Business Associations Gadinis Fall 2016

Business Associations Outline

1. Introduction
1.1.
A.

2. Agency
2.1.

Formation of Agency Relationship

A.
Agency Defined
(1)
Rest. 3rd Agency 1.01 Agency is the fiduciary
relationship that arises when one person (a principal)
manifests assent to another person (an agent) that the agent
shall act on the principals behalf and subject to the
principals control, and the agent manifests assent or
otherwise consents so to act.
(2)
Cargill [Grain case] An agency is created through a course
of conduct where the facts, taken as a whole, show that one
party (first party) has manifested consent that another party
(second party) be its agent; the second party acts on behalf of
the first party; and the first party exercises control over the
second party.
(a)
Agency can be proven by circumstantial
evidence showing course of dealings between
parties.
(b)
directed Warren to implement its
recommendations
(c)
W acted on behalf of procuring grain for W, as
part of normal operations, which were financed
by .
(d)
was active participant in Ws operations.
exercised more than nominal control over W.
(i)
had right of first refusal over
grain.
(ii)
W couldnt buy stock, mortgages,
pay dividends w/o approval.
(iii)
criticized W finances, officer
salaries, inventory. s name on
drafts.
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(iv)
(e)

(f)

B.

C.

s power to discontinue financing

Ws operations.
financed W note to make $ as a lender; but to
establish a source of market grain for its
business. was not simply a Creditor.
(i)
was an intl trader of grain
products. W processed grain from
farmers and resold it.
Controversial Decision b/c much of this is
incident to debtor/creditor relationship.
(i)
Affirmative control power to
initiate or direct transactions []
Recommendations,
correspondence, criticism are
not affirmative power to direct
business. Could just be
rejected.
(ii)
Negative/passive control power to
limit, block, or veto conduct
initiated by others. [Not ]
Approval for mortgages, stock
purchases or paying dividends
are veto powers.

Manifestation of consent by
(1)
the to have act on his behalf
(a)
s manifestation has to reach somehow.
E.g. through intermediary.
(2)
the to act on behalf of the
(a)
doesnt have to be aware that consented.
(3)
On Behalf used to distinguish between other
relationships. Simply benefitting another is insufficient.
must be acting primarily for the benefit of the .
(4)
Consent is not the same as K.
(a)
No consideration/payment necessary e.g.
gratuitous agents.
Objectively Determined by all the facts and circumstances
(1)
Objective Based on RPP would perceive of the
manifestations at the same time, under the same facts &
circumstances. Only look to outward manifestations, not
subjective thoughts.
(2)
Can be oral, written, inferred by silence or conduct
(a)
Silence- e.g. can manifest consent by
beginning the required task
(3)
Can be a reasonable misinterpretation too
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(4)

D.

E.

F.

Can be inferred from the business relationship or course of

conduct. [Cargill]
To enter into a relationship that constitutes an agency
(1)
Not necessarily one that is explicitly defined as an agency
(2)
Parties can believe it to be otherwise i.e. their conception
does not control. As long as the agency amounts to the legal
definition of agency, it is one. [Cargill]
(3)
Formalities are not necessary doesnt have to be oral or
written. Dont need express reciprocal consent.
For to be subject to s control
(1)
Control doesnt need to be total, continuous, or significant
doesnt need to extend to the way the physically performs
work, but there needs to be a sense that the is in charge.
(a)
Control may be found simply b/c/ has
specified the task that should perform, even if
didnt prescribe details of how to accomplish
task
(2)
Control does not have to be expressly addressed courts can
look to course of dealings to determine relationship.
(3)
At a minimum there must be an understanding that is in
control of the goals/result/ultimate objectives of the
relationship.
(4)
When a creditor exercises extensive control over the
operations of its debtor, that control can by itself establish an
agency relationship.
Of Note
(1)
Creditors/Debtors [Cargill] Level of control can be a
substitute method to establish agency. When a creditor
exercises extensive control over the operations of its debtor,
that control can by itself establish an agency relationship.
Like Cargill, in these situations, the creditor becomes liable
for the debtors debts to other creditors.
(a)
A creditor becomes a when the creditor
assumes de facto control over the conduct of his
debtor, whatever the formal terms of the K with
his debtor may be.
(2)
Principals and Agents can be individuals or Organizations.
(3)
No payment or formal K is required Gratuitous s only
diff. is ability to terminate agency and standard of care
applicable to . If compensation is earned by acting to
advance interests of the then it is an agency.
(a)
Favors typically are for the benefit of another

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G.

2.2.

Burden of Proof
(1)
If a seeks to impose liability on an alleged on a K made
by an alleged then must prove the relationship exists.

Liability in Contract Stemming from Agency Relationship

A.
s Liability Depends on Type of
(1)
disclosed When and interact, has notice that is
acting for , and has notice of s identity.
(a)
is not personally liable. negotiates for .
Both and intend to be bound when acts
w/ actual, apparent, or even inherent authority.
(2)
undisclosed When and interact, does not
have notice that is acting for the
(a)
is personally liable on the K itself.
(3)
partially disclosed/ Unidentified When and
interact, has notice that is acting for but does not have
notice of s identity Actual Authority
(a)
is personally liable unless otherwise agreed.
B.
Actual Authority: Manifestation of a to an that the has power to deal
with s as a representative of the . Can be expressly conferred on the or
reasonably implied by custom, usage, or the conduct of the to the .
(1)
Express: Actual authority contained w/I agency agreement.
Expressly granted by the . If s word or conduct would
lead an RPP in the s position to believe the had authority
to act on the s behalf, then the has actual authority to
bind the .
(a)
Oral or written statements, even companys
organizational docs.
(2)
Implied: Comes from words or conduct between the and
the .
(a)
Incidental to Express 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. E.g.
proceeding to accomplish the steps necessary to
reach the stated goal.
(i)
E.g. tells to sell goods at an
auction but and know that a
stat. prohibits anyone but a licensed
auctioner to sell at an auction. With
no other indications, s authority
includes the authority to employ a
licensed auctioner.
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(b)

C.

Implied from conduct based on s

objectives + other facts knows cause to
reasonably infer authorization
(c)
Implied from custom & usage Based on past
dealings + other facts knows cause to
reasonably infer authorization. E.g. The
approval of of s prior transactions would
lead a RPP in s position to believe he had
authority to conduct matters the same way in the
future.
(d)
Implied b/c of emergency
Apparent Authority: When manifests to a that an is authorized, and
the reasonably relies on the manifestation. The must have done something
to cause a to reasonably believe that the has authority, and the must
reasonably rely on the s manifestations.
(1)
Liability If a relies on the apparent authority, the may
hold the liable for the conduct of the as long as the
acted within the scope of the authority manifested by to
the even if the conduct was not actually authorized.
(a)
Cannot be based merely on the representations
of or another actor. Must be based on
manifestations of . [White]
(2)
Established through Title/position An s title or
position given by the may create a reasonable belief in the
that the was authorized to act for the in ways that are
typical of someone who holds that position/title. E.g.
Treasurer likely has authority to write checks on Cos
account.
(3)
White v. Thomas In the absence of a and any indicia
that an has authority to engage in a specific action on the
s behalf, the does not have apparent authority to engage
in such action merely because the agent asserts she has such
authority.
(a)
authorized Simpson (S) to buy land up to
250K for all 217 acres except for the 3 acres of
the house. signed blank check. Pltf.
Successfully bid on the 3 acres for the home but
didnt get the 217. S got the 217 but realized her
bid was 327K. S offered Pltf. To buy some of
the 220 acres to bring amount down. S Kd w/
pltf. To sell 45 acres. S told Pltf. She had POA
for . But Pltf. Didnt ask to see it. later told
Pltf. He repudiated
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(b)

D.

S had actual authority to buy 217 acres for

250K; but not to sell it.
(i)
S didnt have implied authority to
sell any portion b/c not necessary to
accomplish the expressed task of
purchasing the 217 acre tract.
(c)
Ss Actions were not within the scope of her
apparent authority. never manifested that S
had such authority to .
(i)
Pltf. Knew S was acting on behalf
of
(ii)
The blank check signed by may
have indicated some limited
authority to purchase but no
evidence of authority to sell
(iii)
never held S out as having
authority to sell on his behalf (i.e.
never manifested to )
(iv)
Purchasing and selling are not that
closely related that a could
reasonably believe that authority to
purchase carries with it the authority
to sell.
(v)
Pltf. Was even concerned and asked
whether S was so authorized to sell.
Pltf. Didnt try to contact and
inquire further.
(vi)
Pltf. Didnt even demand to see the
POA. He only relied on what S said.
(d)
The declarations of an may be used to
corroborate other evidence of the scope of
agency, an s uncorroborated declarations
cannot solely demonstrate agency/scope of
authority without a manifestation by .
Inherent Authority: The power of an 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 .
[Rs28A]
(1)
Note: Only address Inherent authority once it is clear that
there is no actual or apparent authority.
(2)
General Agent + Disclosed/Partially A general agent
for a disclosed or partially disclosed has inherent authority
to bind for acts done on the s account which usually
accompany or are incidental to transactions which the agent is
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(3)

(4)

authorized to conduct if, although they are forbidden by the

, the reasonably believes that the is authorized to do
them and has no notice that he is not so authorized.
[Rs2161]
Test: Gallant Ins. v. Isaac
(a)
was acting w/I the usual/ordinary scope of its
authority; and
(b)
can reasonably believe that the has the
authority to conduct act in question; and
(c)
is not on notice that the is not so
authorized; thus
(d)
could reasonably foresee that a would
reasonably believe that could act in this
manner.
Gallant Insurance v. Isaac An has inherent authority to
bind its where (1) the acts within the usual and ordinary
scope of its authority, (2) a can reasonably believe that the
has authority to conduct the act in question, and (3) the is
not on notice that the is not so authorized.
(a)
Gallant Pltf. Insurer and Thompson was its
. s auth. Included power to bind on new
insurance policies and interim policy
endorsements like adding new drivers,
changing/adding vehicles under policy.
became bound to provide insurance when
faxed/called info to and premiums were paid
to . had Gallant insurance and on last day of
policy she traded in cars & she contacted and
told them about some specifics that car loan
needed. said that it was end of day, but
would immediately bind coverage contrary to
instructions and the policy. Sat. info was
faxed, but payment to be made mon. Sunday
in an accident. On Mon. paid premium -
said not paying for losses.
(b)
Inherent authority isnt from actual, apparent, or
estoppel comes from the agency relationship
itself.
(i)
Policy: exists for the protection of
persons harmed by or dealing with a
s .
(ii)
Binding insurance is an act that
usually accompanies/incidental to
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insurance transactions. The power to
bind occurred once it was axed.
(iii)
Even though policy states that
cant tell insured that they are bound
without payment this is common
practice since authorizes them to
bind coverage over the phone or by
fax.
(c)
could have reasonably believed that the had
authority to conduct act in question based on the
s direct and indirect manifestations.
(i)
Past dealings were all through
and never communicated with .
So it was reasonably to take s
words at face value. Reasonableness
was bolstered b/c took care of the
paperwork.
(d)
had no reason to second guess stating that
coverage was bound especially b/c it was
common practice by .
(i)
had no notice that wasnt
authorized to verbally bind coverage
absent payment.
(e)
also left unsupervised to establish common
practice in violation of s express authority.
2.3.
Liability in Tort Stemming from Agency Relationship
(Respondeat Superior)
A.
Labels Servants vs. Independent Contractors
(1)
Control in Agency P has the right to control conduct of A
w/ matters entrusted to A. P can determine ultimate goal is,
and A must strive to meet it. The degree of control varies
depending on relationship.
(2)
Master who employs an to perform service in his
affairs and who controls or has the right to control the
physical conduct of the other in performance of the service.
(3)
Servant who is employed by a master. If a person is
subject to control of another as to the means used to achieve a
particular result, he is a servant.
(4)
Independent Contractor person who Ks with another to
do something for him but who isnt controlled by the other or
subject to others right to control w/ respect to his physical
conduct in performing the undertaking. If a person is subject
to control of another as to his results only not how to
achieve results he is an IC.
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B.

C.

(5)
Determining an IC vs. Employee Many factors in Uber.
Liability for the Torts of Servants
(1)
Master is liable for torts committed by a servant within the
scope of his employment
(2)
Vicarious Liability/Respondeat Superior An employer is
liable for all torts committed by an employee acting within
the scope of his/her employment. Imposes strict liability on
employer.
(a)
Policy Servant may be judgment proof and
have no insurance. Master is in the best position
to mitigate and avoid risks/injuries. This is just
an incidental cost of doing business. The
business profits from hiring employees and
injuries by employees always happen. Because
business profits it is justified that the business
instead of the pltf. Bears the costs. Plus business
is better able to absorb costs and distribute them
through prices, rates, or insurance to the
public/society. Plus this makes employers more
selective in hiring, instructing, and supervising
servants and to take precautions to see that the
enterprise is conducted safely.
(b)
Scope of employment R3d 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 employers control. An employees
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.
(i)
R2d: If but only if (a) it is of the
kind he is employed to perform; (b)
it occurs substantially within the
authorized time and space limits; (c)
it is actuated, at least in part, by a
purpose to serve the master, and (d)
if force is intentionally used by the
servant against another, the use of
force is not unexpectable by the
master
Liability for the Torts of Independent Contractors
(1)
Respondeat Superior does not apply to independent
contractors. In certain situations, an employee can be held
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D.

liable for torts of an IC, but these cases are based on the
employers own negligence or as a matter of public policy.
[Humble Oil, Hoover]
(a)
Negligence in selecting an IC, or if the IC is to
perform a highly dangerous act (e.g. blasting)
(2)
Franchise Agreements & Agency Generally Franchiser
supplies brand Id/identity & controls distribution of
goods/services through a K that regulates the activities of
franchisee to achieve standardization. Franchisee has the right
to profit and bear risk of loss from operation of franchise.
(a)
If the agreement gives the franchisee too much
control over the day-to-day operations of the
business, agency relationship arises &
franchisor may be liable for torts of the
franchisee. [Humble Oil, Hoover]
Oconnor v. Uber Factors to consider in determining whether someone is an
employee or an independent contractor. No one factor is decisive. Labels
placed on the relationship by the parties is informative but not dispositive.
(1)
The K w/ drivers says they are independent contractors. Uber
says it is a tech company not a transportation company.
(2)
Performing work and labor for another is prima facie
evidence of employment. Such person is presumed a servant
absent contrary ev. (burden shifts to employer) [Uber says it
is a tech co. only providing platform. But drivers provide an
indispensable service & uber cannot survive w/o them]
(a)
Most significant factor is right to control work
details. [More=E]
(b)
Doesnt need to extent to all possible details.
Instead, does the entity retain all necessary
control over the workers performance. Freedom
is allowed.
(c)
Not how much control hirer exercises, but how
much control he retains the right to exercise.
(d)
Right to discharge at will without cause b/c this
right gives him the means to control s
activities. [E]
(e)
The one performing service is in a distinct
occupation or business [C]
(f)
Kind of occupation in that locality, work is
typically done under direction of [E] or by
specialist w/o supervision [C]
(g)
Skill required in particular occupation [less skill
= E]
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(h)

E.

Whether [E] or worker [C] supplies

instrumentalities, tools, workplace
(i)
Length of time for which services are to be
performed: more [E] less [C]
(j)
Method of payment is by time [E] or by the job
[C]
(k)
If work is part of regular business of the
[Regular business =E]
(l)
Whether the parties believe they are creating
employee or contractor relationship [Indicative
of, but not dispositive]
(m)
Employees opportunity for profit or loss depending on his
managerial skill [More skill = C]
(n)
Employees investment in equipment or materials required or
employment of helpers [C]
(o)
Degree of performance in working relationship
(p)
Whether services rendered is integral part of
alleged employers business [Business = more
control = E]
Humble Oil Refining Co v. MartinA party may be liable for a contractors tort if he
exercises substantial control over the contractors operations.
(1)
Mrs. L left car at humble service s station for repair. Before
working on car, it rolled down a hill and struck Pltf. Who
sued for negligence. argues not liable b/c station operated
by ICs Schneider (S).
(2)
Question of IC is a question of fact. The K between and S
and s exercise of control over the station operation indicates
that S is an employee
(a)
owns station, exercises control over station,
set hours of operation, provides its own car
products for sale & set prices for them.
(b)
pays 75% of utility bills, gave station
equipment, gave advertising & media &
products sold. Paid substantial part of operating
costs.
(c)
S only had business discretion on hiring,
discharging, and paying a handful of station
employees.
F.
Hoover v. Sun Oil Co A franchisee is considered an independent contractor
of the franchisor if the franchisee retains control of inventory and operations.
(1)
Pltf. Injured when car caught fire when filling gas at s
station, which was operated by Barone (B). Accident was due
to negligence of employee Smilyk.
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(2)

Facts indicate that B was an IC & had no control over

stations operation
(a)
B made no written reports to
(b)
B alone assumed the risk of profit or loss in
operating the business
(c)
B independently set station hours, pay scale, and
working conditions of employees.
(3)
Bs relationship w/ is typical of company-service station
relationships
(a)
B advertised & sold gas & other prods. w/ the
Sun label.
(b)
sales reps visited weekly to take orders for
prods., inspect bathrooms, discuss problems B
was having
(c)
reps made suggestions to improve sales/Mktg.
but B wasnt obligated to follow the advice.
2.4.
The Governance of Agency
A.
The as a Fiduciary
(1)
An is a fiduciary and as such owes the the obligation of
faithful service.
(2)
must always act in s interests
(3)
This requires the to disclose all matters affecting the
agency/within scope of agency
(4)
8.01 General Fiduciary Principle - An agent has a
fiduciary duty to act loyally for the principal's benefit in all
matters connected with the agency relationship
B.
Duty of Loyalty
(1)
An is accountable to for any profits arising out of the
transaction he conducts on behalf of
(a)
Tarnowski v. Resop (1) An agent is liable to a
for the s profits made during the course of
agency even if there is no actual injury for
profiting and recovers all damages suffered,
or even if received without violating the duty
(i.e. made more than whole). (2) An is liable
to a for the damages caused by the s
breach of his duty of loyalty.
(2)
An must act solely for the benefit of and not the benefit
of himself or a third party
(a)
Conflicts of Interest Duty of loyalty includes
the duty not to compete with the . Anything
that obtains as a result of employment
belongs to the . cannot retain secret profits,
advantages, and benefits absent s consent.
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(b)

(3)

(4)

(5)

(6)

8.02 Material Benefit - An agent has a duty

not to acquire a material benefit from a third
party in connection with transactions conducted
or other actions taken on behalf of the principal
or otherwise through the agent's use of the
agent's position.
(i)
Part of the agents duty of loyalty is
a responsibility not to use the
agency position and/or the
principals property or facilities for
the agents own benefit, without the
principals (at least tacit) consent
An must refrain from dealing with his as an adverse
party or from acting on behalf of an adverse party
(a)
8.03 Acting as or on Behalf of an Adverse
Party - An agent has a duty not to deal with the
principal as or on behalf of an adverse party in a
transaction connected with the agency
relationship.
An must not compete with his concerning the subject
matter of the agency
(a)
8.04 Competition - Throughout the duration
of an agency relationship, an agent has a duty to
refrain from competing with the principal and
from taking action on behalf of or otherwise
assisting the principal's competitors. During that
time, an agent may take action, not otherwise
wrongful, to prepare for competition following
termination of the agency relationship.
(b)
Town & Country House v. Newberry
An may not use the s property (or confidential
information) for the s own purpose or a s purposes.
(a)
8.05 Use of Principals Property; Use of
Confidential Info. - An agent has a duty
(i)
not to use property of the principal
for the agent's own purposes or
those of a third party; and
(ii)
not to use or communicate
confidential information of the
principal for the agent's own
purposes or those of a third party.
(b)
Town & Country House v. Newberry
Note: All of these can be trumped by agreement. If a fully
informed consents to the behavior there is no problem.
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(a)

(7)

R3d 8.06 Principals Consent. (1) Conduct by

an agent that would otherwise constitute a
breach of duty does not constitute a breach of
duty if the principal consents to the conduct,
provided that
(i)
in obtaining the principal's consent,
the agent
acts in good faith, discloses all
material facts that the agent
knows, has reason to know, or
should know would
reasonably affect the
principal's judgment unless
the principal has manifested
that such facts are already
known by the principal or that
the principal does not wish to
know them, and
otherwise deals fairly with the
principal; and
the principal's consent
concerns either a specific act
or transaction, or acts or
transactions of a specified
type that could reasonably be
expected to occur in the
ordinary course of the agency
relationship.
(ii)
An agent who acts for more than
one principal in a transaction
between or among them has a
duty
Tarnowski v. Resop (1) An agent is liable to a for the
s profits made during the course of agency even if there is
no actual injury for profiting and recovers all damages
suffered, or even if received without violating the duty (i.e.
made more than whole). (2) An is liable to a for the
damages caused by the s breach of his duty of loyalty.
(a)
Tarnowski hired Resop , to investigate &
negotiate purchasing a coin-operated machine
route. Relying on , bought such business
from . argues that represented that he did
a thorough investigation of the route. But
really only did a superficial investigation and
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adopted false representations of s about health
of business and told them to . took a secret
commission from s for closing the sale.
sued for the secret commission & damages
incurred in rescinding the sale.
(b)
It is not material that no actual injury to the
principal resulted, or that profited from the
transaction.
(c)
Irrelevant that rescinded the K and recovered
his damages from the fraud.
(d)
recovered
(i)
Almost all of the purchase price;
damages caused by s misconduct;
the commission paid to the by
s.
C.
Duty of Care: An has a duty to a to act with care, competence, and
diligence normally exercised by agents in similar circumstances in becoming
informed and exercising the power conferred by the principal.
D.
Duty to Disclose: has a duty to disclose info to the . The must use
reasonable efforts to give his information which is relevant to affairs
entrusted to him and which, as the agent has notice, the would desire to
have and which can be communicated without violating a duty to a superior
third person.
2.5.
Termination of the Agency Relationship
A.

B.

Termination at will
(1)
Termination is always at will because these relationships are
grounded in consent. Any party can terminate the relationship
Duties During & After Termination of Agency Grabbing & Leaving:
Post-termination competition w/ a former is permitted, but the former is
barred from disclosure of trade secrets of other confidential information
obtained during his employment.
(1)
Town & Country House v. Newbery An employee can owe
a fiduciary duty to their employer for the employers trade
secrets after their service has been terminated. s cannot
profit from a s trade secrets even after employment ends.
[8.05 & 8.06 R3d]
(a)
Newbery worked for T&C and he broke
away & started a competing business. sued
for unfair competition.
(b)
Held: List of customers is a trade secret. Even
where a solicitor of business does not operate
fraudulently under the banner of his former
employer, he still may not solicit the latters
customers who are not openly engaged in
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(c)

business in advertised locations or whose

availability as patrons cannot readily be
ascertained but whose trade and patronage have
been secured by years of business effort and
advertising, and the expenditure of time and
money []
(i)
The list was painstakingly compiled
by calling 100s of homes in areas
identified as possibly being
interested in services which were
uncommon at the tome.
(ii)
s owe the profits they made
from customers they took from
but they do not have to stop
operations. is entitled to enjoin
s from further solicitation of its
customers.
Reasoning: Most people are at will employees
wherein either side can terminate the
employment at any time. However, public
policy would dictate that an employee should be
able to continue in the field of work while not
having a right to exploit information that was
held in confidence at their prior employment.

3. Partnerships
3.1.

Introduction
A.
Def of General Partnership: Association of 2 or more persons to carry on a
business as co-owners for profit. [UPA 6]. Lawful partnerships cannot be
formed for nonprofit purposes.
B.
Key features of partnership
(1)
All partners are liable as principals
(2)
All partners are general agents of the partnership all can
bind the partnership/ each partner to third parties.
(3)
Liability All general partners are jointly and severally
liable for the debts of the business even when the partner does
not participate in the act that causes the partnership to become
liable [UPA 15] s can sue any or all of the partners for
repayment of a loan
(4)
Management All partners share equally in control, unless
they agree otherwise through a K. But internal agreements
about decision making are not binding on outsiders who are
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C.

3.2.
A.
B.

C.
D.

unaware of the agreements. Any partner can still bind the

partnership if the isnt aware of internal agreement.
(5)
Ownership of property The partnership firm owns the
partnership property. Creditors of the partnership take before
creditors of the individual partners if the firm is liquidated
[Tenancy in partnership]
(a)
Makes K-ing with partnership more attractive.
(b)
But they do each own the rights to the net
financial returns of these assets generate.
Motivation for Partnership
(1)
Borrowing costs associated with taking a loan vs. giving a
stake in a company.
(2)
Different areas of expertise, sharing the work, sharing
contacts and resources.
Formation
No Formalities: Can come into existence by operation of law, without the need
to file any formal papers with a state official. Simply formed by agreement.
Requirements:
(1)
The parties intend to be partners (or intend to be something
that equals a partner under law)
(2)
Co-ownership of the business (again parties conception
irrelevant; just what it is under facts)
(3)
A profit motive
(4)
Cant just be on one occasion needs to be a series of acts
UPA 6(1): A partnership is an association of two or more persons to carry on
as co-owners a business for a prot
UPA 7 Rules for Determining the Existence of a Partnership
(1)
Except in 16 persons who are not partners as to each
other are not partners as to third persons.
(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.
(3)
The sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a
joint or common right or interest in any property from which
the returns are derived. [but it indicates it]
(a)
Note: big distinction between net profits and
gross returns because the whole partnership is
an attempt to make a profit, so the person taking
the profit has incentive to run the partnership in
the most efficient way. Thus the person taking
net profit is the person who is in control
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(4)

The receipt by a person of a share of the profits of a business

is prima facie evidence that he is a partner in the business, but
no such inference shall be drawn if such profits were received
in payment:
(a)
As a debt by installments or otherwise,
(b)
As wages of an employee or rent to a landlord,
(c)
As an annuity to a widow or representative of a
deceased partner,
(d)
As interest on a loan, though the amount of
payment vary with the profits of the business,
(e)
As the consideration for the sale of the goodwill of a business or other property by
installments or otherwise.
E.
Partnership By estoppel: If a person represents itself as being a partner in an
enterprise (or consents to others making the representation) and a third party
reasonably relies on the representation (actual reliance required) and does
business with the enterprise then the person who was represented as a partner is
personally liable on the transaction, even though that person is not in fact a
partner. [UPA 16] applies to all transactions.
F.
Vohland v. Sweet: For purposes of creating a partnership, one partners
contribution may consist of labor and expertise. Generally speaking a
partnership requires mutual contribution and mutual (or agreed upon) share of
the profits. Intent to create partnership is not necessary. The intention to do the
acts creating a partnership is what creates it.
(1)
Sweet P Worked for Charles Vohland since he was young in
nursery. Charles son D took over the business but inventory
was depleted. P & D agreed that P would manage grounds
and D would contribute capital & handle finances. P would
receive 20% net profits after expenses. Each man filed
individual tax returns showing they were self-employed. D
showed nursery as his business and Ps payments as
commissions.
(2)
Sharing profits 80-20 share of profits here. Even though
labelled as commission it was structured as profit sharing
more than compensation.
(3)
If this was just a commission S wouldnt have an incentive to
keep the business running. So by making him co owner, D
knew he would be able to recoup investment 10 years later
for the betterment of the business.
3.3.
Relations with third parties
A.
Partners Liability
(1)
RUPA 306(a): ...all partners are liable jointly and severally
for all obligations of the partnership, unless otherwise agreed
by the claimant or provided by law.
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(a)
(b)

Jointly- each partner is liable to the full amount.

Severally: each partner is only liable up to their
share
(c)
Jointly and severally: creditors can pursue each
partner for the full amount a partner who pays
up creditors can pursue her co-partner for their
share
(2)
UPA 15: Joint & several liability for torts, joint liability for
contracts
(3)
RUPA 307(d): Must exhaust partnership assets before
pursuing personal assets
(4)
In practice creditors sue all partners
(5)
UPA 13: A wrongful act or omission of a partner acting in
the ordinary course of business of the partnership is regarded
as a partnership act or omission.
(6)
UPA 18(g): No person can become a member of the
partnership without the consent of the others.
(7)
UPA 12: Notice to any partner of any matter relating to
partnership affairs... and the knowledge of any other partner
who reasonably should and could have communicated...
operate as notice to or knowledge to the partnership, except in
the case of a fraud...
B.
Retiring Partners liability
(1)
Retiring partner isnt liable for partnership debts if there is an
agreement between partners and partnership creditors [UPA
36(2).
(2)
Retiring partner is released o liability even when the terms of
repayment of debt change materially, provided that creditors
are in agreement.
3.4.
Governance & Issues of Authority
A.
Decision Making
(1)
UPA 18(h): Any difference arising as to ordinary matters
connected with the partnership business may be decided by a
majority of the partners; but no act in contravention of any
agreement between the partners may be done rightfully
without the consent of all the partners.
(a)
Where equal partners exists partners have
equal rights in conduct of the affairs of the
partnership- differences on business must be
decided by a majority of the partners.
(b)
Partners can fashion an agreement as to who
makes agreements
(2)
All partners have equal rights in management even if sharing
in profits is unequal [UPA 18(e)]
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B.

Representation
(1)
UPA 9(1): Every partner is an agent of the partnership for
the purpose of its business, and the act of every partner... for
apparently carrying on in the usual way the business of the
partnership of which he is a member binds the partnership,
unless the partner so acting has in fact no authority to act for
the partnership in the particular matter, and the person with
whom he is dealing has knowledge of the fact that he has no
such authority.
(2)
UPA 9(2): An act of a partner which is not apparently for the
carrying on of the business of the partnership in the usual way
does not bind the partnership unless authorized by the other
partners.
C.
Nabisco v. Stroud One company cannot escape responsibility by notifying a
creditor. The acts of a partner, if performed on behalf of the partnership and
within the scope of its business are binding upon all co-partners. All partners
are jointly and severally liable for all obligations incurred on behalf of the
partnership. If a majority of the partners disapprove of a transaction before it is
entered into then they may escape liability for whatever obligations the
transaction ultimately incurs.
(1)
and freeman created GP to sell groceries under one name.
partnership bought bread from Nabisco P. Stroud told P that
he wouldnt be responsible for any more bread which P sold
to partnership. Freeman requested and P sent another
shipment. On the day it arrived the partnership was dissolved
(2)
If a majority of the partners disapprove of a transaction before
it is entered into then they may escape liability for whatever
obligations the transaction ultimately incurs.
(a)
But Freeman and D were equal partners, neither
possessed the power to exercise a majority veto
over the acts of the other.
(3)
Note: had D dissolved the partnership and given P notice
prior to the order by freeman, D would not have been
personally liable for the partnership debt to P.
3.5.
Statutory Dissolution of Partnership at Will
A.

Introduction:
(1)
(2)
(3)

Dissolution of the partnership does not immediately terminate

the partnership. The partnership continues until all of its
affairs are wound up [UPA 30]
Dissolution (UPA 29): any change of partnership relations,
e.g., the exit of a partner
Winding up (UPA 37): orderly liquidation and settlement of
partnership affairs
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(4)

B.

Termination (UPA 30): partnership ceases entirely at the

end of winding up
(5)
Dissociation (RUPA 601): a partner leaves but the
partnership continues, e.g. pursuant to agreement
(6)
Dissolution (RUPA 801): the onset of liquidating of
partnership assets and winding up its affairs
Causes of Dissolution
(1)
Unless otherwise provided in partnership agreement
(a)
Expiration of partnership term
(i)
Fixed term even where it is
agreed to last for fixed term,
partners can still terminate at will.
But it will be a breach of the
agreement by the terminating
partner which may result in
damages
(ii)
Extension of term the partners
can extend the partnership by
creating a partnership at will on the
same terms
(b)
Choice of a partner
(i)
Any partner can terminate a
partnership at will because a
partnership is a personal
relationship which no one can be
forced to maintain. Where the
partnership is for a term or even
where it is at will, if dissolution is
motivated by bad faith it may be
breach of the agreement.
(c)
Death of partner
(i)
Surviving partners are entitled to
possession of partnership assets and
are charged with winding up the
partnership affairs without delay.
[UPA 37]
(ii)
Surviving partners also have a
fiduciary duty in liquidating
partnership and must account to the
estate of the deceased partner for the
value of his interest.
(d)
Withdrawal or admission of a partner

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(i)
(ii)

(iii)

(e)

(f)

(g)

C.

D.

Most agreements provide that losing

or admitting a partner will not result
in dissolution
New partners may become partners
to the preexisting agreement by
signing it at the time of admission
[UPA 13(7)]
When old partner leaves the
agreement usually has provisions
for continuing and buying out the
partner who is leaving.

Illegality
(i)

Dissolution from any event making

it unlawful for the partnership to
continue business.
Death or bankruptcy
(i)
w/o a provision in agrmt to the
contrary the partnership is dissolved
on the death or bankruptcy of any
partner [UPA 31(4), (5)]
Dissolution by court decree
(i)
A court can, in its discretion, may in
certain circumstances dissolve the
partnership. Such as insanity of a
partner, incapacity, improper
conduct, inevitable loss, and or
whenever it is equitable [UPA 32].

Partnership Dissolution
(1)
UPA 37: Unless otherwise agreed the partners... [have] the
right to wind up the partnership affairs, provided, however,
that any partner... may obtain winding up by the court.
(2)
UPA 38(1): When dissolution is caused in any way... each
partner, as against his co-partners and all persons claiming
through them... may have the partnership property applied to
discharge its liabilities, and the surplus applied to pay in cash
the net amount owing to the respective partners.
Resolution and Distribution of Assets
(1)
Distribution of assets
(a)
Partnership debts all debts paid first
(b)
Capital accounts then amounts are applied to
pay the parties their capital accounts (capital
contributions plus accumulated earnings and
less accumulated losses)
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(i)

Partnership stake is valued at the

time of dissolution and treated as a
debt of the partnership to the
retiring partner UPA 42
(c)
Current earnings finally, if there is anything
left over, the partners receive their agreed share
of current partnership earnings [UPA 40]
(2)
Distribution in Kind
(a)
i.e. payment in securities or other property
rather than in cash
(b)
Where there are no partnership debts, or where
debts can be handled from the cash account,
partnership assets may not be sold, but they may
be distributed in kind to the partners.
(c)
Courts very reluctant to agree to distribution in
kind; only possible when (Rinke v. Rinke):
(i)
No creditors are to be paid by the
proceeds
(ii)
Former partners are the only
potential buyers
(iii)
In-kind distribution is fair
(3)
Partnership losses
(a)
Where liabilities exceed assets the partners must
contribute their agreed shares to make up the
difference UPA 18(a)
(4)
UPA 38(1): When dissolution is caused in any way, except
in contravention of the partnership agreement... each partner,
unless otherwise agreed, may have the partnership property
applied to discharge its liabilities, and the surplus applied to
pay in cash the net amount owing to the respective partners.
(a)
(5)
UPA 42 partnership stake is valued at the time of dissolution
and treated as a debt of the partnership to the retiring partner
Opportunistic Dissolution and the Partners Duty of Loyalty

3.6.
3.7.

A.
A.

Page v. Page
Agency Conflicts Among Co-Owners
Meinhard v. Salmon: Joint ventures owe to one another, while their enterprise
continues, the duty of finest loyalty, a standard of behavior most sensitive.
(1)
P and D were partners in a lease on a hotel, but before the
lease expired, D alone, without Ps knowledge, agreed to lease
the property and an adjacent property.
(2)
There is a broad fiduciary duty between partners.
the unique feature is their symmetry; each partner is, roughly
speaking, both a principal and an agent, both a trustee and a
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3.8.

beneficiary, for he has the property, authority, and confidence

of his co-partners, as they do of him. He shares their profits
and losses, and is bound by their actions. Without this
protection of fiduciary ties, each is at the others mercy
Limited Liability Successors of the General Partnership

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