good Conduct, Obedience, Duty to Indemnify P for Misconduct
     Losses, Duty to Account, Loyalty, Care, Disclosure,
Non-Fiduciary Duties
  - Good Conduct
          o Duty not to act in a manner that makes continued friendly relations with the P
          o Must not bring disrepute to the P.
   -   Obedience
          o To obey all reasonable directions of the P.
          o This is unique to agency law in the commercial world – distinguishes agents from
            all other fiduciaries.
          o There is no duty to perform acts which are illegal, unethical, or unreasonable.
   -   Duty to Indemnify Principal for Loss Caused by Misconduct
          o A servant is subject to a duty to indemnify the master for damages the master
            had to pay resulting from the servant’s negligence while acting within the scope
            of employment.
   -   Duty to Account
          o Restatement § 382: an agent has a duty to keep and render accounts.
Fiduciary Duties
   -   Loyalty, Care, Disclosure (Disclosure is largely subsumed into either care or loyalty)
   -   When Do Fiduciary Duties Attach?
          o   Martin v. Heinold Commodities (Ill. 1987)
                     The question of whether fiduciary duties attach in the pre-agency phase
                      arose in the context of a broker who did not disclose is relationship with
                      a fund, in which he had incentive to steer his clients toward it.
                     This case turned on whether, as a matter of law, the duties attached. The
                      appellate court reversed a finding of summary judgment for the plaintiff,
                      who felt that the duties should attach in the bargaining stages.
                  Normally, the fiduciary duties don’t attach under during creation of the
                   agency relationship. But there are exceptions to this rule, and trial was
                   necessary to establish facts on whether this was the case here.
                Dissent: agency law shouldn’t handle this – this was a misrepresentation.
-   Duty of Disclosure
       o Must disclose all facts relative to subject matter that may be material to the
           decision that the P is going to make.
                Something is material if a reasonable person would consider it important
                   in engaging in this transaction.
       o If an agent possesses information and has reason to know that the P may need
           or desire the information, the agent has a duty to provide the information to the
           P. This duty underlies the attribution rule that binds a P on account of
           information possess by its agents.
       o Olsen v. Vail Associates Real Estate (Co. 1997)
                  The defendant was a real estate company (agent). The plaintiffs
                   (principal) were landowners whose property was up for sale. Their
                   decedent father had previously rebuffed all offers to buy the land. Their
                   neighbor had recently sold his land to the same buyer. It was very
                   important to a buyer to own both the plaintiff’s and landowners’ land.
                   Vail knew of the sale, wasn’t working for the neighbor.
                The neighbor’s plot got a significantly higher price than the plaintiffs.’
                   They sued, saying that Vail knew that the buyer was negotiating with the
                   neighbor, and that this was material to their decision to sell for the price
                   they did.
                The court feels that the fact of negotiation wasn’t material, and thus this
                   wasn’t a breach. The plaintiffs failed in carrying their burden in showing
                   that this knowledge would have affected their asking price.
                But their reasoning was arguably quite flawed – they relied on the fact
                   that the neighbor’s past negotiations hadn’t affect the father’s decision
                   to sell… but the father’s dead now! Court ignores this fact.
-   Duty of Loyalty
       o Restatement (Third): An agent has a fiduciary duty to act loyally for the P’s
           benefit in all matters connected with the agency relationship.
       o Fiduciary duties are default rules that can be contracted out of.
       o Entails:
                The agent may not receive unapproved benefits from his efforts on
                   behalf of the principal. Basically this means no Self-Dealing.
                Has a duty to safeguard the P’s confidential information and not to use
                   that information for his own benefit or for the benefit of others.
                The agent has a duty not to compete with the P is any matter within the
                   scope of the agency relationship.
                No acting for others who have conflicts of interest with the principal.
                An agent may not be an “adverse party” – that is, be the other party in a
                   transaction with his P.
  -   Gelfand v. Horizon Corp. (10th Cir. 1982)
          o  Gelfand (A) was a real estate agent for Horizon (P). They had previously withheld
            his commissions, but these were later granted to him.
          o Horizon then sues for a breach of the duty of loyalty. He had set up a dummy
            corporation through his family to buy a piece of land that he knew was
            substantially undervalued.
          o He used his knowledge of benefit himself. Self-dealing. It also was a failure to
            disclose, which, as we mentioned, is really subsumed under these fiduciary
          o One other facet of this case was the question of whether the company could go
            after his family’s portion of the profits. They owed no fiduciary duty to Horizon.
            However, if Horizon could show that they were aware that this was a wrongful
            self-dealing situation, they could get unjust enrichment awards.

Vicarious Liability

Respondeat Superior
  -   This doctrine imposes strict, vicarious liability on a principal when
           o An agent’s tort has caused physical injury to a person or property
           o The tortfeasor agent meets the criteria to be considered a servant (employee)
                of the P, and
           o The tortious conduct occurred within the servant / employee’s “scope of
  -   It’s strict liability in the sense that the P is liable even though he is not at fault… but it
      must be distinguished from tort strict liability, in that the agent must have done
      something wrong.
  -   This should be distinguished from direct liability that P’s can face – negligent hiring of
      agents, directing agents to do unlawful things…
  -   Vicarious liability is in addition to, not instead of liability of the agent – the agent is also
      liable for the wrongs.
           o Distinguish this from contract law – in contracts, it’s only the P who is liable.
           o This makes sense – if only the P were liable, then being a servant / employee
                would make you immune for your own wrongdoings.
  -   Key Point: only certain kinds of agents give rise to vicarious liability. Agency in of itself is
      not sufficient to find vicarious liability.
           o Traditionally these were called servants. The Third Restatement abandons this
                are calls it “employer / employee”
           o Lawyers, for example, are not servants. Confusingly, these are known as
                “independent contract” agents!
           o Independent contractors, in the typical sense, are not servants, or agents.
  -   Restatement (Second) § 2: (1) Master, (2) Servant, (3) Independent Contractor
-   Third Restatement: An “employee” is employed by an employer 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.
-   Rationalizations:
        o Control: the P is perhaps in a better situation to avoid liability – controls the
            duty, the choice of agent… but then why not simply find liability when the P is
                 Control over physical details is the most important factor when dealing
                    with servants… details over work, how it is done, directions
        o Profit: if the P is the one to profit from the relationship, he should bear the risks
                 When dealing with nonservant agents, control over profits is more
                    important – things like price, cost.
        o History
        o Evidence: It can be difficult to determine which agent of the P caused a harm… it
            might just be easier to hold the enterprise responsible
        o Deep Pockets: typically a P will have more resources. A’s might be judgment-
-   Arguments in Favor of Vicarious Liability
        o Two basic assumptions:
                 Control: P’s are generally in a good position to observe, monitor, and
                    exercise control over the agent
                 Judgment Proof Problem: many agents do not have sufficient assets to
                    withstand personal liability
        o Shavell: Precaution Taking and Liability Evasion
                 Typically, P’s have more of an economic incentive to take precautions –
                    the benefits from the extra cost of the precaution is greater than it is for
                 Furthermore, lack of liability would incentive the hiring of judgment-
                    proof agents to commit your torts for you. We do not want this outcome.
        o Activity Level and Economies of Scale
                 As in torts, imposing this liability on risky behavior minimizes such
                 This really is independent of the question of whether the A is judgment
                 This induces employers to take into account the risky behaviors they
                    engage in.
        o Insurance
                 Employers may be in a better position to get insured.
        o Bonding and Control
                 Even though employees are judgment-proof, generally, the potential of
                    future employment is an incentive for employees to act responsibly.
        o Employee Agency Costs
                 If employees were the only ones liable, then they might take too many
                    precautions, instead of too few, because they can use the resources of
                  the employer with no cost to themselves in order to guard against the
-   Vicarious Liability Cases
       o Heims v. Hanke (Wis. 1958)
                 Plaintiff slips and falls on icy sidewalk. Defendant’s nephew, a child, was
                  helping him wash his car, and spilled water on the sidewalk in making
                  trips to and from the house.
                 Is defendant uncle liable for his nephew’s negligence? Yes.
                       The nephew was his servant for the purpose of washing the car.
                          One volunteering service without any agreement for or
                          expectation of reward may be a servant of the one accepting such
                 So we see here, the employee-employer relationship can exist even
                  within family situations.
       o Sandrock v. Taylor (Neb. 1970)
             Plaintiff are heirs of decedent, who was a passenger in defendant’s car.
             Another defendant was the driver of a milk truck. The two collided at an
             Decedent had asked the defendant to take him to town to fix his
              mower… so was the driver his agent, and the negligence therefore
              attributable to him?
             Or was this simply a “host-guest” situation, rather than agent-principal?
                   There was no evidence that this was anything but gratuitous, that
                      there was any control over the car, or that the defendant had
                      agreed to be subject to such control.
                   There is a general rule that a passenger will not be liable for the
                      driver’s negligence, except where it’s either a joint enterprise, or
                      agency / principal situation (the passenger is in control of the
-   Imputed Contributory Negligence
       o Sometimes the principal wants to be the plaintiff – but contributory negligence
         can bar his suit.
       o A master is barred from recovery against a third person who negligently caused
         a loss to the master if the servant also was negligent in the accident.
-   Control’s Role in Vicarious Liability
       o We see from both Heims and Sandrock that control is important in the vicarious
         liability determination, particularly as it pertains to drivers of automobiles. The
         extent of the control is important.
       o Courts will look to see whether you are simply a “guest” in the driver’s car, or if
         the driver is operating the vehicle subject to your control.
       o But, control is not everything. For instance, schools are not vicariously liable for
         the torts of their students, despite being in control of their behavior.
       o Recall that we also need consent, and on behalf of.
                 Implied consent: consent need not be specific – for instance, if you get
                  out to push someone’s car without their request, if they do not say stop,
                  their consent is implied.
-   Co-Agents
       o A foreman wouldn’t be vicariously liable for the torts of his workers… they’re
         both co-agents working for a principal.
-   The Independent Contractor Exception
       o § 220 Restatement Factors for finding employee or independent contractor
              Extent of control that the agent and the P have agreed the P may
                exercise over details of the work (more control, more likely to be
              Whether the agent is engaged in a distinct occupation of business (more
                distinct, less likely to be employee)
              Whether type of work done by the agent is customarily done under a P’s
                direction (employee) or without supervision (non-employee)
              The skills required in the agent’s occupation (the more skilled, the less
                likely to be an employee)
              Whether the agent or the principal supplies the instrumentalities
                required and the place in which to do it.
              Length of time during which agent is engaged by P (the longer, the more
                likely to be an employee)
              Whether paid by the job or by the time worked (time is employee, by
                the job is contractor)
              Whether the agent’s work is part of the principal’s regular business
              Whether they believe they are creating an employment relationship
              Whether the P is or is not in business.
-   Kane Furniture Corp v. Miranda (Fla. App. 1987)
       o At issue is whether the owner of a furniture store can be held vicariously liable
         for the negligent accident caused by an employee of a carpet layer who
         operating within the furniture store. Was the carpet layer a servant / employee,
         or an independent contractor?
       o Trial court erred in finding that Perrone (the carpet installer) was his servant and
         Kraus (the man who worked for Perrone, who caused the accident) was his sub-
       o The court goes over the Restatement (Second) factors of whether one is an
         employee or not. The extent of the control is the most important factor. Perrone
         didn’t report to anyone at Kane, had total discretion in contracting out
         installation jobs. Kane only gave a few instructions, like no drinking on the job.
       o See Class notes, pp. 28-29 for details of each prong.
-   The Car Accident Cases
o “Management and operation of the employee’s automobile” is an important
  factor… but it is not dispositive! The question of whether one is an independent
  contractor is a complex analysis.
o Soderback v. Townsend (Ore. App. 1982)
       This is a travelling salesman instance. The question is, again, is he to be
         considered a servant, or an independent contractor?
       The court focuses on the level of the control that Quasar (defendant
         company) exercised over the salesman’s travel. They find that there was
         not sufficient control over how to drive, when the drive, what routes to
       Quotes the Supreme Court: “Person employing another to achieve a
         result but not controlling or having right to control details of his physical
         movements is not responsible…”
       Only piece of evidence presented was that the salesman described
         himself as “working” for Quasar.
o Hunter v. RG Watkins & Son (NH 1970)
       Davis, who caused the accident, was an employee of RG Watkins. He was
         driving his own car at the time of the accident.
       He was operating a work truck which broke down. He needed to drive to
         get a part. He was told to get the part and bring it to work the next day.
         He made a couple personal stops along the way.
       Accident happened at the end of the day while he was on his way back
         to apartment.
       The employer is held liable, despite the fact that the employer in this
         case lacked control of the method by which employee operated his car.
         Control doesn’t in of itself make the employee not an independent
o Sandrock v. Taylor (Neb. 1970) (we saw this case earlier)
       Was Taylor an independent contractor, or an employee?
       Taylor owned his own truck, and it was operated at his own expense. He
         had complete liberty to use his own discretion and judgment as to the
         method and manner of performance
       But the court here finds that it was permissible to find that he was an
         employee rather than an independent contractor. Why?
       The employees of the co-op had formerly operated under the same
         conditions. The court emphasizes that you cannot insulate yourself from
         the responsibilities of an employer by simply calling someone an
         independent contractor.
       Factors in finding them to be “employees:”
              Exclusivity: Could only work for this particular employer
              Termination Clause: the co-op could fire them at any time for any
                  reason. Employment is generally “at will.” Independent contractor
                  is not.
-   Limitations to the Independent Contractor Exception
       o There are three primary limitations to the independent contractor exception.
         That is, even if the person is an independent contractor, the principal is still
              The first two, dangerous activities and non-delegable duty, make the
                 principal a “guarantor” – we won’t allow him to contract out of
                 responsibility / put it on someone else.
              Control is important, but isn’t dispositive. In Hixon, the control of the
                 subcontractor over the glue seems to matter… but lack of control over
                 the service in Kleeman doesn’t matter.
       o Inherently Dangerous Activities: this follows the traditional tort rule.
              Why have this exception? Insolvency problem, perhaps… Activity level
                 effect (reduce hazardous activities to their minimal level). Involves
                 principal’s interest in the hazardous occupation, thus encouraging
       o Non-Delegable Duty: there are certain things that hiring an independent
         contractor will not allow you to escape liability for.
       o Negligent Hiring, Supervision, Retention: this actually isn’t an “exception” so
         much as direct liability for the hirer. This isn’t “vicarious” at all.
              It appears from Hixon (below) that only “red flags” will carry in liability if
                 they are ignored.
              A notes case suggested that there is no duty to investigate whether the
                 contractor has insurance.
              Negligent hiring also requires a showing of causation.
                      Restatement (Second): Liability under this rule also requires some
                         nexus or causal connection between the P’s negligence in
                         selecting or controlling an actor, the actor’s employment or work,
                         and the harm suffered by the third party.
              Some courts (as in Kleeman) split this category into “instructing or
                 supervising” and “selection.”
-   Hixon v. Sherwin-Williams Co (7th Cir. 1982)
       o An insurance company hired a contractor, Hixon, to install a new floor in a home
         of one of its insured. Hixon subcontracted to Sherman Williams, who hired
         Benkovich to do the installation.
       o Benkovich had to use a very flammable kind of glue in order to fasten the floor
         to the cement. He didn’t follow precautions and negligently caused a fire.
       o The insurance company had to pay an additional $27,000, and went after
         Sherman-Williams for indemnification.
       o Benkovich was clearly an independent contractor, but does this fall within the
         inherently dangerous activity exception? No, finds court. Negligent hiring? No,
         had good reputation.
       o This was not an inherently dangerous activity. The only reason for the fire was
                Just because on the “inputs” of an activity is hazardous doesn’t mean
                 that the activity itself is dangerous. Laying a floor is not inherently
                 dangerous, even if the glue is.
      o As far as negligent hiring goes, it appears from this case that only “red flags” will
        carry liability.
      o Furthermore, there was no showing of causation. All he had to do was read the
        label on the glue… there was no indication in his hiring that he was a “non-label
        reader,” etc.
-   Kleeman v. Rheingold (NY App. 1993)
      o Question of whether a lawyer can be held liable for his selection of a process-
        server. The process server’s negligence caused a statute of limitations to be
      o The trial court said that the process server is an independent contractor, since
        the attorney does not have control over how process is served.
      o This survives appeal, but at the top level, summary judgment is reversed.
      o The Independent Contractor Rule is overcome by the nondelegable duty
             Often, these are statutorily imposed duties, or might be common law.
             Typically they are “too important” to be delegated.
             Also, in the context of lawyers, this is a fiduciary relationship. The lawyer
                should not be able to escape liability by contracting out of his
                     Of course, lawyers can use Independent contractors… such as
                        folks to do their photocopying.
             Furthermore, the victim here is a client / customer… This might touch on
                a reasonable expectation justification. One who hires a lawyer has a
                reasonable expectation that the person he is hiring is carrying out and is
                responsible for these duties.
             “You cannot contract out of responsibility for malpractice.”
-   Borrowed Servants
      o If a servant is “borrowed” and working under a “special employer,” then that
        employer can be held vicariously liable for the borrowed servant’s torts.
      o There are employers who specialized in “renting employees” to other employers.
              These are known as “the general employer.”
              The renting employer, who is doing the actual supervision, is called the
                 “special employer.”
      o There are several tests coming out of the case law for whether vicarious liability
        for the borrowed servant’s torts will attach to the general employer, or the
        special employer.
              Restatement (Second) § 227: A servant directed or permitted by his
                 master to perform services for another may become the servant of
                 another. Example 6: P rents to B for a week a truck and a driver. A, at $5
                 an hour, does general express work, but does not load or unload the
                  truck. A, under B’s request and directions, loads the truck. A is the servant
                  of B for these purposes.
                 Primary Loyalty / Whose Business Test (Charles/ Cardozo)
                       Liability will remain with the general employer as long as the
                          borrowed servant is still “furthering the business” of the general
                          employer, even when he is working for someone else. We’ve not
                          going to assume a shift in loyalty just because he is working for
                          someone else.
                       “As long as the employee is furthering the business of his general
                          employer by the service rendered to another, there will be no
                          inference of a new relation unless command has been
                          surrendered, and no inference of its surrender from the mere fact
                          of the division.”
                 Spot Control Test (Nepstad)
                       We will assume that liability attaches to the special employer if
                          the special employer is in control of the particular action that the
                          borrowed servant is undertaking.
                       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.
                 About half of jurisdictions use Primary Loyalty, and half use Spot Control.
                 Dual Liability (Gordon)
                       Some courts will hold both the special and general employer joint
                          and severally liable and let them fight out liability in subsequent
                       But this is not common. For one thing, it doesn’t solve the
                          question of liability, it just pushes it off.
                 Captain of the Ship Doctrine (Medical Field)
                       Doctors are held by some courts to be vicariously liable for the
                          torts of their nurses. “All become employees of the captain of the
                       This isn’t widespread either – for one thing, it was initially brought
                          in under a “deep pocket” concern because hospitals couldn’t be
                          sued, but this is no longer the case.
                       Plus, captain of real ships were never vicariously liable for the
                          torts of their crews!
-   Charles v. Barrett (NY App. 1922)
       o Steinhauser was in the trucking business. He supplied Adam Express, defendant,
         with a motor van and chauffer. The defendant unloaded and loaded the truck.
       o The truck was unsupervised / directed by Adams between loading and
       o Court dismisses the suit against Adams when the truck, between loads, stuck and
         killed plaintiff’s son. Steinhauser, the general employer, is liable, under the
         Primary Loyalty test.
-   Nepstad v. Lambert (Minn. 1951)
       o Plaintiff was a laborer working for a general contractor, was injured by a
         negligently operated crane.
       o Lambert, defendant, owned a company which rented the crane and the operator
         to the general contractor.
       o Trial court found that Lambert was liable under the theory that the operator of
         the crane was not a borrowed servant.
       o On appeal, this finding was reversed. The operator was a loaned servant as a
         matter of law. They adopt the “spot control” test. Liability attaches to the
         employer who was controlling the actions of the borrowed servant at the time of
         the tort.
-   Carriage Cases
       o Where a person hires an automobile and driver and designates the destination,
         the route, or even the speed, the driver does not become a loaned servant.
-   Gordon v. SM Byers Motor Car Co (Penn. 1932)
       o A finding of dual liability when the driver of a truck negligently caused an
       o A sale of the truck was being negotiated – B was furnishing H with a truck and
         driver for a week to determine if the truck would fit his needs.
       o So L was working for both – he was showing H how to use the truck, and making
         a sale for B.
- Scope of Employment
       o The other main limitation to Respondeat Superior vicarious liability is that the
         servant’s actions must be within the scope of employment.
              These questions often arrive in the form of deviations. Courts will look at
                extent of the deviation… has the employee resumed his employment?
                Was this deviation a complete abandonment of his employment?
       o Restatement (Second) § 228(1): the master is not liable for every tort of the
         servant… it’s got to be within the scope of employment
              Of the kind he is employed to perform
              Occurs substantially within authorized time and space limits
              Actuated by purpose to serve the master, and
              If force is intentionally used by servant against another, force is not
                unexpectable by the master.
       o Restatement (Second) § 229: to be within the scope of employment, conduct
         must be of the same general nature as that authorized, or incidental to the
         conduct authorized.
       o Restatement (Second) § 237: “Re-entry after a frolic.” A Servant does not re-
         enter the scope of employment until he is again reasonably near the authorized
         space and time limits and he is acting with the intention of serving his master’s
       o Restatement (Third) § 7.07(2): an employee acts within the scope of
         employment when performing work assigned by the employer or engaging in a
         course of conduct subject to the employer’s control. An employee’s act is not
         within the scope of employment when it occurs within an independent course of
         conduct not intended by the employee to serve any purpose of the employer.
-   Joel v. Morison (1834)
       o Old English case about a carriage driven by a servant who did not appear to be
         conducting the business of the plaintiff when he hit the defendant.
       o “The master is only liable where the servant is acting in the course of his
       o But the master is liable if he was going out of his way against the master’s
         command but during the course of the master’s business.
-   Riley v. Standard Oil Co
       o It was deemed within the scope of employment when a driver deviated four
         blocks to go to his sister’s house, then caused an accident shortly after leaving.
       o Found liability as a matter of law, since he was on his way to the mill after
         leaving the sister’s house.
-   Clawson v. Pierce-Arrow Motor Car
       o Servant of defendant drove manager of defendant’s sales dept. home in one of
         defendant’s cars. Was then instructed to drive manager’s seamstress home. Got
         into accident shortly after leaving manager’s house.
       o Would have passed that way even if the seamstress had not been in it.
       o A verdict for plaintiff against the defendant employer was reinstated by the high
         court of NY. They felt that deviate did not vitiate the portion of the trip which
         was legitimate and useful.
-   Marks’ Dependents v. Gray
       o An employee was going to pick up his wife in another town, and his boss asked
         him to stop and fix some faucets while he was there.
       o Killed on his way to the job. The high court reverses the court below that this is
         in the course of employment.
       o “The journey is not part of the work when the person is otherwise going and is
         asked to do a job there.”
       o Test: if the work of the employee creates the necessity for travel, he is in the
         course of employment, though he might at the same time be serving a purpose
         of his own.
               If, however, the work has had no part in creating the necessity for
                  travel, if the journey would have gone forward though the business
                  errand had been dropped, and would have been cancelled upon failure
                  of the private purpose, travel is personal.
-   Fiocco v. Carver (NY App. 1922)
       o Defendants were employers whose truck driver diverged to see his mother.
         Children were climbing on his truck and he started it and injured plaintiff.
       o Was on his way back to the garage. Highest Court finds this is impermissible for
         the jury to find this in the course of employment.
       o Locality and time are not dispositive… the dominant purpose must be proved to
         be the performance of the master’s business.
       o At the time of the injury, the forces set in motion by an abandonment of duty
         were still alive and operative.
-   Disobedience
       o Even if an employer explicitly instructs otherwise, they can still be held
         vicariously liable.
       o According to Restatement (Second) § 230, illustration 1, suppose the owner of a
         sporting goods store directs her employees never to insert a bullet while
         exhibiting a gun for sale, but the employee does so anyway and injures someone
         – the employer is vicariously liable.
       o Disobedience is foreseeable, and foreseeability is a fundamental part of
         vicarious liability law.
       o Why else might disobedience not be allowed as a defense? Could be the
         exception that swallows the rule – if it’s allowed as a defense, employers could
         escape liability through extensive “what not to do” lists.
-   Lunch Break Situations
       o Courts are reluctant to impose vicarious liability for accidents that occur on a
         lunch break.
       o But, as in the Wilson case, if you’re getting lunch for the office, then you’re doing
         something work-related.
             From an economic standpoint, we should encourage employees to get
                 lunch for others, to get less people on the road and at risk. Perhaps this
                 behavior should be encouraged by finding no liability for employers when
                 employees carpool / get group lunches.
-   Clover v. Snowbird Ski Resort (Ut. 1991)
       o Defendant is ski resort. One of its employees injured plaintiff. Plaintiff appeals
         summary judgment for defendant.
       o The employee was told to make trips to a mountainside restaurant to inspect it.
         The restaurant was accessed by ski trail.
       o Employees were given ski passes as compensation, and encouraged to learn to
         ski to get to and from work more easily.
       o He did a run, did the inspection, and did a few more runs. On the last one, he
         hurt the plaintiff.
       o Court finds that it would have been reasonable for the jury to find that his
         deviation wasn’t substantial enough to constitute a total abandonment, and
         that he had resumed his employment.
       o Birkner Test for Deviation: General Kind
               Comes out of the Clover opinion.
                 Acts within the scope of employment are those acts which are so closely
                  connected with what the servant is employed to do, and so fairly and
                  reasonably incidental to it, that they may be regarded as methods, even
                  though quite improper ones, of carrying out the objectives of the
       o Whitehead: Dual Purpose Doctrine
            If dual purpose of employment and personal, usually will be considered
              in scope of employment, but if primary motivation is personal, and the
              business part is merely incidental or adjunctive thereto, it’s not within
              the scope of employment.
-   Intentional Torts
       o Even intentional torts within the scope of employment can bring vicarious
       o Restatement (Second) § 228(1)(c): an employer can be liable for the intentional
         torts of his employee if the employee, in engaging in the conduct that
         constituted the intentional tort, was motivated at least in part by a desire to
         serve the master.
              The Motive Test is an important inquiry, but it isn’t dispositive (see
              The Foreseeability Test may still control in some instances if an
                  intentional tort is very foreseeable. Judge Friendly applies an “arising out
                  of” test – this was foreseeable as arising out of the employment.
              The Outgrowth test is used by the Lisa M. court. The act must be an
                  outgrowth of the employment, beyond simply putting the two people in
                  the same place at the same time.
       o Bremen State Bank v. Hartford Accident & Indemnity Co (7th Cir.
                 An employee of the defendant stole money from the plaintiff during an
                  armored car move.
                 Appeals court reverses a finding of summary judgment for the plaintiff.
                       The act was not committed for the benefit of the employer at all,
                         but rather solely for the benefit of the employee.
                 One possible objection to imposing liability on the employer is that the
                  van company had instructed the bank not to put money in its vans. The
                  money wasn’t supposed to be there… the van company had tried to
                  eliminate the risk of theft in this way, because it didn’t want the
                  responsibility. But the court doesn’t go this way.
       o Ira S. Bushey & Sons v. United States (2d. Cir. 1968)
              A drunken Coast Guard seaman turns some valves on his way back to the
                 ship after a night of drinking. Causes damage to the drydock.
              Really, what this comes down to is, it’s true that this action was in no
                 way motivated by a desire to help the master (in this instance, the US
                 Coast Guard).
                        But this action on the part of the sailor was entirely foreseeable.
                        So Judge Friendly rejects the motives test, and instead applies a
                         fairness / foreseeability standard.
                             o This kind of accident could have been foreseeable, or at
                                 least understood as arising out of the employment.
                             o “Characteristic Risk.” It appears the imbibing habits of
                                 sailors is a factor in this decision, but what if the sailor had
                                 been sober?
                       He gives two examples. They focus on the fact of increased risk
                         because he is a sailor. This characteristic risk is key for Friendly.
                             o First, if the sailor were to set fire to the bar before leaving
                                 it, there would be no liability. Why? Though perhaps this is
                                 “foreseeable,” anybody could have done it. The fact of the
                                 sailor walking into the bar didn’t make it more likely that
                                 the bar would be burned down.
                             o Second, if the sailor had recognized his wife’s lover at the
                                 dry dock and shot him. No liability.
                                       This example shows the location is not dispositive.
                                          The fact that he’s a sailor doesn’t make this action
                                          more likely.
                 Restatement (Third) § 7.07: rejects Friendly’s foreseeability test. Adopts
                  the motive test.
       o Lisa M. v. Henry Mayo Newhall Memorial Hospital (Cal. 1995)
              A patient was sexually assaulted by a tech at a hospital while getting a
              The question is, is the hospital vicariously liable for the harm?
              California courts had previously rejected the motive test.
              The tort must be engendered by or arise from the work. Must be
               proximate, rather than “but for” causation. The employment must do
               more than simply bring the two together in time and place.
              The incident must be an “outgrowth” of the employment… the risk of
               tortious injury must be inherent in the working environment, or typical
               of or broadly incidental to the enterprise the employer has undertaken.
                    This involves a foreseeability inquiry. Must be a generally
                       foreseeable consequence of the activity, meaning that in the
                       context of the particular enterprise, an employee’s conduct is not
                       so unusual or startling that it would seem unfair to include the
                       loss resulting from it…
              Important Note: They distinguish this from the prison guard raping a
               prisoner situation, because they feel the power engendered in the guard
               situation is an sufficient outgrowth of the employment, whereas this was
               not. The dissent very much disagrees.
-   Respondeat Superior Foreseeability vs. Negligence Foreseeability
         o The Lisa M. case and a later case argued that foreseeability is different in the
           Respondeat Superior context than in negligence.
         o Negligence: a level of probability which would lead a prudent person to take
           effective precautions.
         o Respondeat Superior: in the context of particular enterprise, an employee’s
           conduct is not so unusual that it would seem unfair to include the loss.
  -   Restatement Limitation on the Scope of Employment Defense
         o Even if an employee is acting outside the scope of employment, he can still be
           found liable under one of the exceptions outlined in the Restatement (Second) §
           219(2)(d): A master is not subject to liability for the torts of his servants acting
           outside the scope of their employment, unless
                A) the master intended the conduct or consequences
                B) the master was negligent or reckless, or
                C) the conduct violated a non-delegable duty of the master, or
                D) Fraud: the servant purported to act or speak on behalf of the
                   principal, and there was reliance upon apparent authority, or he was
                   aided in accomplishing the tort by the existence of the agency relation.
         o (d) has been latched onto by courts lately, while others feel that it’s about fraud
           and is being misused or misconstrued when applied in the context of sexual
           assaults. The idea is that there is an implied contract that the person will
           exercise care…
  -   Punitive Damages
         o For intentional torts, courts have taken two approaches for punitive damages.
                Minority Approach: if you could have punitive damages against the
                   agent, you can have them against the employer
                Majority Approach: you don’t automatically get punitive damages
                   against the P in situation in which the P is personally culpable. Some kind
                   of wrongdoing must be found by the P, not just the A.
         o Restatement (Second) § 217(c): punitive damages against a master only if
                (a) the principal authorized the doing and the manner of the act
                (b) the agent was unfit and the P was reckless in employing him, or
                (c) the agent was employed in a managerial capacity and was acting in
                   the scope of employment, or
                (d) the principal or managerial agent of the P ratified or approved the
  -   Reliance upon Care or Skill of Apparent Servant or Other Agent
         o Restatement (Second) § 267: one who represents that another is his servant or
           other agent and thereby causes a third person justifiably to rely upon the care or
           skill of such apparent agent is subject to liability to the third person for harm
           caused by the lack of care or skill of one appearing to be a servant or other agent
           as if he were such.

Actual Authority
Express Authority
   -   The ability of an agent to make contracts on behalf of the P and thereby bind the P to
       contracts with third parties, but not bind the agent, is perhaps the fundamental rule of
       agency law.
   -   Restatement (Second) § 7: authority is the power of the agent to affect the legal
       relations of the P by acts done in accordance with the P’s manifestations of consent to
   -   Restatement (Second) § 26: Creation of authority, general rule: “…Authority to do an act
       can be created by written or spoken words or other conduct of the P which, reasonably
       interpreted, causes the A to believe that the P desires him to so act on the P’s account.”
   -   Restatement (Third) § 2.01: Actual Authority: an agent acts with actual authority when,
       at the time of taking action that has legal consequences for the P, the A reasonably
       believes, in accordance with the P’s manifestations to the A, that the P wishes the A so
       to act.
   -   Power of Attorney
          o This is an example of explicit authority that comes up in some cases.
          o There is a rule of strict construction with powers of attorney – they are to be
            narrowly interpreted to cover only those things for which it is explicitly
                 This is perhaps based on a fear of collusion between A’s and TPs against
                     the P.
          o All-embracing expressions found in powers of attorney will be ignored.
   -   King v. Bankerd (Md. App. 1985)
          o Question of whether a power of attorney which authorized the attorney to
            convey, grant, bargain and / or sell the P’s property authorized him to give it
            away to the P’s estranged wife.
          o The P had disappeared for some time.
          o The court says that even this broad grant in the power of attorney does not
            authorize this gratuitous transfer.
          o Powers of attorney will be interpreted narrowly. Must always act in the P’s
            benefit, and any non-beneficial (gratuitous) actions must be expressly
   -   Lamb v. Scott (Al. 1994)
          o Basically, an ailing man made his daughter his attorney with a durable power of
            attorney. He had requested, before incapacitation, that his property be divided
            between his two daughters and his stepson.
          o As soon as he became incapacitation, his daughter cut the stepson out.
                 The court invalidates this. Her power of attorney did not say that she
                    could convey this land to herself.
                 Furthermore, the conveyance to her sister was contrary to the express
                    intent of Dollie to leave her property to the three equally.
          o “One who accepts a power of authority covenants to use power for sole benefit
            of one conferring the power and to use it in a manner consistent with purposes
            of agency relationship created by power of attorney.”
   -   Implied Authority
          o Implied authority falls under actual authority – that is, it’s real authority (see
            apparent authority, later).
          o This is authority by conduct, not language.
          o The Second Restatement handled implied authority two ways.
                 Restatement (Second) § 33: If the agent understands that the
                     circumstances allow him to act a certain way, even if it isn’t expressly
                     told to him, he can do so.
                          Example: a factory doesn’t have much business, and the P tells
                             the A to run it on half-time. The P leaves and cannot be reached.
                             Suddenly a huge order comes in. Can the A go against the order
                             and run the factor on full time? Quite possible.
                          If the P is there, however, the A must act with explicit orders.
                 Restatement (Second) § 35: Incidental Authority: Unless otherwise
                     agreed, authority to conduct a transaction includes authority to do acts
                     which are incidental to it, usually accompany it, or are reasonably
                     necessary to accomplish it.
          o The Third Restatement brings these both under Scope of Authority.
                 Restatement (Third) § 2.02: Scope of Authority: (1): an agent has actual
                     authority to take action designated or implied in the P’s manifestations
                     to the A and acts necessary or incidental to achieving the P’s objectives,
                     as the agent reasonably understands the P’s manifestations and
                     objectives when the A determines how to act.
   -   Delegation of Authority
          o If you’re not authorized to use subagents, you can’t do it…
          o Recall that there are non-delegable things for the P… there also are for the A.
          o Well-established common law rule: agent owes P a duty to personally discharge
            his employment and thus is unable to delegate his authority unless P so consents,
            or particular circumstances of the case indicate that the P’s consent could
            reasonably be implied.
          o Delegatus non potest delegare: delegate cannot delegate. Agent’s power cannot
            be delegated in absence of authority to do so.

Apparent Authority

Differences with Actual Authority
   -   In actual authority cases, the agent is behaving reasonably. He is acting on some
       reasonable belief that he is authorized.
-   In apparent authority cases, the agent is acting unreasonably! He does not have actual
-   Actual authority is about manifestations from the P to the A which he reasonably
    interprets to mean he is authorized. Apparent authority is about manifestations from
    the P to the third party such that they reasonably believe the agent is authorized.
-   Restatement (Second) § 8: apparent authority is the power to affect the legal relations
    of another person by transactions with third persons, professedly as agent for the other,
    arising from and in accordance with the other’s manifestations to such third persons.
-   Restatement (Third) § 2.03: Apparent authority is the power held by an agent or other
    actor to affect a P’s legal relations with third parties when a third party reasonably
    believes the act has authority to act on behalf of the P and that belief is traceable to the
    P’s manifestations.
-   Apparent authority prevents P’s from making representations to Third Parties and then
    getting out of it.
        o Apparent authority cannot come from the agent. It can come only from the
            principal. But the manifestation does not have to come directly from the P in
            person. It can be made through another person. Best Example: Restatement
            (Second) § 27: a job title. Titling someone a “general manager” can carry
            apparent authority connotations.
        o This manifestation from the P can actually come from an agent, but it’s got to be
            more than a statement by the agent.
        o The person making the manifestation must have actual authority to make the
            manifestation upon which apparent agency is based.
-   The reasonableness of the third party is what controls in apparent authority. In actual
    authority, the reasonableness of the third party is irrelevant.
        o Must cause the one claiming apparent authority to subjectively believe that the
            agent has authority to act for the P.
        o Must be such that the claimant’s actual, subjective belief is objectively
-   Two Steps:
        o First, always ask if there were manifestations from the principal. If no, you
            can’t have apparent authority
        o Second, could the third party have reasonably believed the person was acting
            with authority?
-   You do not even need actual agency for apparent authority to exist! As long as a party is
    held out to be an agent to a third party, that’s good enough.
-   Both actual and apparent authority are based upon objective manifestations. With
    actual authority, it’s manifestations to the agent. With apparent authority, it’s
    manifestations to the third party.
-   Smith v. Hansen, Hansen & Johnson (Wash. App. 1991)
       o Fentron employed Foster for various duties, but none of these were selling glass.
       o However, he sold glass to plaintiff, which ended up being bad glass, caused
         o They find that the evidence was insufficient to make reasonable inference that
           Foster had apparent authority to sell the materials on Fentron’s behalf.
               This is despite his having business cards, an office…
               Business custom did not indicate that he was authorized.


Apparent Authority When P Had Made No Manifestations
  -   Typically a third party must establish that the principal had made manifestations to
      them in order to establish a claim of apparent agency.
  -   However, if the P has sat by while someone else has made the manifestations, which
      the TP then relied on to the TP’s detriment, then recovery can be had under
      partnership by Estoppel.
  -   Restatement (Second) § 8B(1) A person who is not otherwise liable as a party to a
      transaction purported to be done on his account is nevertheless subject to liability to
      persons who have changed their positions because of their belief that the transaction
      was entered into by or for him, if
          o (a) he intentionally or carelessly caused such belief, or
          o (b) knowing of such belief and that others might changes their positions because
              of it, he did not take reasonable steps to notify them of the facts.
  -   Estoppel does not create a contract. It’s “one-way” liability. Apparent authority,
      however, does – thus, a third party claiming apparent authority can be bound to the
      transaction, but a third party claiming agency by estoppel is not bound by the
  -   Note that a change is position is required. Contrast this with contract law, in which a
      change is not required to hold the contract enforceable.
  -   Furthermore, your remedy is only your reliance, not your expectation, unless the
      behavior of the P was intentional, in which case you might see expectation damages.
  -   Summary: Differences Between Estoppel and Apparent Authority
          o Liability runs only one way in estoppel
          o You must have a change in position
          o Remedy will typically only be reliance, not expectation.
  -   Restatement (Third) § 2.05: pretty much identical to § 8B(1).
  -   Hoddeson v. Koos Bros (NJ Sup. 1957)
         o The plaintiff was a woman who entered the defendant’s store to purchase
           furniture. When she entered the store, a man asked if he could help her, and she
           purchased furniture from him with a promise of delivery.
         o When the furniture never came, she realized he was an imposter and didn’t
           actually work there.
         o There was no manifestation from the defendant on the record. Thus, apparent
           agency isn’t upheld – but the court remands for a trial on whether agency by
           estoppel might hold. The defendants may have had a duty to prevent such a
           thing from happening, and perhaps she can recovery on estoppel.
Inherent Agency

Not Actual Authority, Apparent Authority, or Estoppel…
   -   Restatement (Second) § 8A: inherent agency power is a term used in the restatement of
       this subject to indicate the power of an agent which is derived not from authority,
       apparent authority, or estoppel, but solely from the agency relation and exists for the
       protection of persons harmed by or dealing with a servant or other agent.
   -   Essentially, this is like apparent authority, but without representations from the P…
       Restatement (Second) § 161: Unauthorized Acts of General Agents: General agent for
       disclosed or partially disclosed P subjects his P to liability for acts done on his account
       which usually accompany or are incidental to transactions which the A is authorized to
       conduct if, although they are forbidden by the P, the other party reasonably believes
       that the A is authorized to do so and has no notice that he is not so authorized…
   -   The Restatement (Second) authors seemed to think there were situations that didn’t fit
       Actual, Apparent, or Estoppel situations but nonetheless should protect third parties.
       For instance, the example of the factory agent whose owner is out of town – there is no
       actual authority (explicit instructions otherwise), no apparent authority (no
       manifestations from P) and no estoppel (no negligence or failure to monitor by P).
   -   This is abandoned by the Restatement (Third), but in § 2.03 there is a subtle change in
       treatment of apparent authority that seems to indicate some acceptance of inherent
           o They have expanded manifestation in apparent authority to make up for the
                absence of inherent agency. Now T’s belief that A had authority must only be
                traceable to the P’s manifestations.
   -   Differences Between Inherent Agency and Apparent Authority
           o Apparent authority is about reasonable believes of third parties based upon
                manifestations of the P.
           o Inherent authority refers to acts done on P’s account which accompany or are
                incidental to transactions which the A is authorized to conduct, even though
                those actions are forbidden by the P, the third party reasonably believes the A is
                authorized to do them, and has no notice that he is not authorized.
                     In some sense, inherent agency is about an “indirect manifestation” by
                       the P in placing the A in a position in which it’s reasonable to believe that
                       the A has power.
   - v. Dreyer and Reinbold (In. App. 2004)
          o At issue was the method of payment. Ellingwood was the agent of Auto, and he
            told Dreyer that he could make a payment directly to Auto’s creditor, but they
            were not actually supposed to do that.
          o There was inherent agency authority here – Ellingwood was put forth as the sole
            negotiator of Auto, and thus it was reasonable to believe that he had authority
            to direct payments to the creditor.

Elements of Fraud
   -   A representation made by defendant
   -   Knowledge by defendant that representation is false, or that he doesn’t have a
       sufficient basis of info to make it
   -   Intention to induce person to act or refrain from acting in reliance upon
   -   Justifiable reliance upon the representations
   -   Damage resulting from the misrepresentation
Relation to Doctrines We’ve Already Studied
   -   Fraud is really a hybrid of contract and tort principles. You can have vicarious liability
       here for non-employees, like lawyers, and you can have fraud outside the scope of
   -   So we see under Restatement (Second) § 219(2)(d), dealing with instances when the
       employer can be vicariously liable even absent scope of employment, that fraud is one
       of these instances.
   -   Restatement (Second) § 261: apparent authority – this isn’t limited to servants or
       employees… if you put any agent in a position to commit a fraud while acting with
       apparent authority, you can be liable.
   -   There is less concern about collusion between the TP and the A against the P, because
       it’s quite often the TP being defrauded.
Entente Mineral Co v. Parker (5th Cir. 1992)
   -   A firm was sued on vicarious liability for the tort of one of its lawyers, who had co-opted
       a business opportunity to buy a piece of property. Entente is the plaintiff, who was
       planning to purchase the property.
   -   The court does not find vicarious liability, on the grounds that, in this case, there’s no
       relationship between the firm and Entente that could be imputed to the firm’s agent.
       Parker, the lawyer who co-opted the opportunity, had no relationship with Entente, but
       rather had been approached by Edwards, who had been approached by Young, the
           o They appear to be insisting upon a contractual relationship, but this doesn’t
               seem to be required by the Restatement.
   -   Court also finds that he was not within the scope of his employment here.
   -   This decision is very shaky. Parker was only placed in this situation to commit the fraud
       by his position as the attorney.
           o Perhaps the court, in finding no relationship between the P and the Third Party,
               thought the connection too remote to bring liability.
Rothman v. Fillette (Penn. 1983)
   -   Basically an attorney absconds with some money. Who must bear the burden of the loss
       between the parties?
   -   Fillettes had injured Rothmans in a car accident. The lawyer was the Rothmans. He
       steals the money from them.
   -   Long-standing maxim: As between two innocent parties, the party who accredited the
       agent must bear the loss. So the Rothmans must bear the $7000 loss.
            o Court seems to base this on a “better position to avoid” rationale.

Undisclosed Principals

The Undisclosed Principal Scenario
   -   One in which a third party thinks he is dealing with one person, but there is a principal
       behind the scenes not revealed by the agent.
           o Important Note: The agent remains personally liable for the contract in the
               undisclosed P situation!
           o Undisclosed Principals can sue to enforce contracts.
   -   A partially disclosed principal is one in which the third party knows he is dealing with
       an agent, but does not know the identity of his principal.
   -   Why doesn’t this violate the basic contract principal of mutual assent? Doesn’t this allow
       the A and P to collude against the TP?
           o Four Examples of Beneficial Instances of Allowing Undisclosed Ps:
                    The Land Assemblage Case: if one buyer is trying to buy up a lot of
                       parcels of land (ie, Disney in Orlando), if he cannot hide his identity, then
                       everyone will hold out and up their price.
                    Expertise: If you have expertise and people know it, they might charge
                       you more for goods you are interested in because they see your interest
                       as reflecting higher quality. Example: an antique dealer who shows up at
                       an auction to buy antiques.
                    Wealthy Principal: if a third party knows that someone who is very
                       wealthy is buying something, they might charge more because they know
                       the wealthy individual has more ability to pay.
                    Desperate Principal: if the third party knows the principal is in a
                       desperate situation, might charge more to exploit.
   -   Restatement (Third) § 6.03: When an agent acting with actual authority makes a K on
       behalf of an undisclosed P,
           o (1) unless excluded by the K, the P is a party to the K;
           o (2) the agent and the third party are parties to the contract, and
           o (3) the principal, if a party to the K, and the TP have the same rights, liabilities
               and defenses against each other as if the P made the K personally.
   -   Restatement (Second) § 195: an undisclosed P who entrusts an A with the management
       of his business is subject to liability to TPs with whom the A enters into transactions
       usual in such businesses and on the P’s account, although contrary to the directions of
       the P.
   -   Other Justifications for the Undisclosed P Doctrine
          o “Contractual Surplus:” that is, there is a gap between what the seller is willing to
            sell for, and what the buyer is willing to pay. Who will get the difference?
                  Undisclosed P doctrine might prevent free-riders from gaining that
                     surplus after an investment by the principal in information… for instance,
                     the antique dealer has invested in gaining his expertise… someone who
                     knows he is buying for a certain price can capitalize on that price without
                     making the advantage.
Exceptions to the Undisclosed P Rule
   -   Where we do not feel that the TP would have entered into the K if the TP had known
       the undisclosed P was involved, then this can void the contract.
   -   You can also contract out of this – have a clause that voids the K if there is an
       undisclosed P
   -   Materiality is what controls in these instances… would it have mattered to the person
       with whom I’m contracting that the undisclosed P is this person?
Payment of an Undisclosed P
   -   When a TP has notification that there is an undisclosed P, you are obligated to pay the
       P, not the agent.
   -   This can obviously create difficulties for the TP… how does he know who is being
Darling-Singer Lumber v. Commonwealth (Mass. 1935)
   -   A TP was held liable when he paid the agent he had been dealing with instead of an
       undisclosed P from who he received a bill after the transaction was complete.
Kelly Asphalt v. Barber Asphalt (NY App. 1914)
   -   Plaintiff sued to recover damages for breach of implied warranty. Defendant made
       contract with Booth, who plaintiff claims is his agent as an undisclosed Principal.
   -   But here, the defendant argues that it would not have entered into the contract had it
       known the identity of the undisclosed P. The plaintiff, a competitor of the defendant,
       knew that the defendant wouldn’t want to do business with him, so used Booth, the
           o But the court doesn’t apply this argument here. The defendant had delivered
               unusable materials, and the court feels that it had reaped the full benefit of the
               contract made with Booth, thus it must perform or pay.
           o The substandard performance of the defendant “trumps” the fact that he
               wouldn’t have otherwise entered into the K.
Finley v. Dalton (SC 1968)
   -   Duke energy was trying to acquire a lot of land in South Carolina.
   -   Dalton was the agent (defendant), acting for Duke, the undisclosed P.
   -   Dalton lied to the plaintiff seller about why he wanted to land so quickly after the
       plaintiff asked.
           o So can the agent lie, or not? Well, if you agree that the undisclosed P principal is
               sound, then you must allow some level of lying.
           o TP must do something more than just asking.
   -   The conclusions can seem inequitable, but allowing untruths is necessary to protect the
Liabilities of the Undisclosed P
   -   The TP can sue to enforce the K against an undisclosed P.
   -   Restatement (Third) § 6.03: Principal is bound by the K and can be sued by the part
       contracting with the A.
           o Recall that the Agent is always on the hook, as well!
   -   Justifications for This Rule
           o “You’ve got to take the bad with the good.”
           o Least Cost Avoider Theory: the P is the one setting the transaction in motion, is
                in the best position to avoid problems.
           o If you allow principals to escape liability in these instances, they will overuse this
                doctrine in order to protect themselves from liability if the contract goes bad.
   -   Who Can You Sue? Agent or Undisclosed P?
           o English Rule: you have to pick one, and that’s all you get.
           o American Rule: Election Rule – we will only apply the English Rule where the TP,
                at the time they elected to sue, knew of the undisclosed P. If they didn’t know of
                the undisclosed P at the time of the suit, can sue either.
           o Restatement (Third) § 6.09: abandons the election rule entirely – you can collect
                against any of them.
   -   Watteau v. Fenwick (England 1893)
          o Humble was the manager of an alehouse. Everything was in his name (the name
            on the building, etc) but he had sold ownership.
          o He had authority to buy only water and ale. But he bought a bunch of other
            stuff, such as cigars and Bovril.
          o Watteau was the seller, and Fenwick, the undisclosed P. Fenwick is held liable.
          o Humble was insolvent. There is a concern in this case that the Fenwicks of the
            world could put “unauthorized shills” out to make contracts for them, and then
            escape liability when the bill comes due.
   -   Senor v. Bangor Mills (3d. Cir. 1954)
          o This is an unauthorized transaction, as in Watteau… Plaintiff was a reseller of
            nylon yarn, and defendant was a large user of nylon yarn. It used an
            intermediary in order to avoid paying above-market prices, since its demand was
          o Here, the case comes out the other way than it did in Watteau. Why?
                 Perhaps the key difference is that Humble was put forth as the
                     proprietor, general manager… the agent in Bangor Mills was not put up
                     this way. He was simply a buyer with an account.
                 Restatement (Third) § 2.06(2): Undisclosed P may not rely on instructions
                     given an agent that qualify or reduce the A’s authority to less than the
                     authority a TP would reasonable believe the agent to have under the
                     same circumstances if the P had been disclosed.
Payment and Setoff
Third Party Makes Payment to the Agent
   -     Such as the Darling-Singer Lumber case.
   -     If the third party makes the payment prior to knowing of the undisclosed principal, he
         can make the payment to the agent.
              o But if you are on notice that there is an undisclosed P, you must pay the
                  undisclosed P.
              o Restatement (Third) § 6.07(3): if the agent has apparent authority to accept
                  payment or has historically accepted payment, payment can still be made to the
                  agent, even if the P reveals himself and demands payment… but how can we
                  have apparent authority when we explicitly know that the A isn’t authorized?
              o This rule encourages Ps to reveal themselves quickly after the transaction in
                  order to get paid properly.
The Undisclosed P Pays the Agent
   -     Where the TP is a seller and the Undisclosed P is a buyer.
   -     Majority Rule: if the undisclosed P pays the A in good faith with the intent that the A is
         going to pay the TP, then the undisclosed P is covered against suit by the TP.
   -     Minority / Restatement Rule: If the A absconds, then the P will have to pay twice.
             o Restatement (Third) § 6.07(1): The P is only protected in instances where the TP
                has manifested that it has accepted payment from the A.
   -     This involves instances in which money from a different transaction is owed by the A to
         the TP in an undisclosed P situation.
   -     Restatement (Third) § 6.06(2): rights of a TP to set off amounts owed to it by the A when
         dealing with an undisclosed P:
             o When an A makes a K on behalf of an undisclosed P, third party may set off:
                     (a)(i): any amount that the A independently owned the TP at the time
                         the A made the K, and
                     (a)(ii): Any amount that the A thereafter independently comes to owe
                         the TP until the TP has notice that the A acts on behalf of a P against the
                         amount the TP owes the P under the K
                     (b) After the TP has notice that the A acts on behalf of a P, the TP may
                         not set off any amount that the A thereafter independently comes to
                         owe the TP against an amount the TP owes the P under the K, unless the
                         P consents.
   -     Note that the Third Restatement doesn’t require the agent to be authorized to conceal
         the identity of the P – thus, an A could bring setoff liability by concealing the identity
         when the P doesn’t want to conceal the identity.
   -     Oil Supply Co. v. Hires Part Service (In. 2000)
            o Dolin, a broker, owed Oil Supply a bunch of money. He also owed Hires.
          o He contracted for Hires to buy antifreeze from Oil Supply, in exchange for
            forgiveness of the debt (Oil Supply was unaware). The antifreeze was delivered,
            but payment never made.
          o The trial court awarded Oil Supply the value of the antifreeze, but set off the
            amount that Dolan owed Hires.
          o But the higher court shoots down the set-off. Felt that Hires had notice of the
            undisclosed P (Oil Supply). Plus, Dolan wasn’t authorized to conceal Oil Supply,
            and thus the concealment can’t grant setoff.
Liability of Agent to Third Parties
   -   There are a few ways that agents can be liable to Third Parties
   -   However, they are not liable when the principal is disclosed on a contract.
   -   Unintentionally Undisclosed P: as we’ve seen, an agent can be liable when the principal
       is undisclosed, even when it wasn’t the intent of the P to be disclosed.
   -   Disclosed P: there still might be agent liability:
           o A sole proprietor who incorporates is technically the “agent” of the corporation
               – if he doesn’t make clear that he is acting on behalf of the entity, rather than
               himself, then he can still be personally liable for the K.
           o When the agent gives a personal guarantee because the assets of the business
               are not sufficient.
                     This is usually, but doesn’t have to be, explicit – for instance, if a law firm,
                       as agent, hires an expert witness for a case, it’s understood that it will be
                       liable if the client (P) doesn’t pay.
   -   Avoiding Liability as an Agent: sign things “as agent for the P,” or “agent on behalf of…”
       Must be careful that you are not incurring personal liability / guaranteeing a transaction
   -   Partially Disclosed P: if the P is insolvent, then the A might be held liable… not disclosing
       that there is an insolvent P involved might open you to liability.

Agent’s Warranty of Authority

Implied Warranty of Authority
   -   An agent who lacks authority to make a contract can be liable to the TP!
          o Did the agent, representing himself as such, contract in the name of the
             undisclosed P without or in excess of his authority?
          o Was the third party aware of such lack of authority?
                  What level of knowledge is required? Actual, or presumptive? In Husky,
                     they say actual. You can be unreasonable in believing the Agent that he
                     has authority.
                  This makes sense – presumptive knowledge means that a reasonable
                     person would know. But this reasonableness standard would mean that
                     there is Apparent Authority. But if there is apparent authority, then you
                     can sue the principal, which is contrary to this doctrine.
          o Was the third party damaged by the breach?
   -   Restatement (Third) § 6.10: Person who purports to make a K with a TP on behalf of
       someone else, lacking power to bind that person, gives an implied warranty of
       authority to the TP and is subject to liability to the TP for damages caused by the
       breach of that warranty, including loss of benefit expected from performance.
   -   Husky Industries v. Craig Industries (Mo. App. 1981)
          o Basically Craig had entered into a deal to sell a coal plant on behalf of the
            corporation of which he was president, but he wasn’t authorized by the board.
            They voted against the deal. Is he liable?
          o Yes. Part of the dispute here is over the knowledge requirement – should the TP
            have known that he would have to get board approval? But the court requires a
            showing of actual knowledge.
   -   Cokar v. Dollar (11th Cir. 1988)
          o Jackson purchases an apartment complex in Florida, planning to convert them
            into condos. He contracted with the Dollars, promising them a cut of the sales.
          o Coker, agent of Jackson, was supposed to set up an escrow account to get the
            payments to the Dollars. He failed to do so negligently, and the Dollars were
            never paid.
          o Is he liable to the Dollars? No! An agent who fails to carry out the P’s wishes is
            liable only to the P.


Doctrine of Ratification
   -   The idea is, the A has entered into an unauthorized transaction, but the P decides he
       likes the deal and wants to go along with it. At what point does it become binding? At
       what “date” is the deal effective (the point of ratification, or the point of the original
       unauthorized deal?).
   -   Important Note: These ratifications can be entirely gratuitous, and yet be enforceable –
       an exception to the rule of contract, which requires consideration!
   -   Ratification Relates Back to the point where the original contract was made. It is not
       the making of a new contract, but instead is viewed as relating back to the old contract
   -   Elements:
           o 1. Subjective Affirmance (§ 4.01 / § 95 (2d))
           o 2. Professedly Done on P’s Account (§ 4.03 / § 85)
           o 3. Knowledge of Material Facts (§ 4.06 / § 91)
           o 4. Relation Back (§ 4.02(1) / § 100A)
           o 5. Changed Circumstances (§ 4.05(2) / § 89)
           o 6. No Partial Ratification (§ 4.07 / § 96)
   -   Restatement (Second) § 82: Ratification is 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
        o Restatement (Second) § 83: Affirmance is either (a) a manifestation of an
             election by one on whose account an unauthorized act has been done to treat
             the act as authorized, or
                  (b) conduct by him justifiable only if there were such an election.
-   Restatement (Third) § 4.01: (1) Ratification is the affirmance of a prior act done by
    another, whereby the act is given effect as if done by an agent acting with actual
        o (2) a person ratifies an act by
                  (a) manifesting assent that the act shall affect the person’s legal relations
                  (b) conduct that justifies a reasonable assumption that the person so
        o (3) Ratification does not occur unless
                  (a) the act is ratifiable as stated in § 4.03 (a person may ratify an act if the
                      actor acted or purported to act as an agent on the person’s behalf).
                          Note that you cannot ratify something not done on your behalf!
-   Restatement (Third) § 4.05: Timing of Ratification: A ratification of a transaction is not
    effective unless it precedes the occurrence of circumstances that would cause the
    ratification to have adverse and inequitable effects on the rights of third parties. These
    include: (2) any material change in circumstances that would make it inequitable to bind
    the third party, unless the third party chooses to be bound.
-   Restatement (Third) § 4.06: knowledge requisite to ratification: a person is not bound by
    a ratification made without knowledge of material facts involved in the original act
    when the person was unaware of such lack of knowledge.
-   Restatement (Third) § 4.07: no partial ratification: a ratification is not effective unless it
    encompasses the entirety of an act, contract, or other single transaction.
-   Some Justifications for Ratification
        o Posner: This makes the promises of Principals more valuable. If you are able to
             ratify these, you are allowing yourself the ability to make future promises that
             will be taken seriously.
        o Perhaps this could just be seen as the P “waiving his claim” that the agent
             wasn’t authorized, ex-post.
-   Evans v. Ruth (Penn. 1937)
       o The question is whether Ruth ratified a contract that he would pay Evans for the
         delivery of stone.
       o He said he would, but then claimed he hadn’t entered into a K with Evans.
       o Court finds that ratification applies, and relates back to the original contract
         between Evans and the Agent who made it.
-   Dempsey v. Chambers (Mass. 1891)
       o An agent of P who was delivering coal broke glass window of the third party
       o M didn’t have the authority to deliver the coal, though – just sort of did it!
       o But the dealer of the coal had subsequently presented a bill for delivery of the
         coal to the plaintiff.
          o Court therefore finds that he had ratified the agency, and became liable for his
            agent’s negligence.

Notice, Notification and Imputed Knowledge
Three Concepts: Notice, Notification, Imputed Knowledge
   -   Notice: the umbrella concept for the idea that some legal consequence is going to
       happen as a result of the knowledge of the party, usually the Principal
          o Restatement (Third) § 1.04(4):
                   A person has notice of a fact if the person knows the fact, has reason to
                      know the fact, has rec’d an effective notification of the fact, or should
                      know the fact to fulfill a duty owed to another person. Notice of a fact
                      that an agent knows or has reason to know is imputed to the principal.
          o Restatement (Second) § 9: similar to 1.04(4), p. 6 of restatement doc
   -   Two Ways in Which a Principal Gets Notice
          o Notification: an act intended to give information to another, which for most
              purposes has the same legal effect as if the other had received the information…
              For instance, leaving notification of an action at their place of residence might be
                   So this is an act done by the T to convey information to the P. It’s
                      irrelevant that the agent doesn’t know the contents of the conveyance
                      (for instance, doesn’t open his mail…)
                   Under what circumstances will notification to an agent mean notification
                      to a principal? Must be notice within the scope of his authority as
                   Restatement (Third) § 5.01, 5.02
                   Restatement (Second) § 11
          o Montana Resevoir & Irrigation v. Utah Junk Co. (Utah 1924)
                   Question of whether Montana had notice of the termination of the
                      agent, Rosenblatt, who had previously been Utah Junk’s agent.
                   Court made findings of fact for Montana.
                   Rule: if you have no notice otherwise, you can assume the previous
                      agency continues. Lingering Apparent Authority.
                   Questionable Ruling: Technically, Montana Reservoir had never dealt
                      directly with Rosenblatt – only Montana Power had. So this must be
                      construed narrowly.
          o Imputed Knowledge: When knowledge of the agent gets imputed onto the
              principal. Essentially, if A has actual knowledge of a material fact, P is charged
              with legal consequences of actual knowledge of the fact. Same for “reason to
              know” – P is charged with having reason to know if A has reason to know.
                   Restatement (Third) § 5.03, 5.04
                   Restatement (Second) § 272
          o Constant v. University of Rochester (NY App. 1889)
                     Constant, Plaintiff, sued to foreclose a mortgage. Defendant university
                      had acquired title to land through purchase at foreclosure sale on
                      mortgage that Constant had executed on it.
                     But her mortgage had not been recorded at the time that Rochester took
                      its mortgage. It denied knowledge of the mortgage.
                     Question of the case: Did Deane, who had represented both Constant,
                      long before, and the University later, have knowledge of Constant’s
                           Can an agent in one transaction be put on notice in a separate
                           In this case the court finds no evidence that he recalled her
                     General Rule of the Case, Widely held in the US:
                           As a general rule, a P is charged with the knowledge an agent
                             acquired before the relationship only when the knowledge can
                             reasonably be said to have been in the mind of the agent while
                             acting for the P or where he acquired it so recently as to raise the
                             presumption he still retained it in his mind


General Partnership: Basics
   -   Where there is more than one principal, General Partnership is the default category.
           o This is a default rule, meaning it typically comes into play with small businesses
               who do not partake in sufficient business planning
   -   Unlimited Liability: General partners are personally liable for all debts of the
   -   Non-Transferability of Partnership Interests: You cannot simply transfer shares
       of a partnership on a market.
   -   Limited Life: Depending on whether the state is a UPA or RUPA state, the partnership
       might terminate by default when membership changes.
   -   UPA § 6: Partnership defined: A partnership is an association of two or more persons
       to carry on as owners a business for profit.
   -   RUPA § 202: same definition
           o UPA § 7(2): Joint tenancy, tenancy in common, tenancy by the entireties, joint
               property, common property, or part ownership does not of itself establish a
               partnership, whether such co-owners do or do not share any profits made by the
               use of the property
                     Distinguishes Partnerships From Joint Ventures: joint ventures are subject
                      to partnership law, but are a single or isolation series of transactions, not
   -   Consent: Like agency, Partners must consent to the business relationship that creates
       a partnership – but they do not need to have knowledge of the legal status of the
When Do People Become Partners?
   -   UPA § 7(4): Receipt by a person of a share of profits is prima facie evidence that the
       person is a partner (no such inference for loans)
   -   In Martin v. Peyton (NY App. 1927), a similar situation to Cargill arose – a troubled
       firm sought an infusion of capital from “The Trustees,” a group of lenders. Creditors of
       the firm sought funds from the Trustees, arguing that they had become partners.
           o However, here the court does not find a partnership. They feel that the type of
               control exercised in this case was the type that creditors exercise in trying to
               protect their loans.
                    No partnership exists if the relationship does not contemplate an
                      association of two or more persons to carry on as co-owners a business
                      for profit.
           o The profit-sharing aspect of the loan was not sufficient, either – a true owner
               bears more risk than the maximum or minimum profits the Trustees were
               subject to.
   -   Thus Limits to the Sharing of Profits and Limits to Control help distinguish partnership
       from creditor situations.
           o Lupien v. Malsbenden (Me. 1984): Here, a creditor was found to be a
               partner, subject to creditors.
                    Malsbenden, the partner, had dealt with partners, had supervised, had
                      control over the premises at times
                    He had a “total involvement” of a partner. Had poked his nose into the
                      business too much…

Partnership Property
   -   Even under UPA, an “entity” theory was used. That is, the partnership is a legal entity
       that can own its own property.
   -   General Rule: Under either UPA or RUPA, property acquired by the partnership is
       presumed partnership property, not individual partners’ property.
          o UPA was more vague about property brought into the partnership - “property
              brought into partnership stock.”
                   Intention to convert individual property into partnership may be inferred
                      from circumstances, but case law says that it must be such that the
                      circumstances don’t point equally to another reasonable explanation.
          o RUPA § 204(d) provides an innovative treatment of the issue: if in a partner’s
              name, with no mention of partnership, and not purchased with partnership
              funds, it’s presumed to be the partner’s, even if used for partnership purposes.
   - Entity vs. Aggregate: RUPA vs. UPA Approach
          o UPA views a partnership as simply an aggregate of its individual partners. It is
              not a separate entity. This can cause difficulties.
                   For instance, the property of the partnership was not in the partnership’s
          o RUPA abandoned this approach, and solves the problem with RUPA § 201(a): “A
              partnership is an entity distinct from its partners.”
   -   UPA § 8(1): All property originally brought into the partnership stock or subsequently
       acquired by purchase or otherwise, on account of the partnership is partnership
          o RUPA § 203: Property acquired by a partnership is property of partnership and
              not the partners.
   -   UPA § 8(2): Unless contrary intention appears, property acquired with partnership
       funds is partnership property
          o RUPA § 204: Property is partnership property if acquired in the name of (1) the
              partnerships, or (2) one or more partners in their capacity as partners of the
                   § 204(d): Property acquired in the name of a partner, without indication
                      of the person’s partnership status in the instrument transferring title to
                      the property, or of existence of a partnership, and without use of
                      partnership assets, it’s presumed to be separate property, even if used
                      for partnership purposes.

Rights of Partners in Partnership Property
   -   General Rule: Under both UPA and RUPA, partners do not have unrestricted individual
       rights to partnership property. UPA divides the property rights of partners into three
       parts: rights in property as a tenant in partnership, meaning he can use it for
       partnership but not personal purposes; his interest in the partnership, which is his
       share of the surplus (aka, earnings), and his rights to participate in management. RUPA
       takes a similar line, saying that the only personal property of a partner in a partnership
       is his right to the partnership profits.
            o Partner Services were not held to be partnership property in Sharfman, but
                RUPA might lead to a different result under § 101(11): “Property means all
                property, real, personal, or missed, tangible or intangible, or any interest
   -   UPA § 24: the property rights of a partner are (1) his rights in specific
       partnership property, (2) his interest in the partnership, and (3) his right to
       participate in the management.
   -   UPA § 25: nature of partner’s rights in specific partnership property:
            o (1) A partner is co-owner with his partners of specific partnership property held
                as Tenant in partnership
           o (2) Incidents of this tenancy: (a) you have a right to use it for partnership
               purposs, but you cannot (b) Assign it for personal reasons (c) Borrow against it
               for personal reasons; (d) Pass it on to his heirs.
   -   UPA § 26: A partner’s interest in the partnership is his share of the profits and surplus,
       and the same is personal property.
   -   RUPA § 501: A partner is not a co-owner of partnership property and has no interest
       in partnership property which can be transferred, either voluntarily or involuntarily.
   -   RUPA § 502: The only transferable interest of a partner in the partnership is the
       partner’s share of the profits and losses of the partnership, and his right to receive
       distributions. This interest is personal property.
   -   Groff v. Citizens Bank of Clovis (10th Cir. 1990)
          o Groff borrows money and uses cattle as collateral. Collateral includes, per
            agreement, “after-acquired” cattle.
          o He then joins a joint venture with Pickering which involves buying cattle.
            Partnership law is applied to the joint venture.
          o Question is, does the creditor of Groff have rights to the Groff-Pickering cattle?
                No. The cattle are partnership property, and therefore cannot be reached
                   by Groff’s individual creditors.
                Furthermore, parties under UPA have no rights to contract out of the
                   rules governing partnership property. Partnership property is
                   partnership property.
   -   Putnam v. Shoaf (Tenn. App. 1981)
          o When an award recovered from an embezzling accountant was received after a
            partner had left a partnership, the question is, does she have a right to a
            recovery for a wrong that occurred prior to her leaving?
          o No, says the court. You do not have a right to divvy up partnership property –
            you only have your interest in the property. She assigned away her interest, so
            does not have a right to the current interest of the partnership.
                She has no right to any specific portion of that which belongs to the
                This arguably gave a windfall to the remaining partners – she would have
                   a had a right to a portion of the money if it had been discovered at the
                   time she was still a partner.
   -   Sharfman v. State (Cal. App. 1967)
          o When a partner is injured in a negligently-caused car accident and his services in
            a landscaping firm are lost, can the partnership reclaim for a loss of earnings and
            profits resulting from the injury?
          o The court does not allow it. Allowing the partner to recover on top of the
            partnership would in effect be giving double-recovery.
          o This result isn’t necessarily infallible – it seems as though there could be times
            when a partnership could recover, or at least seek indemnification for its losses.

Contractual Powers of Partners
-   Partners are regarded as agent of the partnership when dealing on behalf of the firm.
-   UPA § 4(3): Law of agency applies to UPA.
-   UPA § 9: defining partnership agency: (1) partner is agent of partnership… an act of a
    partner for apparently carrying on in the usual way is binding, unless had no authority
    to act, and person with whom he was dealing has knowledge that he has no such
    authority (UPA § 3: person has knowledge not only when has actual knowledge, but also
    when has knowledge of other such other facts as the circumstances show bad faith). (2)
    Act of partner which is not apparently for the carrying on of the business of the
    partnership in the usual way does not bind the partnership unless authorized by the
    other partners.
         o RUPA § 301: identical to UPA 9(1), and 9(2)
-   UPA § 18: Rules determining Rights and Duties of Partners: (a) each partner shall be
    repaid contributions and share equally in profits & losses after all liabilities are satisfied.
    (b) indemnify partners for payments and liabilities reasonably incurred (g) no one can
    become a partner without consent of all partners. (h) any difference arising as to
    ordinary matters can be settled by a majority
         o RUPA § 401: Partner’s Rights and Duties: (a)(1) each partner has an
            account that is: credited with amount equal to anything he has contributed,
            minus liabilities, plus his share of profits (2) charged with amount equal to
            money plus value of any other property distributed by the partnership, minus his
            share of partnership losses. (b) equal shares in profits and losses; (c)
            indemnification; (f) equal rights in management; (i): person may become partner
            only with consent of all other partners; (j) majority rule for disputes.
-   Actual Authority
       o General Rule: In some cases, actual authority can be implied by course of
         conduct. In Babbit, one partner, Beall, had been given broad management
         powers in the past, so the court upheld his ability to invoke those powers. If
         partners do not use their management rights, they might lose them with regards
         to ordinary decisions.
              In partnership disputes, where the partners are equally divided, the
                 status quo will rule – in Summers, one partner was able to stop the other
                 from hiring an employee, while in Nabisco, one partner was unable to
                 stop the other from continuing to order bread as usual. UPA § 18:
                 partners have equal rights in management
              Also, Apparent Authority: if a partner has apparent authority to do a deal,
                 courts will be more sympathetic to their actions
       o Elle v. Babbitt (Ore. 1971)
              A dispute within a partnership arose with regards to a reduction of a
                 royalty payment by one of the partners from leased pipe-making
              Could the partner, Beall, make this decision without a vote, etc.? Yes, the
                 court decides. The prior course of conduct implies that he was the
                   “managing partner,” and partners can agree, explicitly or implicitly, to
                   give management rights.
                  This decision is debatable, though:
                        The partners had previously rejected proposals by him
                        A conflict of interest, in that Beall owned the corporation that got
                          the benefit of the royalty cut
      o Summers v. Dooley (Id. 1971)
           Question of whether one partner had the authority to hire an employee
              against the wishes of the other partner, when the objecting partner
              enjoyed the benefits of the employee, and the hiring partner paid the
              employee out of personal funds.
           In this case, the court shoots down the ability to hire the employee. Per
              UPA § 18, majority must ratify disputes as to ordinary matters. If the
              partners are equally divided, then the status quo must rule.
      o National Biscuit Co. v. Stroud (NC 1959)
           One partner continued to order bread from Nabisco for a grocery store
              run by the partners, while the other repeatedly told Nabisco that he
              would pay for no bread.
           The court holds that, because the ordering of the bread was ordinary
              partnership business, one partner, with no majority power, could not
              restrict the other. Thus, the ordering of the bread was binding on the
-   Apparent Authority
      o General Rule: UPA § 9(1) and RUPA § 301 both allow for apparent authority, if
        the action was in the ordinary course of business, and the person with whom he
        is dealing had no actual knowledge that he lacked the authority.
      o RNR Investments LLP v. Peoples First Community Bank (Fla. App.
                  Question of whether a general partner who had no actual authority to
                   make a loan beyond the amount authorized by the limited partners.
                   Peoples had loaned the money to RNR.
                  Florida was under RUPA: first, must determine whether partner is
                   carrying on partnership business in the usual way, or business of the kind
                   carried on by the partnership. If so, then it is binding, absent a showing
                   that the person with whom the partner is dealing knew the partner
                   lacked authority.
                        This must be actual knowledge. Both UPA and RUPA agree.
-   Estoppel
      o General Rule: If a person represents itself as being a partner in an enterprise,
        and a third party reasonably relies on the representation and as a result does
        business with the enterprise, then the person who was represented as a partner
        is liable as if they were a partner, and others who made or consented to the
        representation are bound by the person’s act, as if they were partners.
                 UPA § 16, RUPA § 308.
                       Similarities:
                              o Both hold that there is no duty of denial – a partner must
                                  actually consent to the representation, though this
                                  consent can be implicit.
                              o BUT: If the representation is made publically, then the
                                  partner can be liable to someone who relies even if the
                                  partner is not aware of being held out.
                       Differences: RUPA clarifies in the comments that there must be
                          actual reliance by the party claiming estoppel
                 Public indicia of a partnership can tip the balance…
                 Recall that there must be consent to the representation by the other
                  “partners” – but that consent can be implied from a history of the
                 Duty to Investigate? It’s unclear. There is no “reasonable” requirement
                  under §§ 16 or 308.
       o Royal Bank v. Weintraub, Gold & Alper (NY App. 1986)
            The question in the case is whether a firm can be found to be in existence
               by estoppel based on representations they made, including have a
               receptionist answering phones, having their office name, no public
               announcement of their dissolution…
            Court: They are estopped from denying the existence of their firm, based
               here on UPA § 16.
                    Consent to the representations can be implied – here, they
                      allowed them to go on for two years.
-   Tort Liability for the Wrongs of Partners
       o General Rule: Both UPA and RUPA impose liability upon partnerships for the
         wrongs of their partners, though UPA imposes only joint liability upon contract
         wrongs, and Joint and Several upon torts, while RUPA imposes joint and several
         liability upon everything.
              There is vicarious liability in general partnerships.
              You are always liable for your own torts.
       o UPA § 13: Partnership Bound by Partner’s Wrongful Act: when loss or injury are
         caused to any person not a partner, in the ordinary course of partnership
         business, partnership is liable to the same extent as the partner.
              UPA § 14: Partnership Bound by Partner’s Breach of Trust
              UPA § 15: partners are joint and severally liable for everything chargeable
                  to the partnership under §§ 13 & 14.
       o RUPA § 305: (a) correlates with § 13, (b) § 14
              RUPA § 306: imposes joint and several liability for all obligations of the
       o Differences: UPA imposes only joint liability upon contractual breach, and joint &
         several liability upon torts. RUPA imposes joint and several liability upon both.
       o Exhaustion Requirement: RUPA retains personal liability for General Partners for
         wrongs, but imposes an exhaustion requirement of partnership assets before
         individual assets can be reached. RUPA § 307.
-   Tort Liability of Partnership to an Injured Partner:
       o General Rule: Under UPA, the Co-Principal Doctrine prevented recovery of a
         partner against the partnership for a tort – you were not considered separate
         from the partnership, and thus couldn’t “sue yourself.” Was based on the “Not a
         partner” language in § 13.
             RUPA, due to the entity theory, gets rid of the Co-Principal Doctrine
       o Smith v. Hensley (KY 1962)
             Hensley sues partnership to recover for the negligent destruction of a
                truck he had lent the partnership.
             The court circumvents the Co-Principal Doctrine, finding that it will not
                prevent recovery upon the “imputed negligence” legal fiction (since
                Hensley is a partner, he shares in the negligence of the partnership), for
                practical reasons.
-   Notice and Notification to the Partnership
       o General Rule: Both UPA and RUPA hold that knowledge can be imputed onto the
         partnership when received by a partner. But they differ in their approach.
              Generally, UPA § 3(1) imputes knowledge onto a person when they
                actually knew, or should have known.
              RUPA § 102(a) only imputes actual knowledge onto a person.
              They are similar in their treatment of notice – stated to person, or
                delivered to place of business. UPA § 3(2), RUPA § 102(d)
                      RUPA 102(b), unlike UPA, defines notice: you have notice if you
                        know of a fact, have received notification of it, or have reason to
                        know it exists…
              When Attributing Knowledge to the Partnership,
                      UPA § 12: only binds the partnership regardless of reasonability
                        when the partner is “acting in the particular manner” of a
                        partner. Can be either acquired while a partner, or if it’s present
                        in his mind while a partner.
                            o If not so acting, only binds partnership if reasonably could
                                and should have communicated it to the acting partner.
                      RUPA § 102(f) says simply that a partner’s knowledge of a fact is
                        effective immediately as knowledge by the partnership.
       o UPA § 3: (1) knowledge when has actual knowledge, or circumstances would
         show bad faith; (2) person has notice of a fact when the person who claims the
         benefit of the notice (a) states the fact to such person, or (b) delivers through
         the mail a written statement…
              UPA § 12: notice to any partner of any matter relating to partnership
                affairs and the knowledge of the partner acting in the particular manner,
                 acquired while a partner, or knowledge of any other partner who
                 reasonably could and should have communicated it to the acting partner,
                 operates as notice to or knowledge of the partnership, except in case of
       o RUPA § 102: (b) person has notice of a fact if the person (1) knows of it; (2) has
         rec’d notification of it; (3) has reason to know it exists from all facts known to
         person at time in question. (d): a person receives a notification when the
         notification (1) comes to the person’s attention, or (2) is duly delivered at the
         person’s place of business or at any other place held out by the person as a place
         for receiving communications.
              (f) a partner’s knowledge, notice, or receipt of a notification of a fact
                 relating to the partnership is effective immediately as knowledge by,
                 notice to, or receipt of a notification by the partnership, except for case
                 of fraud
       o Federal Deposit Insurance Corp. v. Braemoor Associates (7th Cir.
                 The president of a bank had funneled money to Braemoor, a joint
                  venture, in breach of his duty to the bank.
                 Can the breach of duty by one of its partners be imputed to the joint
                 This case turns on whether the partners should have known that he was
                  acting illegally. FDIC argues that they had constructive knowledge.
                 Posner says that, yes, the knowledge is imputed onto them, by fact that
                  they’re partners.
-   Duty of Loyalty
       o UPA left most of the fiduciary duty issues up to the common law – was silent
         about them.
       o RUPA § 404, on the other hand, incorporates fiduciary duties, is more specific. It
         also adds a wholly new subsection, (e), that implies that a partner doesn’t
         violate the duty merely because he acts in his own self-interest. This attempts
         to add flexibility on issue of whether partners could act in their own interest.
              Per RUPA, you cannot contract out of the duty of loyalty entirely, but
                 you can identify specific areas of conduct that you will allow, and you
                 ratify actions that otherwise would violate.
       o Loyalty During Formation of Partnership: The Corley court dodged the question
         of whether loyalty attaches pre-formation, ruling instead under § 21, that a
         partner must account for any benefit he receives. RUPA eliminates the language
         of “during formation” found in UPA… contentious decision, but wanted to ensure
         that there was no attachment during the arms’ length negotiation period pre-
              UPA § 21(1): every partner must account to the partnership for any
                 benefit, and hold as trustee for it any profits derived by him without the
                 consent of the other partners from any transaction connect with the
           formation, conduct, or liquidation of the partnership or from any use by
           him of its property.
          RUPA § 404: (a) only fiduciary duty a partner owes the partnership and
           the other partners are duty of loyalty and duty of care.
                (b) Duty of Loyalty:
                       o (1) UPA § 21(1) – account to partnership
                       o (2) no dealing with adverse parties during conduct or
                          winding up of partnership.
                       o (3) no self-dealing (ie, competing with partnership) before
                (c) Duty of Care:
                       o Duty of care is limited to refraining from engaging in
                          grossly negligent or reckless conduct, intentional
                          misconduct, or knowing violation of law.
                (e) A partner does not violate a duty or obligation merely because
                   the partner’s conduct furthers the partner’s own interest.
          RUPA § 103(b)(3)(i): you cannot contract out of the duty of loyalty, but
           you may agree to specific types of activities that do not violate, as long as
           not manifestly unreasonable.
                (ii): partners may ratify a specific transaction that otherwise
                   would violate the duty of loyalty.
o Corley v. Ott (SC 1997)
      Question of Duty of Loyalty during the formation of the partnership
      Ott held an option to purchase some land that he did not disclose to
        Corley when he approached him to buy the land to try to make money on
        it. He then exercised his option, bought the land himself, and
        immediately sold the land to their partnership for a profit.
      The question in the case is, is there a duty of loyalty before formation of
        the partnership, such that Ott had a duty to tell Corley?
              Court dodges the question. Says that the partnership may be
                 found to have existed by implication from the partners’ conduct,
                 and that it existed at least concurrently with the transaction.
o Meinhard v. Salmon (NY App. 1928)
      Famous case dealing with partnership opportunity. Salmon breached his
        fiduciary duty in making a side deal concerning property after the current
      What was the duty? Had to at least inform him of the opportunity.
        Disclosure appears to be the only thing at issue. Meinhard should have
        been given the option of taking the deal.
      Cardozo does not go as far as to say that the opportunity belongs to the
                 Salmon’s role as the managing partner appears to have sway – perhaps
                  bears a greater burden. Furthermore, his role allowed him to take the
                  opportunity in the first place.
                 Decision appears based on: management responsibility; opportunity;
                  proximity of the new property to the partnership property.
       o Singer v. Singer (Ok. 1981)
             Singer family was a partnership for oil production, which became
               fractionalized over the years.
             When partnership met to discuss the purchase of a plot of land, two of
               the partners thereafter purchased the land on their own.
             But, a paragraph in the partnership agreement held that “partners are
               free to deal as if they are not and never have been members of this
             So what otherwise would have been a breach is allowed.
-   Fiduciary Duties While Leaving the Business
       o We examined these issues in the context of “grabbing and leaving” – lawyers
         who are dissatisfied with their compensation. The ability to “compete” with the
         firm is what is at issue in these cases.
       o General Rule: in both the cases we examined, the courts found a breach, not
         because of leaving and competing, nor the fact of their solicitation, but rather
         because of the way in which they went about the leaving.
              UPA and RUPA differ on disclosure – UPA § 20 requires demand, while
                 RUPA § 403 imposes obligation on partners even without being asked,
                 when information is reasonably required for the proper exercise of the
                 partner’s rights and duties under the partnership agreement.
              Solicitation of Employees is more restricted than solicitation of clients.
                 Pre-withdrawal recruitment is allowed only after the firm has been given
                 notice of the lawyer’s intention to withdraw.
              Meehan v. Shaugnessy (Mass. 1989)
                      Two partners left a law firm. The court finds that they breached
                         their duty to account to the partnership, so they owed the
                         partnership for cases that they took with them.
                      Actions by Partners That Violated:
                              o Sent a letter on the firm’s letterhead, didn’t make clear to
                                 clients that they had a choice of who to go with
                              o Refused to give their list of clients to the firm
                              o Denied that they were leaving.
                      UPA § 20: partners shall render on demand true and full
                         information of all things affecting the partnership to any partner
                         or legal representative.
              Gibbs v. Breed, Abbott & Morgan (NY 2000)
                      Gibbs and Sheehan left BAM and lost a counterclaim at trial for
                         breach of fiduciary duty. Appeal is from that finding.
                        One of them had prepared a memo for their new firm, with
                         information about BAM’s billing, attorneys, etc.
                        On appeal, only this memo is found to be a breach. The deskfile
                         removal was not, because it was common practice, and the
                         partnership agreement was silent as to them.
                        They also found a breach in their recruitment of other employees
                         while still at the firm.
-   Duty of Care
       o Again, not mentioned in UPA. Applied via common law.
             The Business Judgment Rule applies under UPA – only egregious error
                will bring liability for managers.
       o RUPA has a duty of care, but allows it to be contracted out of.
             The duty of care is limited to gross negligence or recklessness or
                intentional misconduct by RUPA § 404(c). Mere negligence will not carry
       o Bane v. Ferguson (7th Cir. 1989)
             A retired partner loses a pension he would otherwise be entitled to
                because the firm goes out of business after a bad merger. Sues under the
                duty of care.
             To start, however, Posner says that there is no fiduciary duty owed to
                former partners.
             Furthermore, § 9 of UPA cannot be used to create liability – it was
                intended to limit it.
             Finally, the Business Judgment Rule protects managers from everything
                but the most egregious of errors.
       o Moren v. Jax Restaurant (Minn. App. 2004)
             Jax is a partnership. Moren, one of the partners, brings her child to work
                and he injures himself in the kitchen. His father sues the partnership. The
                partnership sought indemnity against Moren.
             Courts holds that, because she was in the ordinary course of business,
                RUPA § 305. she does not need to indemnify the partnership, and the
                partnership must indemnify her.
             A seemingly mixed personal / business element is still found protected
                here. Despite the fact that her son being there was entirely personal, she
                is still indemnified.
-   The Duty of Disclosure
       o UPA § 20: conditions duty of disclosure on a request by a partner.
       o RUPA § 403: requires partners to furnish relevant information without any
         specific demand.
             But remember: § 103, and 103(b)(2): you can contract around specific
                 duties, within reason – but (b)(2): you may not unreasonably restrict
                 right of access to books and records.
       o Materiality Requirement: Courts will limit this duty to information that is
             Materiality can take into account not only particular circumstances, but
               also the degree of sophistication of the partners, whether they’re a
               managing partner, etc.
-   Duty of Good Faith
       o UPA only mentions good faith in regards to expulsion: UPA § 31(1)(d) says that
         you can dissolve the partnership by the expulsion of any partner from the
         business “bona fide.”
             In the Page v. Page case (see below), Traynor suggests that a dissolution
                 of an at-will partnership is subject to the duty of good faith.
       o RUPA § 404(d): a partner shall discharge the duties to the partnership and other
         partners, and exercise any rights consistently with the obligation of good faith
         and fair dealing.
             RUPA appears to treat this more as a contractual obligation than
-   Creditors’ Rights
       o Under UPA, the aggregate theory prevented a collection against the partnership,
         but rather allowed for suit against the individual.
             Partner’s Equity: The creditor’s right were derived through the partner’s
                rights under § 38 of UPA to have partnership property paid to discharge
                partnership liabilities.
       o Today, most states allow direct suits against partnerships by statute, even if
         RUPA has not been enacted.
       o Under RUPA, a partnership can sue and be sued.
             RUPA § 307(a): partner may sue and be sued in the name of the
             RUPA § 501: a partner is not a co-owner of partnership property and has
                no interest in partnership property which can be transferred, either
                voluntarily or involuntarily.
       o Rights Against Personal Assets of Individual Partners
             At common law, individual creditors could reach partnership assets.
             The Key Aspect of entity law was to provide protection of the group assets
                against the creditors of the individual members of the entity.
                           o Summary: a creditor can get a payment stream, usually
                                through a charging order, or can foreclose on the property
                                if he doesn’t think he’ll get paid in a reasonable amount of
                                time, but he cannot get the partner’s management rights,
                     UPA § 25: seals partnership assets from individual creditors.
                           o § 27: a conveyance by a partner of his interest in the
                                partnership does not of itself dissolve the partnership,
                                nor entitle the assignee during the continuance of the
                     partnership, to interfere in the management or
                     administration of the partnership business or affairs…
                     Merely entitles the assignee to receive in accordance with
                     his contract the profits to which the assigning partner
                     would otherwise be entitled
                 o § 28: Charging Order: may be imposed by a court against
                     the interest of the debtor partner on due application by
                     the creditor.
                          Recall § 24: Partner has three rights in a
                             partnership: property, interest, and management.
                             Creditors can only reach the interest.
                 o § 28(2): creditor may foreclose on the interest of a
                     partner. This has been restricted by courts to
                     circumstances where creditor would not otherwise obtain
                     payment within a reasonable time through partnership
                     distributions pursuant to a charging order
                 o § 26: interest of a partner is his share of the profits and
                     surplus (excess of assets over liabilities).
                 o § 32(2): purchaser at a foreclosure sale does not buy the
                     privilege to exercise managerial powers, but does acquire
                     the power to dissolve the partnership
                          IMPORTANT ERROR IN 32(2): Is meant to say “27
                             or 28,” talking about assignments… instead, says
                             “28 and 29.”
   RUPA § 504: equivalent to § 28, Charging Orders
   Exhaustion Requirement: RUPA § 307 imposes an exhaustion
    requirement before partners’ individual property can be reached.
   The Jingle Rule: Under UPA, priority of creditors during insolvency was
    split based on what type of creditor it was. A personal creditor had first
    priority over personal assets, while a partnership creditor had priority
    over partnership assets.
         RUPA § 807(a): gets rid of Jingle Rule (Comment 2). Creditors, not
             distinguishing between personal and partnership, must be
             satisfied before any payout to partners occurs.
   Majority of states: creditor of a joint and several obligation can obtain a
    judgment against any partner it chooses, or against the partnership, or
         Creditor can execute against the personal assets of the partner it
             has chosen until satisfaction of the underlying claim is achieved
             without having first to execute against partnership assets
   UPA § 18(b) softens this rule, since a partner who pays a firm obligation
    is entitled to indemnity
   RUPA § 306: retains personal liability for each partner, despite entity
    theory. But, 307(d): must exhaust partnership assets first.
-   How to Prevent Partners From Hiding Assets From Creditors
      o How to prevent partnership from transferring its asset to hide from creditors?
               Neither UPA or RUPA address, but Uniform Fraudulent Conveyance Act
      o § 8: conveyances of partnership property when firm is or will be thereby
          rendered insolvent are fraudulent as to partnership creditors if there is no fair
          consideration given to the partnership.
               Insolvency defined: § 2(1): time when the present fair salable value of a
                 person’s assets is less than the amount that will become absolute and
      o § 2(2): in determining whether a partnership is insolvent, there shall be added to
          the partnership property to the present fair salable value of the separate assets
          of each general partner in excess of the amount probably sufficient to meet the
          claims of his separate creditors
-   Tupper v. Kroc (Nev. 1972)
      o Kroc is the limited partners, Tupper the managing partner of some limited
      o Kroc was seeking the dissolve the partnerships.
      o Kroc was a personal creditor of Tupper. Kroc seeks a charging order.
               Charging order is a lien against the partner’s interest in the partnership –
                  he gets the partner’s interest until the loan is repaid.
               Despite the presence of a no-assignment clause in the partnership
                  agreement, court allows charging order. Trumps a no-assignment clause.
-   Bauer v. Blomfield Co. / Holden Joint Venture (Ark. 1993)
      o Bauer, assignee of partnership interest, sues, feeling that profits are being
          wrongfully withheld from him. He loses at lower court, and Superior Court
          affirms against him.
      o Basically, the partnership paid a large and questionable commission to one of its
          partners… is it funneling money away from the debtor partners in order to keep
          funds from Bauer?
      o The majority says that they are not entitled to interfere with partnership affairs.
          However, the dissent makes the point that a good-faith inquiry into the
          commission must be made before the commission can be upheld.
- Dissolution (Termination of Partnership)
       o “Dissolution” under both UPA and RUPA begins the “winding up” period which
         results in the termination of the partnership. However, UPA and RUPA approach
         the process quite differently.
       o Dissolution Under UPA
              In general, UPA holds that any dissociation of a partner causes
              Summary:
                      § 29: defining dissolution
                      § 30: defining winding up
           § 31: causes of dissolution
           § 32: court-ordered dissolution
           § 37: right to wind up
           § 38(1): liquidation upon dissolution
           § 38(2): wrongful dissolution
   UPA § 29: the dissolution of a partnership is the change in the relation
    of the partners caused by an partner ceasing to be associated in the
    carrying on as distinguished from the winding up of the business.
         UPA § 30: on dissolution the partnership is not terminated, but
            continues until the winding up of partnership affairs is completed.
   UPA § 31: Causes of Dissolution. If any of the events in § 31(1) – (5)
    occur, the partnership is dissolved under UPA.
         (1) Without violation of the agreement between the partners

               o (a) by the termination of the definite term or particularly
                 undertaking specified in the agreement

               o (b) by the express will of any partner when no definite
                 term or particular undertaking is specified

               o (c) by the express will of all the partners who have not
                 assigned their interests or suffered them to be charged for
                 their separate debts, either before or after the
                 termination of any specific term or particular undertaking

               o (d) by the expulsion of any partner from the business bona
                 fide in accordance with such a power conferred by the
                 agreement between the partners

          (2) in contravention of the agreement between the partners,
           where the circumstances do not permit a dissolution under any
           other provision of this section, by the express will of any partner
           at any time;
          (3) by any event which makes it unlawful for the business of the
           partnership to be carried on or for the members to carry it on in
          (4) by the death of any partner
          (5) by the bankruptcy of any partner or the partnership
          (6) by decree of court under section 32.
         UPA § 32: Dissolution by Decree of Court:

                (1) On application by or for a partner, the court shall decree a
                 dissolution whenever

                    o (a) a partner has been declared insane or of unsound mind

                    o (b) a partner becomes in any other way incapable of
                      performing his part of the partnership contract

                    o (c) a partner has been guilty of such conduct as tends to
                      affect prejudicially the carrying on of the business

                    o (d) a partner willfully or persistently commits a breach of
                      the partnership agreement, or otherwise so conducts
                      himself in matters relating to the partnership business that
                      it is not reasonably practicable to carry on the business or
                      partnership with him.

                    o (e) the business of the partnership can only be carried on
                      at a loss

                    o (f) other circumstances render a dissolution equitable.

                UPA § 38: Rights of Partners Upon Dissolution
                    o (1) If not wrongful, you have a right to liquidation

                    o (2) If wrongful, (a)(I) partners who didn’t cause wrongfully
                      have rights from (1), and (a)(II) right to damages against
                      wrongful dissolvers.
                    o (b) If a partner wrongfully dissolves, the other partners
                      have a right to continue on, provided they either secure
                      bond from the court or pay the partner who wrongfully
                      dissolved his interest in the partnership.

                    o (c) (I) If the business is not continued, then has the right
                      to liquidation, subject to damages against him. (II) if the
                      business is continued, has a right to have his interest
                      ascertained and paid him in cash, or payment secured by
                      bond approved by court, and to be discharged from all
                      existing liabilities of the partnership.
o Dreifuerst v. Dreifuerst (Wis. App. 1979)
                 Plaintiffs and defendants are brothers in a partners. Partnership had two
                  feed mills. Parties, upon dissolution, were unable to agree to a winding-
                 The trial court divided the assets in kind – one mill to the plaintiff, the
                  other to the brothers. The plaintiff appealed the division, instead seeking
                 Appeals court rules for plaintiff- there must be a liquidation. The only
                  exception to the liquidation rule, in Rinke v. Rinke, is when there are no
                  creditors, only the partners are interested in the assets, and the
                  distribution would be fair to all partners.
       o Nicholas (Notes Case)
             Another situation where courts might order in-kind division – when they
               feel it would be inequitable to allow one partner to underbid a partner
               who had contributed the assets himself to the partnership. Because
               capital contributions must be paid back first, one way of framing this case
               is that the factory was a “capital contribution” of sorts.
-   Dissolution at Will vs. Wrongful Dissolution Under UPA
       o Under UPA, partnerships were considered a voluntary association and could be
         dissolved at the will of a partner at any time. However, if a partnership
         agreement were in place, a dissolution could be wrongful. If it was, this changed
         the character of the winding up process.
              Per UPA § 31(2), a dissolution can be in contravention of the agreement
                 between the partners. So even if it is a term partnership, it can be
                 dissolved at will by a partner, albeit wrongfully.
              Per Page, a dissolution might also be wrongful in an at-will partnership if
                 it violates a fiduciary duty – namely, good faith.
       o Page v. Page (Cal. 1961)
              Plaintiff and defendant are partners in a linen business that has been
                 losing money for years. Finally, it becomes profitable. The plaintiff seeks a
                 declaratory judgment that the partnership is at will, and thus he is free to
                 dissolve it.
              First Issue: Can a term partnership be implied, with the “term” being that
                 the partnership will continue until it has paid off its loans? Traynor, for
                 the court, rejects this reasoning. Every partnership could be said to be in
                 it to pay off its loans. If a partnership has been unprofitable for years,
                 there should be a way for the partnership to get out of it.
              Second Issue: Traynor suggests, however, that there are limits to when a
                 partner can terminate a partnership, even in an at-will partnership! The
                 partners are still bound by fiduciary duties to one another, among which
                 is the duty of good faith. If the termination is not made in good faith,
                 then it can be deemed a wrongful dissolution.
       o Potter v. Brown (Penn. 1938)
                 A dominant partners, Brown, wants to bring in another partner from a
                  different line of work. When most of the other partners reject his
                  proposal, he cuts their salaries by half, though he later restores them.
                 This was a term partnership. Brown had the ability to do what he did
                  under the partnership agreement.
                 This is an instance requirement court intervention: § 32.
                 First, court shoots down § 32(1)(c). Why? The business is thriving. Thus,
                  “affects prejudicially” can’t apply.
                 § 32(1)(d): Willful and consistent breach… but his actions were not literal
                  violations of the agreement.
                 Court eventually shoots down the suit, will not dissolve the partnership.
                  “Equity is not a referee of partnership quarrels.” Perhaps this suit also
                  turns on the fact that Brown built the business, and contributed much
-   Dissociation / Dissolution Under RUPA
       o RUPA changes the presumption that dissolution ends the partnership. Instead,
         its “default” is that the partnership continues.
               RUPA continues, however, the “Single Partner Bust Up Rule,” which is
                 the at-will bust up rule.
       o RUPA § 601: Events Causing a Partner’s Dissociation

                 (1) partnership having notice of partner’s express will to withdraw as a

                 (2) an event agreed t in the partnership agreement as causing the
                  partner’s dissociation

                 (3) partner’s expulsion pursuant to the partnership agreement

                 (4) partner’s expulsion by unanimous vote of partners, if

                        (i) it is unlawful to continue with that partner

                        (ii) there has been a transfer of all or substantially all of that
                         partner’s transferable interest in the partnership

                        (iii) it is a corporation partner who is being dissolved

                        (iv) it is a partnership partner and is being dissolved / wound up.

                 (5) on application by partnership or another partner, the partner’s
                  expulsion by judicial determination, because:
                (i) partner engaged in wrongful conduct that adversely and
                 materially affected the partnership business
                (ii) partner willfully or persistently committed a material breach of
                 the partnership agreement or of duty owed to partnership under
                 § 404
                (iii) partner engaged in conduct relating to partnership business
                 which makes it not reasonably practicable to carry on business in
                 partnership with the partner.

         (6) the partner
               (i) becomes a debtor in bankruptcy
               (ii) executes an assignment to the benefit of creditors
               (iii) agrees to have all of his property consented to a trustee /
                  receiver / liquidator
               (iv) if does not consent to it, fails within 90 days to have it

         (7) partner as an individual:
               (i) partner dies
               (ii) appointment of guardian or conservator for the partner
               (iii) a judicial determination that the partner has otherwise
                  become incapable of performing partner’s duties under
                  partnership agreement.

o RUPA § 602: Defining Wrongful Dissociation

         (a) A partner has the power to dissociate at any time, rightfully or
          wrongfully, by express will pursuant to § 601(1)

         (b) A partner’s dissociation is wrongful only if:

                (1) it is in breach of an express provision of the partnership
                 agreement, or

                (2) in the case of a partnership for a definite term or particular
                 undertaking, before the expiration of the term or the completion
                 of the undertaking:

                     o (i) the partner withdraws by express will, unless the
                       withdrawal follows within 90 days after another partner’s
                       dissociation by death or otherwise or wrongful
                       dissociation under this subsection.
                     o (ii) the partner is expelled by judicial determination under
                       § 601(5)

                     o (iii) partner is dissociated by becoming a debtor in
                       bankruptcy, or

                     o (iv) in the case of a partner who is not an individual, trust
                       other than a business trust, or estate, the partner is
                       expelled or otherwise dissociated because it willfully
                       dissolved or terminated.

         (c) a partner who wrongfully dissociates is liable to the partnership and
          to the other partners for damages caused by the dissociation.

o RUPA § 603: Effect of Dissociation

         (a) If a partner’s dissociation results in a dissolution and winding up of the
          partnership business, Article 8 applies; otherwise, Article 7 applies.

         (b) upon a partner’s dissociation:

                (1) the partner’s right to participate in management and conduct
                 of partnership business terminates

                (2) the partner’s duty of loyalty under § 404(b)(3) terminates; and

                (3) the partner’s duty of loyalty under § 404(b)(1) and (2) and duty
                 of care under § 404(c) continue only with regard to matters
                 arising and events occurring before the partner’s dissociation,
                 unless partner participates in winding up the business.

o Horizon v. Southern Oaks (Fla. App. 1999)
     Both partners are corporations. Southern Oaks will provide a nursing
        home, and Horizon will run it.
     Southern Oaks alleges that Horizon breached by failing to adequately run
        the homes.
     Brings suit under RUPA § 405: a partner may maintain an action against
        the partnership or another partner for legal or equitable relief to (1)
        enforce the partner’s rights under the partnership agreement.
     But the court does not allow for damages to Southern Oaks under the
        wrongful dissolution theory.
         Court’s Reasoning: The trial court dissolved this agreement under § 801,
          which is dissolution, and not under § 602, which is dissociation. Under
          RUPA, the court reasons, there cannot be wrongful dissolution, only
          wrongful dissociation.
         Flaws in the Court’s Reasoning:
              First, the appellate court relies on the fact that the trial court
                 below had found irreconcilable differences, and that the
                 partnership agreement made provisions for irreconcilable
                 differences. But there has to be reasonable and good faith
                 differences to have irreconcilable differences, and that’s not what
                 is occurring here.
              Also, seems to be suggesting that if an agreement makes
                 provision for a court-ordered termination, it is contracting around
                 602, wrongful dissociation… but this doesn’t seem likely. Just
                 because a court orders a dissolution doesn’t mean it isn’t
              Furthermore, the court suggests that § 806 somehow wipes out
                 the § 405 liability because it is a dissolution. This is not actually
                 contemplated by RUPA.

o Post-Dissolution Liabilities of Partnerships and Partners
      Incoming Partners’ Liabilities for Pre-Existing Partnership
                 UPA § 17: a partner who comes is responsible for preexisting
                  debts of partnership, but only as far as their rights to partnership
                  assets and profits – they are not personally liable for preexisting
                 RUPA § 306: (b) A person admitted as a partner into an existing
                  partnership is not personally liable for any partnership obligation
                  incurred before the person’s admission as a partner.
         Actual Authority Upon Partner’s Leaving Partnership
                 Under UPA, no partner had authority to act until a new
                  partnership was formed, except for winding up.
                 UPA § 33: Except so far as may be necessary to wind up
                  partnership affairs or to complete transactions begun but not
                  then finished, dissolution terminates all authority of any partner
                  to act for the partnership.
                      o But, § (1)(a) – (b): If the dissolution is by act, bankruptcy,
                          or death, UPA § 34 applies:
                               If it’s caused by act, bankruptcy or death, then the
                                  partnership is still liable for acts done as if it had
                                  not been dissolved, unless they had knowledge of
                          the act, or had knowledge or notice of the death or
   Apparent Authority to Bind Partnership After Leaving
          UPA § 35: Power of Partner to Bind Partnership to Third Persons
           After Dissolution (Apparent Authority)
              o (1)(a): any act appropriate for winding up partnership
                  affairs or completing transactions unfinished at dissolution
              o (1)(b) by any transaction that would have bound the
                  partnership absent dissolution, provided the other party
                       (I) had extended credit to partnership prior to
                          dissolution and had no knowledge or notice of the
                          dissolution, or
                       (II) Hadn’t extended credit, but nevertheless known
                          of the partnership prior to dissolution, and having
                          had no knowledge or notice, dissolution hasn’t
                          been advertised in a newspaper.
              o 35(2) liability of a partner under (1) shall be satisfied out of
                  partnership assets alone (not personally liable) when such
                  partner had been prior to dissolution
                       (a) unknown as a partner to the person with whom
                          the K is made, and
                       (b) so far unknown and inactive in partnership
                          affairs that the business reputation of the
                          partnership could not have been said to have been
                          in any degree due to his connection with it.
              o (3) partnership is in no case bound by any act of a partner
                  after dissolution
                       (a) where partnership is dissolved b/c it is unlawful
                          to carry on the business, unless the act is
                          appropriate for winding up partnership affairs
                       (b) where the partner has become bankrupt
                       (c) where the partner has no authority to wind up
                          partnership affairs, except by a transaction with
                          one who (I) had extended credit to partnership
                          prior to dissolution and had no knowledge or
                          notice of his lack of authority, or (II) had no credit,
                          and was not notified by newspaper.
          Warner v. Modano (Mass. 1960)
              o Beale was a silent partner in a grocery store partnership
                with Modano.
              o They dissolve the partnership, but no notice is given.
                Creditors want to come after Beale.
       o Beale is definitely liable for debts incurred while he was a
           partner, even if no one knows he is a partner.
       o But as far as creditors for issues after the dissolution,
           Modano had not been operating under actual authority…
           can he bind the partnership based on apparent authority?
                Modano’s actions were not related to winding up…
                But, per § 35(1)(b), any transaction that would
                   otherwise bind, if creditors had previously known o
                   the partnership… and these creditors had… but did
                   they have to know of Beale, or just the
                   partnership? Court doesn’t answer this. Finds they
                   sufficiently know.
       o So Beale is liable out of his partnership share, but what
           about person liability?
                He gets out of personal liability through 35(2)(b) –
                   he was so far unknown that can’t be said to be
                   improving or enhancing the reputation of the
       o Note: Beale would have lost under RUPA § 804 if it had
           been dissolution (because partners are liable if party had
           no notice), but would have been fine under § 703 if it had
           just been dissociation (dissociated partners is only bound if
           creditors reasonable believed that he was still a partner).
   RUPA has more complex rules regarding actual authority, since
    they have both dissociation and dissolution.
   Authority Under Dissolution
       o RUPA § 806: (a) Except as in (b) and 306, after
         dissolution a partner is liable to the other partners for the
         partner’s share of any partnership liability incurred under
              (b) a partner who, with knowledge of the
                 dissolution, incurs a partnership liability under
                 804(2) by an act not appropriate for winding up, is
                 liable to the partnership for any damage caused to
                 the partnership arising from the liability.
       o RUPA § 804: Subject to 805, a partnership is bound by a
         partner’s act after dissolution that (1) is appropriate for
         winding up the partnership business, or (2) would have
         bound the partnership under 301 before dissolution if the
         other party to the transaction did not have notice of the
       o RUPA § 805: A partner can file a statement of
         dissolution, and if he does, person not a partner is deemed
                          to have notice of the dissolution as a result 90 days after it
                          is filed.
                 Authority Under Dissociation
                     o RUPA § 702: (a) For two years after a partner dissociates
                        without resulting in dissolution, if the partner is acting
                        under apparent authority, partnership is still bound to
                        parties who didn’t know of the dissociation.
                             (b) dissociated partner is liable to the partnership if
                                  this occurs.
                      o RUPA § 703: (a) a dissociated partner is still liable for
                        liabilities incurred before dissociation. (b) a dissociated
                        partner can be liable for liabilities incurred by the
                        partnership up to two years after he dissociates, if the
                        third party (1) reasonably believed he was still a partner,
                        (2) did not have notice of the dissociation, and (3) did not
                        have knowledge under 303 or 704.
o Pre-Existing Liabilities
      Long Tail Liability: Lawyers can be on the hook for existing relationships,
        even though they’re gone and have no ability to control for those cases.
             This is owing to § 703 of RUPA: dissociation doesn’t discharge you
               for obligations incurred while you were still a partner, and this can
               mean client that were taken on. Also, up to two years after you
               leave, you can be liable if the client reasonably believes you are
               still there…
             UPA § 36(1) used the words “existing liability,” which leaves open
               the question of whether a contract, as in a client, is a “liability” in
               this understanding.
                    o Redman find it to implicate malpractices on existing clients
                        that occur after departure.
      Redman v. Walters (Cal. App. 1979)
             Walters leaves the firm while Redman is still a client. After
               Walters is gone, a malpractice occurs and Redman is indisputably
               wronged by the remaining partners – can he go after Redman?
             Yes, says high court. Redman’s case was, per § 30, something that
               needed to be wound up. It was an existing liability, per § 36(1).
             Imputed Knowledge Issue: knowledge of a partner won’t be
               imputed onto a client except as within the scope of the client’s
               relationship with the firm. Here, Redman’s departure had nothing
               to do with client’s relationship with the firm (he wasn’t the
               client’s attorney).
      Munn v. Scalera (Conn. 1980)
                       Plaintiff Munns had contracted with two brothers to build their
                        home. The brothers then dissolved their partnership. The Munns
                        opted to go with one of the brother to continue the house. He
                        later incurred a liability onto them, and they sued both brothers.
                        Is the departing brother liable?
                       This turns on a reading of § 36(3): where a person agrees to
                        assume the existing obligations of a dissolved partnership, the
                        partners whose obligations have been assumed shall be
                        discharged from any liability to any creditor of the partnership
                        who, knowing of the agreement, consents to a material
                        alternation in the nature or time of payment of such obligations.
                       Does this mean, though, that the remaining brother had to take
                        all the liabilities? Court doesn’t read it this way. The fact that the
                        brother agreed to take some liabilities is sufficient.
                       Finally, court finds this to be material. Really, this was a situation
                        in which the Munns had made a loan to the existing brother.
-   Winding Up and Termination
      o UPA § 37 and RUPA § 803 are the relevant statutes.
            UPA § 43 gives the right to an accounting at the time of dissolution,
               which is a thorough investigation into a partner’s past transactions, and
               an evaluation / determination of the partner’s interests.
            UPA § 22 governs the actions during an accounting.
      o RUPA § 405 does away with the need for an accounting in order to have a
        partnership suit.
      o What does winding up entail?
            So must finish up the work, must do it without extra pay beyond what
               you would normally get, and you still owe fiduciary duties.
                    Dispensing with cases that are already under way. Proceeds from
                       those cases are partnership assets.
                    UPA § 18(f): There is no right to compensation for services
                       rendered by partners in furtherance of partnership business
                       during winding up…. Distributions continue according to pre-
                       dissolution rules.
                    RUPA § 401(h): a partner is not entitled to remuneration for
                       services performed for the partnership except for reasonable
                       compensation for services rendered in winding up the business of
                       the partnership.
                    § 404(b): once dissolution occurs, you are allowed to compete
                       with the partnership, but you can still breach by usurping a
                       partnership opportunity, or dealing on behalf of an adverse party.
      o RUPA § 803: you may preserve the partnership business or property as a going
        concern for a reasonable time… so winding up could take years, depending on
        how “reasonable” is interpreted.
o UPA § 37: Right to wind up: the partners who have not wrongfully dissolved the
  partnership, no bankrupt, has the right to wind up partnership affairs…
o Resnik v. Kaplan
       A partner, Resnick, who is departing, takes a bunch of cases and clients
         with him. The partners who remained want their share of a case Resnick
         took with him.
       Court: is Resnick entitled to the full fees from the clients he took?
               There is no extra remuneration during winding up. Resnick is
                  entitled to payment, but not the entire payment. The partnership
                  is entitled to its share.
o Marr: Similar factual situation to Resnick, opposite results – Lawyer gets to keep
  the entire fee. Court feels that they have “contracted out” of the Resnick

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