AGENCY & PARTNERSHIP
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.
- 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
- 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.
- 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
- 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
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
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
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.
DUTIES OF PRINCIPAL TO AGENT
- 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:
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,
- 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.
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
- Duty to Account
o Restatement § 382: an agent has a duty to keep and render accounts.
- 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
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.
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
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.
- 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
- 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.
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 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
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.
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
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
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
- 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
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
- 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
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
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
“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
- 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
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.
o Even if an employer explicitly instructs otherwise, they can still be held
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
o But, as in the Wilson case, if you’re getting lunch for the office, then you’re doing
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
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
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
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
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
- 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.
- 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
- 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
- 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
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.
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
- 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
- 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.
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.
- Autoxchange.com 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.
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
- 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
- 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
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
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
- 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
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
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
- 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
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
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
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
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
- 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…
- 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
- 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
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
This must be actual knowledge. Both UPA and RUPA agree.
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.
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
- 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
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
- Duty of Loyalty
o UPA left most of the fiduciary duty issues up to the common law – was silent
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
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
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
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
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
§ 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
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
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
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
(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
(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
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
(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
o (iii) partner is dissociated by becoming a debtor in
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
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
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
(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
(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
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
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
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
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
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
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
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
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-
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
§ 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