I.

AGENCY

(Only part that is state case law driven)

 Three important topics of Agency
1. How does Agency relationships arise?
2. Under what circumstances can an agent bind a principle?
3. What duties does the agent owe the principal?
 Agency: A fiduciary relationship created by express or implied contract or by law, in
which one party (the agent) may act on behalf of another party (the principal) and
bind that other party by words or actions.
 Three main forms:
1. The relations of principal and agent
2. The relation of master and servant
3. The relation of employer and private contractor

1. WHO IS AN AGENT?

 Agent: One who is authorized to act for or in place of another; a representative

 General Agent: An agent authorized to transact all the principal's business of a
particular kind or in a particular place. Among the common types of general agents
are factors, brokers, and partners
 Principal: One who authorizes another to act on his or her behalf as an agent.

Who is an Agent?

Typical Agent Agency is the fiduciary relationship which results from:

(Principal/Agent 1. Manifestation of consent by the principle
Relationship) 2. That the Agent shall act on the principal’s behalf under the
principal’s control
Rest. 2nd §1 3. The agent consents to be principal’s agent (§1, Gorton v. Doty)
Debtor/Creditor A creditor who assumes control of his debtor's business may be
Relationship held liable as principal for the acts of the debtor in connection with
the business. (Gay Jenson Farms)
Rest. 2nd §14O  Comment: “merely exercising veto power…by preventing
purchases or sales above specified amounts does not thereby
become a principal”
 Comment: Creditor becomes a principal when it exercises de
facto control over conduct of debtor

Buyer/Supplier One who contracts to acquire property from a third person and
Relationship convey it to another is the agent of the other only if agreed that he
is to act primarily for the benefit of the other and not for

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Rest. 2nd §14K himself.
 Comment: Factors indicating that one is a supplier and not an
agent are
1. Receives fixed price for property no matter what price paid
by him
2. Acts in own name and receives title to property later
transferred
3. Has an independent business in buying and selling similar
property

 Formation of Agency Relationship- Rest. 2nd §1. Agency; Principal; Agent

o Agency Rule:
 1) Manifestation of consent by principle.
 2) That the agent shall act on principle’s behalf and subject to the
principle’s control.
 3) Consent by agent so to act for the principal.
 Gorton v. Doty: (Gratuitous Bailment v. Agency/Principal)
o Issue: Whether the coach was the agent of appellant while and in driving her
car from the school to the game.
o Rule: (§1. Agency; Principal; Agent):
 Manifestation of consent by principle Consent by Doty
 The agent shall act on principle’s behalf and subject to the principle’s
control Control/condition that none of the football players get
behind the wheel
 Consent by agent so to act for the principal Acceptance when Garst
took her up on her offer
 Furthermore a K is not essential for the existence of authority.
o Main Point: Agency relationships may be very informal (do not require a
business relationship, a contract, or any compensation). However, here there
was an agency relationship between the owner of the car and the driver
because the ownership creates a presumption that the driver is an agent for the
owner.
 Gay Jenson Farms Co. v. Cargill Inc.: (Creditor / Debtor)
o Issue: Whether Cargill, by its course of dealing with Warren, became liable as
a principal on K made by Warren with plaintiffs.
o Rule: A creditor who assumes control of his debtor's business may be held
liable as principal for the acts of the debtor in connection with the business.
o RT Agency 2 §14: A creditor who assumes control of his debtor’s business
may become liable as a principal for the acts of the debtor in connection with
the business. Having veto power over a business transaction is ok.

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 2. LIABILITY OF PRINCIPAL TO 3RD PARTIES IN CONTRACT

 Issue: Does the agent have the authority to bind the principal to 3P and 3P to
principal?
 “Qui facit per alium facit per se” "He who acts through another does the act
himself."

Liability of Principal to 3rd Parties in Contract

Agent’s Authority: The right or permission to act legally on another's behalf;

Authority esp., the power of one person to affect another's legal relations by
acts done in accordance with the other's manifestations of assent
Rest. 2nd §7
Rest. 2nd §7 Authority: the power of the agent to affect legal
relationship of the principal by acts done in accordance with the
principal’s manifestations of consent to the agent.
Rest. 2nd §26 Creation of Authority
1. Objective manifestation of Principal written/spoken words or
other conduct of principal
2. Agent’s reasonable interpretation of that manifestation
3. Agent’s belief that she is authorized to act for Principal

Types of Authority
1. Actual
 Express
 Implied
2. Apparent
3. Inherent
Ratification  Rest. 2nd §82- Retroactive approval of a previously unauthorized
act
 Rest. 2nd §83- Affirmance through words, conduct, silence
indicating consent
 Requirement of intent and knowledge of all material facts
(Botticello v. Sterfanovicz)
Estoppel Rest. 2nd § 8B Estoppel
1. Principal allows another (who has no authority) to create
appearance of authority and does not correct the misimpression
2. Reasonable belief by third party
3. Change in position of third party (reliance) (§8B, Hoddesson v.
Koos Bros.)
Agent’s Liability 1. Person purporting to make a contract with a third party for a
on K undisclosed or partially disclosed principal (§4) is a party to the
contract. (§321)

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 2. Avoid liability by disclosing P. (Atlantic Salmon v. Curran)

THE AGENT’S AUTHORITY

Types of Authority
Actual  The power delegated by a P to an A
Authority  Authority that a P intentionally confers on an A or authority that the A
reasonably believes they have as a results of the A's dealings with the P
Express Authority
 Authority given to the A by explicit agreement, either orally or in
writing
 Rest. 2nd §7- in accordance with P's manifest consent
 Rest. 2nd§ 26- General Test for Creation of Authority
Implied Authority
 Authority intentionally given by the P to the A as a result of the P's
conduct, such as the P's earlier acquiescence to the A's actions.
 Fills the gap in express authority
 Rest. 2nd § 35 When Incidental Authority is Inferred- 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. (Mills St. Church)
Apparent  Authority that a third party reasonably believes an agent has, based on
Authority the third party's dealings with the principal, even though the principal
did not confer or intend to confer the authority.
 Apparent authority can be created by law even when no actual authority
has been conferred
 Rest. 2nd §8- Apparent authority is the power to affect the legal relations
of another person by transactions with 3rd persons, professedly as the A
for the other, arising from and in accordance with the other’s
manifestations to such 3rd persons.
 Rest. 2nd §27 Creation of Apparent Authority (General Rule)-
apparent authority to do an act is created as to a 3rd person by written or
spoken words or any other conduct of the principal which, reasonably
interpreted, causes the 3rd person to believe that the P consents to have
the act done on his behalf by the apparent A
Test for Apparent Authority
1. Objective manifestation from one party (apparent principal)
2. Which reaches a third party
3. Causing the third party to reasonably believe that another party
(apparent agent) is authorized to act for the apparent principal (370
Leasing Co.)
What counts as a manifestation by the principal?

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  Manifestation may consist of “written or spoken words or other
conduct”
 Direct communications from principal by letter/word of mouth
 Authorized statements of the agent
 Documents or other indicia of authority given by the principal to the
agent
 Communications from third persons who have heard of the agent’s
authority from authorized or permitted channels of communication
 Appointing a person to a position like manager or treasurer which
carries with it generally recognized duties
 Communication to the public through signs or advertising
 Continuously employing the agent
Inherent  Rest. 2nd of Agency§8A, 161,194, 195
Authority o Principal liable for acts done on his account that usually accompany
or are incidental to transactions agent authorized to conduct
o Exists for the protection of persons harmed by or dealing with a
servant or other agent
 Rest. 2nd §8(A): Inherent agency power is the power of the 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.
 Rest. 2nd §161 Unauthorized Acts of General Agent- a GA for a
disclosed/partially disclosed P subjects his P to liability for acts from on
his account when which usually accompany/are incidental to
transactions which the A is authorized to conduct if, although the are
forbidden by the P the 3rd party reasonably believes that the A is
authorized to do them and has no notice that he is not so authorized
(Watteau v. Fenwick)
 Rest. 2nd §194 Acts of General Agents- a GA for an undisclosed P
authorized to conduct transactions subjects his P to liability for acts
done on his account, if usual or necessary in such transactions, although
forbidden by the P to do them
 Rest. 2nd §195 Acts of Manager Appearing to be Owner- an
undisclosed P who entrusts an A with the management of his business is
subject to liability to 3rd persons with whom the A enters into
transactions usual in such business and on the P’s account, although
contrary to the directions of the P
 Covers actions by General Agent or General Manager
o R2d Agency §3(a): General Agent is an agent authorized to
conduct a series of transactions involving continuity of service.
o R2d Agency §3(b): Special agent is an agent authorized to conduct
a single transaction or a series of transactions no involving
continuity of service.

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 Actual Authority:
 §7. Express Authority – Authority is the power of the agent to affect the legal
relations of the principal by acts done in accordance with the principal’s
manifestations of consent to him.
 §26. Creation of Authority –
1. Objective Manifestation of consent by the principal.
2. Agent’s reasonable interpretation of that consent.
3. Agent’s belief that she is authorized to act for the principal.
 §35. Implied Authority – When incidental authority is inferred.
o Acts which are incidental, usually accompany, or are reasonably necessary
to accomplish a transaction.
o Fills the gaps in express authority.
o Fails if in direct opposition to agreement.
o Mill Street Church v. Hogan (Implied Authority)
 Issue: Whether Hogan possessed implied authority as an agent to hire
Hogan.
 Rule: Implied Authority – Is actual authority circumstantially proven
which the principal actually intended the agent to possess and includes
such powers as are practically necessary to carry out the duties
actually delegated. Burden of proof is on the one claiming implied
authority.
o Test: Whether the agent reasonably believes because of present
or past conduct of the principal that the principal wishes him to
act in a certain way or to have certain authority.

 §8. Apparent Authority– Apparent authority is the power to affect the legal relations
of another person by transaction with third persons, professedly as agent for the other,
arising from and in accordance with the other’s manifestations to such third persons.
 §27. Creation of Apparent Authority
1) Objective manifestation1 from one party (apparent principal)
2) Which reaches a third party.
3) Causing the third party to reasonably believe that another party
(apparent agent) is authorized to act for the apparent agent.
 Three-Seventy Leasing v. Ampex
 Issue: Whether Kay had apparent authority to bind Ampex to the K.
 Rule: An agent has apparent authority sufficient to bind the principal when
the principal acts in such a manner as would lead a reasonably prudent person
to suppose that the agent had the authority he purports to exercise…. Further,
absent knowledge on the part of third parties to the contrary, an agent has the
apparent authority to do those things which are usual and proper to the
conduct of the business which he is employed to conduct.
 Holding: The court held that based on a past letter that Joyce had every
reason to believe, based on Ampex’s prior actions, that Joyce spoke on behalf

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 of the company, therefore they held that Kay had apparent authority. (Ampex
could have made contract clear that Kay did not possess this authority.)

 §8A. Inherent Authority (General Agent) – Power of an agent derived solely from
the agency relation and exists for the protection of persons harmed by or dealing with
a servant or other agent. (Also §§161, 194, 195)
 Watteu v. Fenwick
 Issue: Whether Fenwick could be liable for their manager Humble’s
purchases from Watteua.
 Rule: An undisclosed principal can be held liable for the actions of an agent
who is acting with an authority that is reasonable for a person in the agent’s
position regardless of whether the agent has the actual authority to do so.
 Principle of fairness it would be wrong for someone going about their
normal commercial business to be punished because of an agent like Humble
holding himself out to have more authority than he did
 Nogales v. Arco – (Good Case for Distinguishing Apparent from Inherent
Authority)
 Issue: Whether ARCOs alleged agent (Trucker) had authority to enter into
agreement.
 Three part test for apparent authority:
 Turns on the principal and the principal’s manifestations
1. Objective manifestation of P
2. A’s reasonable interpretation of that manifestation
3. A’s belief that she is authorized to act for P
RATIFICATION
 Retroactive approval of a previously unauthorized act
 Affirmance through words, conduct, silence indicating consent
 Requirement of intent and knowledge of all material facts
 Rest. 2nd §82. Ratification – 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 him.
 Rest. 2nd §83. Affirmance – 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.
 Botticello v. Stefanovicz
 Issue: Whether Mary ratified the contract.
 Rule: The affirmance by a person of a prior act which did not bind him but which
was done or professedly done on his account. Ratification requires acceptance of
the results of the act with an intent to ratify, and with full knowledge of all
material facts. Furthermore a person may ratify an agreement simply by receiving
its benefits and by failing to repudiate it (silence).

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ESTOPPEL
 Rest. 2nd §8B Estoppel- Change of Position
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
a. he intentionally or carelessly caused such belief, or
b. knowing of such belief and that others might change their positions
because of it, he did not take reasonable steps to notify them of the facts.
2) An owner of property who represents to third persons that another is the owner of
the property or who permits the other so to represent, or who realizes that third
persons believe that another is the owner of the property, and that he could easily
inform the third persons of the facts, is subject to the loss of the property if the
other disposes of it to third persons who, in ignorance of the facts, purchase the
property or otherwise change their position with reference to it.
3) Change of position, as the phrase is used in the restatement of this subject,
indicates payment of money, expenditure of labor, suffering a loss or subjection to
legal liability.
 Hoddesson v. Koos Bros.
 Issue: Whether Koos Bros. are liable for the imposter salesman’s sale of furniture
to Hoddesson.
 Rule: Absent proof of an agency relationship, a party may still have a duty of care
for the other party to ensure that the other party is not disadvantaged in dealing
with the party.
o Duty of the Proprietor encircles the exercise of reasonable care and
vigilance to protect the customer from loss occasioned by the deceptions
of an imposter.
 Holding: The court held the proprietor liable for dereliction of his duties.
o No actual or apparent authority no manifestation of consent, agent can’t
create his own authority
o But, D can be estopped from asserting that no claim existed when there
was no agency relationship established. D, as a furniture store, still owed a
duty of care to P when she enters the store and has an expectation that she
will be tend to by an actual salesperson rather than an impostor. Therefore,
a new trial was ordered in order to allow P to establish a duty of care.

AGENT’S LIABILITY ON THE CONTRACT

 § 321 Partially disclosed principal – Person purporting to make a contract with a
third party for a partially disclosed principal (defined in Section 4) is a party to
the contract
o Disclosed principal no agent liability
o Partially disclosed principal agent liability (Atlantic Salmon v. Curran)
o Undisclosed principal agent liability

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  §4. Disclosed Principal; Partially Disclosed Principal; Undisclosed Principal
o 1) Disclosed Principal If, at the time of a transaction conducted by an
agent, the other party thereto has notice that the agent is acting for a
principal and of the principal’s identity, the principal is a disclosed
principal (no agent liability).
o 2) Partially Disclosed Principal If the other party has notice that the
agent is or may be acting for a principal but has no notice of the
principal’s identity, the principal for whom the agent is acting is a
partially disclosed principal.
o 3) Undisclosed Principal If the other party has no notice that the agent
is acting for a principal, the one whom he acts is an undisclosed principal
(agent liability).
 Atlantic Salmon v. Curran
 Issue: Whether an agent can be held personally liable if he does not disclose
the principal to the other party.
 Rule: The duty rests upon the agent, if he would avoid personal liability, to
disclose his agency, and not upon the others to discover it. It is not, therefore,
enough that the other party has the means of ascertaining the name of the
principal; the agent must either bring to him actual knowledge or, what is the
same thing, that which to a reasonable man is equivalent to knowledge or the
agent will be bound.

3. LIABILITY OF PRINCIPAL TO THIRD PARTIES IN

TORT

3. Liability of Principal to Third Parties in Tort

Respondient  Master is subject to liability for torts of his servants

Superior committed in the scope of employment (§219)
o Master – Control or has right to control (§2)
o Servant – Controlled or subject to control (§2)
o Independent Contractor – Not controlled (§2)
 Express repudiation is not enough to overcome RS (Humble
Oil)
 Franchisor can become Master (Murphy v. Holiday Inns)
Tort Liability and 1. One who represents another as his servant or agent
Apparent Agency 2. Causing a third party to justifiably rely on care or skill of
such agent
3. Is liable for harm caused by lack of care or skill of such
agent (Miller v. McDonald’s)
Scope of 1. Conduct is within the scope of employment
Employment a. Of the kind he is employed to perform
b. Within authorized time and space limits
c. Purpose to serve the master

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 d. If force intentionally used, use of force not
unexpectable by the master (§228(1))
2. Conduct of an employee may be within the scope of
employment even if the specific act does not serve the
employer's interests if it is foreseeable (Ira v. United States)
Liability for Torts of General rule: One who hires an independent contractor is not
Independent liable for such contractor’s negligent actions (§2)
Contractors Exceptions:
1) retain control of manner and means of doing work;
2) engages an incompetent contractor;
3) inherently dangerous activity (Majestic Realty v. Tuti
Contractors)

 Servant vs. Independent Contractor

 §2 Master, Servant, Independent Contractor, Restatement 2nd Agency,
o Master = principal who employs an agent to perform service in his affairs
and who controls or has the right to control the physical conduct of the
other …
o Servant = agent employed by a master 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 Independent contractor = person who contracts with another to do
something for him but who is not controlled by the other nor subject to the
others right to control with respect to his physical conduct … may or may
not be an agent
 R2nd § 220(2) Definition of Servant- Relevant Factors: In determining whether
one acting for another is a servant or an independent contractor, the following matters
of fact, among others, are considered
o a) the extent of control which, by agreement, the master may exercise over the
details of the work;
 Right to terminate relationship
 “I’ll make him an offer he can’t refuse”
o b) whether or not the one employed is engaged in a distinct occupation or
business;
o c) the kind of occupation, with reference to whether, in the locality, the work is
usually done under the direction of the employer or by a specialist without
supervision;
o d) the level of skill required in the particular occupation;
o e) whether the employer or the workman supplies the instrumentalities, tools,
and the place of work for the person doing the work;
o f) the length of time for which the person is employed;
o g) the method of payment, whether by the time or by the job;
o h) whether or not the work is a part of the regular business of the employer;
o i) whether or not the parties believe they are creating the relation of master
servant; and

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 o j) whether the principal is or is not in business.
 Humble Oil & Refining Co. v. Martin
 Issue: Whether Humble is liable for Love’s and the gas station’s negligence of
not applying parking break that took out Martin and his daughters in Austin.
 Rule: Determining whether a master-servant relationship exists, rather than an
independent contractor relationship, is a question of fact that will be answered in
the affirmative when the master exerts a considerable amount of control over the
responsibilities of the servant.
o Express repudiation of liability is not enough to overcome an RS claim if
there are other facts bearing on the right or power of the principal to control
the details of the work at the station and therefore the employees which it was
expressly contemplated that they would hire.
 Holding: The court found that there was enough evidence of control to show that
Schneider was Humble’s servant despite the express renunciation. Humble
maintained considerable control over Schneider by dictating several important
aspects of Schneider’s business. Humble had significant financial control and
supervision, rendering Schneider’s station a retail marketing enterprise for
Humble’s products.
 Hoover v. Sun Oil Company
 Issue: Whether Sun Oil could be held liable for the station fire cause by the
negligence of Barone their independent contractor.
 Rule: A master-servant relationship does not exist when an independent
contractor controls the day-to-day operations of the entity that is responsible for
damages suffered by a plaintiff.
 Holding: The court found that although that Sun Oil gave advice to Barone on all
phases of operation of the business, Barone was under no obligation to follow the
advice. Therefore there was no evidence of control to warrant a master-servant
relationship.
 Franchises
 Franchise: licensing system used in business. To grant (to another) the sole right
of engaging in a certain business or in a business using a particular trademark in a
certain area.
 Franchisor: party that grants franchise rights by K
 Franchisee: party that contracts for franchise rights
 Franchise Relationship: (Franchisor can become the master and franchisee
the servant)  Special relationship created under K:
o Franchisor obligations – transferring license use of valuable name, intellectual
property, logo and “system”
o Franchisee Obligations – payment of royalties (i.e. yearly fee), payment of
advertising fees, must operate within “system” (set forth in K and/or operating
manual), must maintain minimum standards (purpose to maintain prestige)
o Franchisor-franchisee relationship can give rise to liability claims against the
franchisor for franchisee negligence based on agency principles
 Murphy v. Holiday Inns, Inc.
 Issue: Whether a master/servant relationship exists.

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  Rule: In a franchise agreement in determining whether a K establishes an agency
relationship, the critical test is the nature and extent of the control agreed upon.
 Control test factors:
o Trade name, signs, and other symbols of the system designated by the
licensor
o Plans, specifications, feasibility studies, and locations
o payment of a continuing fee
o solicit applications for credit cards for the benefit of other licensees
o protect and promote the trade name
o not raise funds by sale of corporate stock or dispose of a controlling
interest
o training for employees
o prohibition to employ a person contemporaneously engaged in a
competitive motel or hotel business
o system under the rule of operation of the licensor
 Holding: The court found that the regulatory provisions of the franchisee K did
not constitute control within the definition of agency and therefore held that there
was no master/servant relationship. Many of the provisions of the K were in place
to protect D’s trademark. However, normal day-to-day operations, such as hiring,
price structure and business expenditures were still controlled by the third party
hotel owner.
 Tort Liability and Apparent Agency
 R2nd of Agency §267 Apparent Agency
o One who represents another as his servant or agent
o Causing a third party to justifiably rely on care or skill of such agent
o Is liable for harm caused by lack of care or skill of such agent
 Miller v. McDonald’s Corp.: (Right to Control Test)
 Issue 1: Whether McDonald’s had sufficient control over 3Ks daily
operations to qualify 3K as its agent.
 Issue 2: Whether the putative principal held the third party out as an agent and
whether the plaintiff relied on that holding.
 Rule 1: If, in practical effect, the franchise agreement goes beyond the stage
of setting standards, and allocates to the franchisor the right to exercise
control over the “daily operations” of the franchise, an actual agency
relationship exists.
 Rule 2: 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 the one appearing to be servant or other agent as if
he were such.
 Holding 1: The court found that there was sufficient evidence to show that
McDonald’s had the right to control 3K in the precise part of its business that
allegedly resulted in plaintiff’s injuries therefore the evidence was sufficient
to raise actual agency.

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  Holding 2: The court found that McDonald’s system of uniformity could
reasonably lead someone to believe that every franchise was part of the same
system and rely on that inference in deciding to eat at that restaurant, therefore
held that a jury could find that 3K was an apparent agent of McDs.
 Scope of Employment
 R2nd of Agency§228(1) – When conduct is within the scope of employment
o Of the kind he is employed to perform
o Within authorized time and space limits
o Purpose to serve the master
o If force intentionally used, use of force not unexpectable by the master
 R2nd of Agency§229- Scope of Employment factors:
o Act commonly done by servants
o Time, place & purpose of act
o Previous dealings between principal & agent
o How business is apportioned between different servants
o Act outside of enterprise of master or not entrusted to servant
o Master expectation that act will be done
o Similarity to act authorized
o Instrumentality furnished by master
o Departure from normal methods
o Act is seriously criminal
 Ira S. Bushey & Sons, Inc. v. United States
 Issue: Whether the sailor was within his scope of employment when he tipped
the ship while drunk.
 Rule: Employer is responsible for expecting risks, especially foreseeable
ones, which arise in the course of employment. Here, seaman’s conduct and
drunkenness was so foreseeable that it is justifiable to hold Navy responsible.
Conduct of an employee may be within the scope of employment even if the
specific act does not serve the employer's interests.
 Holding: The court found that it was foreseeable that crew members crossing
the drydock might do damage negligently or intentionally. Therefore the sailor
was within his scope of employment and the government was liable for his
damage.
 Judge Friendly’s Foreseeability Test:
o Friendly declines to base his decision on policy rationales such as
economic incentives and deterrence and focuses on the “sentiment” that
businesses cannot justly disclaim liability for accidents that are
characteristic of its activities.
o Reasoning: The employer should be held to expect risks, to the public
also, which arise out of and in the course of his employment labor
i.e. Foreseeable that crewmembers crossing the drydock might do damage.
Foreseeable that seamen might go out drinking after work.
o Fairness and foreseeability Don’t want business enterprises to be off the
hook for damages that are related to their business and are foreseeable.
They should take steps to stop the damages from happening. (i.e. Make

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 boat more secure, ect.). Human nature must be taken into account when
considering this issue of foreseeability
o Outcome of test Ps no longer required to show that agent was motivated
by a purpose to serve the master. It would suffice to show that the conduct
arose out of and in the course of employment
 Liability for Torts of Independent Contractors
 Generally
o Servant vs. Independent Contractor
o General rule: One who hires an independent contractor is not liable for such
contractor’s negligent actions
o Exceptions: 1) retain control of manner and means of doing work; 2) engages
an incompetent contractor; 3) inherently dangerous activity
 R2nd Torts § 416: One who hires an independent contractor to conduct
inherently dangerous activity requiring precautions is liable if contractor is
negligent in taking precautions
o Inherently Dangerous Activities: an activity which can be carried on safely
only by the exercise of special care and skill, and which involves a grave risk
of danger to persons or property if negligently done
o Distinguish ultra-hazardous activities: a) necessarily involves a serious risk
of harm to the person, land or chattels of others which cannot be eliminated by
the exercise of utmost care, and b) is not a matter of common usage
o Distinction important liability is absolute where work is ultra hazardous
 R2nd of Agency §2. Independent Contractor - person who contracts with
another to do something for him but who is not controlled by the other nor subject
to the others right to control with respect to his physical conduct … may or may
not be an agent (therefore not liable for acts generally)
 Majestic Realty v. Tuti Contractors
 Issue: Whether Tuti Contractors is liable for the damage of its ICs.
 Rule: Ordinarily where a person engages a contractor, who conducts an
independent business by means of his own employees, to do work not in itself
a nuisance, he is not liable for the negligent acts of the contractor in the
performance of the K, but some actions are so inherently dangerous that a
party can not delegate their liability for the duty of care to another party.
 Certain exceptions have come to be accepted:
o a) where the landowner retains control of the manner and means of the
doing of the work which is subject of the K;
o b) where he engages an incompetent contractor; or
o c) where the activity contracted for constitutes nuisance per se- inherently
dangerous activity when the contractor is negligent in taking precautions
(distinguish from ultra hazardous activities)
 Holding: The court held that demolishing of the building was a nuisance per
se and therefore fell within the exceptions of contractor liability of
independent contractor’s actions. The Parking Authority is liable for Toti’s
negligence because the demolition work was so inherently dangerous that a
party cannot delegate the liability.

14
 4. FIDUCIARY OBLIGATION OF AGENTS

 Fiduciary: A person who is required to act for the benefit of another person on all
matters within the scope of their relationship; one who owes to another the duties of
good faith, trust, confidence, and candor
 Fiduciary duty: duty of utmost good faith, trust, confidence, and candor owed by a
fiduciary (such as a lawyer or corporate officer) to the beneficiary (such as a lawyer's
client or a shareholder); a duty to act with the highest degree of honesty and loyalty
toward another person and in the best interests of the other person (such as the duty
that one partner owes to another).
 Fiduciary relationship: A relationship in which one person is under a duty to act for
the benefit of another on matters within the scope of the relationship.

Fiduciary Obligation of Agents

Duties During Agency is a Fiduciary Relationship §1

Agency  Duty of Loyalty – Solely for benefit of P §387
 Duty to Account for Profits Arising out of Employment §388
 Liability for Use of Principal’s Assets §404, Reading v. Regen
 Duty Not to Compete §393, GAM v. Singer
Duties After  Generally Barrier to Competition ends §396(a)
Agency  During Agency Duty to Confidentiality §395
 Duty not to use trade secrets §396(b), Town & Country v.
Newberry
 Duties During Agency
 §1 R2d Agency– “Agency is … [a] fiduciary relationship”
o A fiduciary relationship is one involving trust and confidence
o Agent must place principal’s interests over her own
 §387 R 2nd of Agency Duty of Loyalty
o A is subject to a duty to act solely for the benefit of the P in all matters
relating to the agency
 §388 R 2nd of Agency Duty to Account for Profits Arising out of Employment
o If A makes a profit in connection with transactions conducted by him on
behalf of the P, A must turn over profit to P
o Example: P authorizes A to sell land for a fixed price. A makes a contract to
sell land to 3P who makes a nonrefundable deposit. 3P does not conclude the
sale and forfeits the deposit. A sells the land to another person. A is under a
duty to P to turn the forfeited deposit over.
 §404 R 2nd of Agency Liability for Use of Principal’s Assets
o A must pay over profit if uses assets of P in violation of a duty
o A not liable for profits made by use of time to be devoted to principal unless
he violates duty not to act adversely or in competition with P
 Reading v. Regem (Crown)- Liability for Use of Principal’s Assets

15
  Issue: Whether the Crown is entitled to the money.
 Holding: If a servant is unjustly enriched by virtue of his service without his
master’s sanction, the money must be taken and given to the master. The
master is entitled to the profits regardless of whether or not they were
damaged or lost profits. P-servant enriched himself through his position with
D-master’s army, and therefore D is entitled to the money earned. P is
required to serve his master when in the position of servant.
 Rule: While using an asset that belongs to their employer. The court holds
that that is a breach of a “duty of honesty and good faith to make profit for
himself in the sense that the assets of which he occupies, are the real cause of
his obtaining the money as distinct from merely affording the opportunity for
getting it, if they play the predominant part in his obtaining the money, the he
is accountable to the master.
o Exceptions: Duty of honesty and good faith. Court mentions
moonlighting and gambling. Gambling does not necessarily require
misuse of employers property. May be breach of K but not duty.
 R2nd of Agency §393. Competition as to Subject Matter of Agency – Unless
otherwise agreed, an agent is subject to a duty not to compete with the principal
concerning the subject matter of his agency. (aka Duty Not to Compete)
 GAM Co. v. Singer (Duty Not to Compete)
 D violated duty of loyalty by taking jobs on the side even though it would be
unlikely that the company would have actually taken the jobs. Still required
to inform the principal and afford them the opportunity.
 Issue: Whether Singer’s consulting business on the side was competition with
GAM and thus a violation of his duty of loyalty.
 Rule: An agent owes a fiduciary duty to his principal to be bound to the
exercise of the utmost good faith and loyalty so that he does not act adversely
to the interests of the principal by serving or acquiring any private interest of
his own. He is bound to act for the furtherance and advancement of the
interest of the principal.
 Holding: By failing to disclose all the facts relating to the orders from Husco
and by receiving secret profits from these order, Singer violated his fiduciary
duty to act solely for the benefit of GMA. Therefore he is liable for the
amount of the profits he earned in his side line business. He owed them an
opportunity to act on the opportunities.
 Duties During and After Termination of Agency
 R2nd of Agency §395: During agency, A has duty not to use or disclose
confidential info
 R2nd of Agency §396(a) After termination of agency, barrier to competition ends
o Exceptions: cannot use confidential information, no deceit, non-compete
contract clauses
 R2nd of agency §396(b): After termination of agency, A has duty not to use…in
competition with the P or to his injury…trade secrets, written lists of names, or
other similar confidential matters…
 Town & Country House & Home Service, Inc. v. Newberry

16
  Issue: Whether Newberry violated their fiduciary duty of loyalty when they
used T&C’s secret client list to take T&C’s clients after they left.
 Rule: Even where a solicitor of business does not operate fraudulently under
the banner of his former employer, he still may not solicit the latter’s
customers who are not openly engaged in 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, constituting a part of the good will of
a business which enterprise and foresight have built up.

II. PARTNERSHIPS

WHAT IS A PARTNERSHIP? AND WHO ARE THE PARTNERS?

Partnership vs.  2 or more co-owners §6(1)
Employer-Employee  Sharing of Profits Prima Facie evidence §7(4)
Relationship  Judicial Factors (Fenwick v. Unemployment):
1. Intention
2. Sharing of Profits §18(a)
3. Sharing of Losses §18(a)
4. Control of Business §18(e)
5. Contribution of Capital and Share in Capital Upon
Dissolution (and Dissolution Rights)
6. Agreement Language
7. Conduct Toward 3rd Parties
Partnership vs.  Partners are jointly and severably liable §15
Debtor-Creditor  Lender can protect interests as long as partner maintains
Relationship day to day control (Martin v. Peyton)

Partnership by 1. If a person represents himself as a partner in an enterprise

Estoppel or allows another to so represent him and
2. 3P relies on that representation and enters into a
transaction with the supposed partnership
3. That person is liable to 3P on that transaction §16, Young
v. Jones
 Partnership: A voluntary association of two or more persons who jointly own and
carry on a business for profit. Under the UPA, a partnership is presumed to exist if the
persons agree to share proportionally the business's profits or losses.
 General partnerships are the most basic A partnership in which all partners
participate fully in running the business and share equally in profits and losses
(though the partners' monetary contributions may vary)
 Limited Partnerships also common A partnership composed of one or more
persons who control the business and are personally liable for the partnership's debts
(called general partners), and one or more persons who contribute capital and share

17
 profits but who cannot manage the business and are liable only for the amount of their
contribution (called limited partners). The chief purpose of an LP is to enable persons
to invest their money in a business without taking an active part in managing the
business, and without risking more than the sum originally contributed, while
securing the cooperation of others who have ability and integrity but insufficient
money.
 Default Rules vs. K Clauses:
o Statute based UPA 1914 provides underlying rules for partnership, but these are
default rules. You can K around the statutes.
o There is a statue for formation, dissolution etc. But can change these rules through
contract. (Ex. Changing default rule from management equality to system based
on capital invested in the company.)
o UPA §18- “The rights and duties of the partners in relation to the partnership shall
be determined, subject to any agreement between them, by the following
rules…”
 Partners Compared With Employees
 UPA §6(1) – Fundamental. An association of two or more persons to carry on as
co-owners a business for profit.*
 UPA § 7 (4) – Sharing of Profits is prima facie evidence of partnership…but not
if received…as wages of an employee…or as interest on a loan
 UPA §18(a) - Partners share equally in Profits and Losses
 UPA §18(e) – all partners have equal control rights in the management and
conduct of the partnership business
 Fenwick v. Unemployment Compensation Commission (Employees? Courts
not bound by Contract language)
 Rule: The sharing of profits does not alone constitute a partnership, despite
the parties intentions.
 The following are the factors courts use:
o Intention - intention to create partnership
o Profit Sharing - right to share in profits (Big One, but not conclusive)
o Loss Sharing - obligation to share in losses
o Control - Control of the Business (Big One)
o Agreement Language - language in the agreement
o Third Party Conduct - conduct of parties toward third persons
o Dissolution Rights - rights of the parties on dissolution
o *Right to Share Profits and Right to Share Control are generally the most
important factors when determining if there is a partnership
 Holding: Partnership was not established, agreement was nothing more than a
means to provide compensation. Existence of a written agreement is not
conclusive. Also writing is not necessary to establish a partnership. There is
an informal means of creating a partnership.
 Partners Compared With Lenders
 UPA §18(a) – Partners share equally in profits and losses.

18
  UPA §15 (underlying rule) – All partners are jointly and severably liable for debts
and obligations of the partnership.
 Martin v. Peyton (Course of Dealings can create partnership)
 Question of who is a partner is important because of the rule of partnership
law that makes each partner potentially liable for all of the debts of the
partnership
 Rule: An agreement that offers a degree of control by the first party to protect
first party’s interest should not be considered a partnership if factors as whole
indicate that the other party still maintains day-to-day control of the business.
When examining whether a partnership exists the court refers to the
circumstances surrounding their execution only so far as is necessary to make
them intelligible. The relationship is examined and determined by degree.
 Holding: The court held that the relationship did not progress to a degree to
warrant being labeled a partnership. They do not have to pay the debt to the
third party creditor. There were rights to control. They had veto rights etc.
There were elements of control but not to a degree to create a partnership
relationship.
 Partnership by Estoppel
 Partnership by Estoppel: A partnership implied by law when one or more
persons represent themselves as partners to a third party who relies on that
representation. A person who is deemed a partner by estoppel becomes liable for
any credit extended to the partnership by the third party.
 UPA, § 16
1) If a person represents himself as a partner in an enterprise (or allows another
to so represent him) and
2) 3P relies on that representation and enters into a transaction with the supposed
partnership (“has given credit”)
3) That person is liable to 3P on that transaction
 Young v. Jones (Don’t let others think you are with someone else)
 Rule: A person who represents himself, or permits another to represent him,
to anyone as a partner in an existing partnership or with others not actual
partners, is liable to any such person to whom such a representation is made
who has, on the faith of the representation, given credit to the actual or
apparent partnership.
 Holding: The court found no evidence that Ps relied on any act or statement
by any PW-US partner which indicated the existence of a partnership with the
Bahamian partnership.

THE FIDUCIARY OBLIGATIONS OF PARTNERS

The Fiduciary Obligations of Partners

Fiduciary Duties  Fiduciary Duty of Loyalty

Among Partners o UPA §21, RUPA §404(b)
o Meinhard case

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  Duty of Care
o RUPA §404(c)
Leaving Partnership  Duty to Render Info: Partners shall provide on demand
(“Grabbing and true and full information of all things affecting the
Leaving”) partnership to any partner UPA §20
 Partnership Books: Partners may inspect and copy
partnership’s books UPA §19
 May plan to compete but must follow other FDs (Meehan
v. Shaughnessy)
 RUPA §403 – No Demand Requirement
Expulsion  Violate Partnership Agreement §31(d)
 Good faith reason Lawlis v. Kightlinger

 Obligations Among Partners

 UPA, § 21- Partner Accountable as Fiduciary
o 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
o Profits/benefits derived from any transaction connected with partnership or
use of its property
o Disgorgement: the act of giving up something (such as profits illegally
obtained) on demand or by legal compulsion.
 RUPA, §404(b) – Duty of Loyalty
o Duty of loyalty to account/hold as trustee profits/benefits derived from a use
of partnership property including partnership opportunity
o Refrain from conflict of interest transactions
o Refrain from competing before dissolution of the partnership
 RUPA, § 404(c) – Duty of Care
o Partner must not act in a manner that is grossly negligent or reckless or
engage in intentional misconduct or knowing violation of the law
 Meinhard v. Salmon (Joint Venture, Duty to Allow Partners to Enjoy Fruits
of Partnership)
 Rules: Members of a partnership (or joint adventurers) owed duty of loyalty
to each other and so must disclose opportunities that arise in order for both to
have an equal chance to take advantage of it.
 Holding: Co-adventures are subject to fiduciary duties akin to those of
partners. Joint adventurers, like copartners, owe to one another, while the
enterprise continues, the duty of the finest loyalty. Uncompromising rigidity
has been the attitude of courts of equity when petitioned to undermine the rule
of undivided loyalty by the disintegrating erosion of particular exceptions.
 Grabbing and Leaving
 UPA § 20 Duty to Render Information - Partners shall provide on demand true
and full information of all things affecting the partnership to any partner (or legal
rep. of partner)
 UPA § 19 Partnership Books - The partnership books shall be kept, subject to
any agreement between the partners, at the principal place of business of the

20
 partnership, and every partner shall at all times have access to and may
inspect and copy any of them
 RUPA, §403- Information
o Partners may inspect and copy books and records
o Partner entitled to information from other partners and partnership that is
needed for exercise of partner’s rights and duties without making demand
o Partner entitled to other information upon demand concerning the
partnership’s business and affairs, except to the extent the demand is
unreasonable or otherwise improper under the circumstances

 Meehan v. Shaughnessy
 Facts: Partners in a law firm decided to split from firm and start their own
venture. They took with them clients, and employees. Also during the
transition to the firm, they secretly signed a lease. When discovered that they
were leaving, they failed to given the other partners a list of the clients that
they were anticipating taking with them. The partnership agreement required
certain procedures when leaving the firm.
 Rule:
 1) Speaking of engaging in improper conduct does not require the
conclusion that misconduct took place.
 2) Fiduciaries may plan to compete with the entity to which they owe
allegiance, provided that in the course of such arrangements they do not
otherwise act in violation of their fiduciary duties with good faith and
loyalty.
o As a fiduciary, a partner must consider his or her partners’ welfare,
and refrain from acting for purely private gain
 3) A partner has an obligation to render on demand true and full
information of all things affecting the partnership to any partner.
 Holding: The court held that partners make take their clients with consent but
must reveal which clients they are taking to their partners or else they will
have an unfair advantage.
 Expulsion
 UPA § 31(d)
o Dissolution is caused without violation of the partnership agreement by
expulsion of any partner from the business bona fide in accordance with such
a power conferred by the agreement between the partners.
 Lawlis v. Kightlinger & Gray (Alcoholic, Can still let someone go even if they
try)
 Rule: When a partner is involuntarily expelled from a business, his expulsion
must have been in good faith for dissolution to occur w/o violating the
partnership agreement.
 Holding: The conduct is good faith if it does not lead to withholding of
money or property legally due to the partner (cannot have predatory purpose).

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 THE RIGHTS OF PARTNERS

PROPERTY RIGHTS OF PARTNERS

Partnership Property
Nature of  UPA §8 Partnership Property
Property Rights  UPA §26 Nature of Partner’s Interest in Partnership
 General Prop. Rights (Putnam):
1) to use partnership property for partnership business
2) to share in income stream from partnership
3) to participate in management

Financial  Partners contribute capital and/or labor

Investment and  UPA §18(a) Financial Return
Return 1) Right to repayment of contribution
2) Right to share equally in profits and surplus after payment of
liabilities
3) Obligation to contribute to losses sustained by partnership
according to share in profits
 UPA §18(b) Right to indemnity against expenses and liabilities
incurred in partnership business
Extent of  UPA §24 Extent of Property Rights of Partner (Putnam)
Property Rights  UPA §26 Partner’s Interest in Partnership
of a Partner  UPA § 27 Assignment of Partner’s Interest

 UPA §8 Partnership Property

1) All property originally brought into the partnership stock or subsequently
acquired by purchase or otherwise, on account of the partnership, is partnership
property.
2) Unless the contrary intention appears, property acquired with partnership funds is
partnership property.
3) Any estate in real property may be acquired in the partnership name. Title so
acquired can be conveyed only in the partnership name.
4) A conveyance to a partnership in the partnership name, though without words of
inheritance, passes the entire estate o f the grantor unless a contrary intent
appears.
 UPA § 18 Determining Rights of Partners
a) Each partner shall be repaid his contributions, whether by way of capital or
advances to the partnership property and share equally in the profits and
surplus remaining after all liabilities, including those to partners, are satisfied;
and must contribute towards the losses, whether of capital or otherwise,
sustained by the partnership according to his share in the profits.
b) The partnership must indemnify every partner in respect of payments made
and personal liabilities reasonably incurred by him in the ordinary and proper
conduct of its business, or for the preservation of its business or property.

22
 UPA §24 Extent of Property Rights of a Partner The property rights of a partner
are:
1) Rights in specific partnership property
o Partner is co-owner with partners of specific partnership and has right to use
specific partnership property for partnership purposes (but not for other
purposes)
o UPA §25 (1) Specific Partnership Property: A partner is co owner with his
partners of specific partnership property holding as a tenant in partnership.
2) Interest in the partnership
o Partner’s interest in partnership is share of profits and surplus and is personal
property (UPA §26)
3) Right to participate in management
 UPA §26 Nature of Partner’s Interest in the Partnership
o A partner 's interest in the partnership is his share of the profits and surplus, and
the same is personal property.
 UPA § 27 Assignment of Partner’s Interest
o Assignee may only receive profits of assignor but may not participate in
management or require information or account of partnership transactions or look
at books unless there is an agreement with the other partners
 Partners may only assign their economic interests in the partnership
 Consistent with UPA §18(g): No person may become member of partnership
without the consent of all the partners.
 Putnam v. Shoaf (Once You Leave, You Leave Even Leave the Goodies you
Didn’t Know About)
 Facts: Putnam (P) sold interest in partnership to Shoaf (D) with quit claim deed.
Putnam intervened in Shoaf’s lawsuit against one of the employees of the
partnership – he had been embezzling and the court awarded $58,000; P now
claims a ½ interest in the judgment
 Holding: P gave up her interest and therefore doesn’t have a right to 1/2 the
money. You can’t claim specific property rights later on, unless they were
specified in the agreement. UPA §24 –only economic rights may be transferred.
 Reasoning: P intended to convey her interest as a partner, and when she did, she
lost her right to any partnership property As a partner, you have rights in
specific partnership property. That is the partnership tenancy possessory right of
equal use or possession by partners for partnership purposes. The right is incident
to the partnership and the possessory right does not exist absent the partnership.
Thus, a partner owns no personal specific interest in any specific property or asset
of the partnership.
 Rule: When a partner clearly evinces an intention to “get out” of the partnership,
she relinquishes any right to her share of the profits, even those that come from a
judgment with respect to dealings that occurred while she was a member of the
partnership. This also shields that partner for liability for the same kind of
situation.
MANAGEMENT RIGHTS OF PARTNERS
The Rights of Partners in Management

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Default Voting Rules  Disagreements among partners are decided by a
partnership vote
 One partner = one vote, even if contributions are not
equal §18e
 Some matters are decided by majority vote =
ordinary business decisions §18h
 Other matters require unanimous consent §9(3),
§18g, §18h
Partners as Agents  Each partner is an agent for partnership and binds
the partnership when apparently carrying on in the
usual way the business of the partnership (UPA
§9(1), Nabisco)
o Exception: Partner has no authority to act for
partnership in the matter and 3P knows that
o *But: Giving notice to creditor that you will not
be responsible for purchases DOES NOT STOP
YOU FROM HAVING LIABILITY (Nabisco
Rule)
 Partners are jointly and severally liable for debts
and obligations of partnership (UPA §15)
Changing Management Partnership may change default rules by K. Day v.
Rights by K Sidley & Austin

Management Rights Generally

Rights in Management of Partnership Business include:
The right to know what is going on in the partnership
The right to be involved in conducting the business
The right to commit the partnership to third parties
The right to participate in decision making, and
The right to veto certain decisions.

 Default Voting Rules:

 UPA §18e: All partners have equal rights in the management and conduct of the
partnership business
 UPA §18h: 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.
 Other matters require unanimous consent
o UPA §9(3) Partner Agent of Partnership as to Partnership Business
unless authorized by the other partners or unless they have abandoned the
business, one or more but less than all the partners have no authority to:
a) Assign partnership property in trust to creditors/secure payment of debt

24
 b) Dispose of good will of partnership
c) Do an act making it impossible to carry on partnership’s ordinary business
d) Confess a judgment against partnership (
e) Submit a claim involving the partnership to arbitration
o UPA § 18(g) Admitting New Partners: No person can become a member of
a partnership without the consent of all the partners
o UPA § 18(h) Contravene any agreement of the partners 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
 This may include extraordinary matters that substantially change past
practice e.g. entering new lines of business

 Partners as Agents
 UPA §9(1) - Every partner is an agent of the partnership for the purpose of its
business, and the act of every partner, including the execution in the partnership
name of any instrument, 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.
 UPA §15: Partners are jointly and severally liable for debts and obligations of
partnership
 Nabisco v. Stroud (Giving notice to creditor that you will not be responsible
for purchases DOES NOT STOP YOU FROM HAVING LIABILITY)
 Facts:  Stroud & Freeman in general partnership, grocery business; Stroud
tells Nabisco he won’t personally be liable for any future bread deliveries;
Freeman continued to purchase bread, and Nabisco delivered; partnership
dissolved and Stroud refuses to pay the bread debts to Nabisco
 Holding: Because buying bread was an ordinary matter connected with the
partnership business, and within its scope, Freeman's purchase bound the
partnership and his co-partner Stroud
 Reasoning: 1) All partners are jointly and severally liable for the acts and
obligations of the partnership (UPA 15). 2) Each partner is an agent for
partnerships and binds the partnership when apparently carrying on in the
usual way the business of the partnership (UPA 9(1))
 Rule: 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.
 Changing Management Rights by K
 Default rules are often changed in the following areas:
o Decision making: Delegating decision making to a managing partner or
executive committee (Day v. Sidley)
o Voting Weight: Weighting partnership voting to reflect pro rata contributions
to capital
o Unanimous: Changing requirement of unanimous consent

25
 o Supermajority Voting: Requiring supermajority voting for important
decisions
o Expulsion: Right to expel partners
 Day v. Sidley & Austin
 Facts: P’s law firm had altered default management rules by K - the partners
have equal voting rights, but the day-to-day operations are controlled by an
executive committee. Executive committee drew up a merger proposal, and all
partners on committee approved. As a result, P is now sharing control of his
office with another chairman – no longer sole chairman. Claims exec
committee breached fiduciary duties by beginning negotiations on merger
without consulting other partners who were not on exec. Committee
o Decided by Committee: all questions of firm policy, including
determination of salaries, expense, Partners’ participation, required
balances of Partners, investment of funds, designation of Counsel, and the
admission and severance of partners.
o However, determination of participation, admission and severance of
Partners shall require approval of all Partners then holding a majority fall
voting percentages.
 Holding: no breach of fiduciary duties.
o Essence of breach of fiduciary duties is when partners advantaged
themselves at the expense of the firm (secret profit-taking) – here, no
evidence of that. Alleged wrongdoers also did not gain any more power as
a result of their actions either.
o No court has recognized a fiduciary duty to disclose information regarding
changes in the internal structure of the firm, the concealment of which
does not produce any profit for the offending partners nor any financial
loss for the partnership as a whole.
 Rule: Basic Fid. Duties are:
o a partner must account for any profit acquired in a manner injurious to the
interests of the partnership
o a partner cannot w/o consent of the other partners, acquire for himself a
partnership asset, nor may he divert to this own use a partnership
opportunity; and
o he must not compete with the partnership within the scope of the business

Partnership Dissolution

Partnership Dissolution

The Right to  UPA § 30 Partnership is not terminated upon dissolution but

Dissolve continues until winding up of business is completed. § 30
 UPA§ 31 Causes of Dissolution
 UPA §32 Dissolution by Court Decree If partner:
a) Insane
b) Incapability

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 c) Conduct as prejudices carrying on the business (Owen)
d) Persistently breaches the agreement
e) Business can only be carried on at a loss (Page)
 RUPA §801(5)
The Consequences  Liquidation or Continuation?
of Dissolution o Default Rule- UPA §38(1) Right to Require Liquidation
o Partners often agree for continuation
 UPA § 38(2) Right to Damages and to Continue the Business
o Right of non-culpable party to damages for wrongful
dissolution & right to continue the business and possess
partnership property
o Right of culpable partner to receive value of partnership
interest (excluding good will) less damages payable to non-
culpable partners
o Pac-Saver v. Vasso- UPA allows for a dissolved
partnership to be continued by one of the former partners
(UPA § 38(2)).
The Sharing of Rules for Distribution Following Dissolution
Losses  UPA §40(b) Payment of Liabilities:
o Payment to creditors other than partners
o Payment to partners other than for capital or profits
o Payment to partners for capital
o Payment to partners for profits § 40(b)
 UPA §40(d): Partners must contribute the amount necessary to
satisfy the liabilities in Section 40(b)
 Mandatory loss sharing. §18(a) and §401(B)
Buyout 1. Common terms in such agreements?
Agreements a. Trigger events
b. Obligation versus option to buy
c. Price
d. Method of Payment
e. Protection against partnership debt
f. Procedure for offering to buy or sell

 The Right to Dissolve

 UPA § 30 Partnership not Terminated by Dissolution  Dissolution vs. Winding
Up: Partnership is not terminated upon dissolution but continues until winding up of
business is completed.
o Dissolution is what causes the partnership as a legal matter to come to an end.
It is just the start of the end of the partnership. The practical matter goes mast
the date/event of dissolution until the “winding up” of business is completed.
 UPA § 31- Causes of Dissolution
1) Without violation of partnership agreement:
a) At the end of a fixed term or with consent of all partners if partnership for a
term

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 o Express Term – “Together for [5, 10, 15…] years”
o Implied Term:
 Until certain sum of $ earned
 One or more partners recoup investment
 Certain debts are paid
 Certain property disposed of on favorable terms
o 2 types of evidence people introduce when arguing for an implied term: 1)
Past agreements and 2) outstanding loan/debt
b) By express will of any partner if partnership at will
o At Will – no limitation on duration; default rule
o At will dissolution must be done in good faith
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 specified term or particular undertaking.
d) Upon expulsion of a partner under a clause in the partnership agreement
o expulsion of any partner from the business bona fide in accordance with
such a power conferred by the agreement between the partners
2) With violation of the partnership agreement, if dissolution not permitted by any
other section, by express will of any partner at any time
3) Business becomes unlawful
4) Death of any partner
5) bankruptcy of partner or bankruptcy of partnership
6) Court decree under Section 32
 UPA § 32 - Dissolution by Court Decree:
a) If partner is declared insane by judicial proceeding
b) Partner in any other way unable to meet requirements of partnership agreement
c) If partner guilty of such conduct as prejudices carrying on the business
d) Partner willfully or persistently breaches the agreement or makes it not reasonably
practicably to carry on business with him
e) Business can only be carried on at a loss
 RUPA §801(5) Dissolution by Court Decree
o Partnership is dissolved on application by a partner through judicial determination
that
1) Economic purpose of partnership is likely to be reasonably frustrated
2) Another partner has engaged in conduct relating to the partnership business
that makes it not reasonably practicable to carry on the business in partnership
with that partner OR
3) It is not otherwise reasonably practicable to carry on the partnership business
in conformity with the partnership agreement
 Rightful v. Wrongful Dissolutions:
o Rightful Dissolution: dissolution without violation of the partnership agreement
 If you are in a partnership that was agreed to be for a stated term
 At-will partnership dissolution; the partners have not agreed to be together for
any specified term - you can rightfully exit at any time
 If you cannot specify or imply a term
o Wrongful dissolution: you may be exiting at your peril

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 Owen v. Cohen (Formal Dissolution, Bowling Alley)
 Facts: P and D entered into a partnership to operate a bowling alley; P paid $6986
into the partnership, with the understanding that it would be paid back to him
from profits; partners began to disagree about how to run the business, affected
profits; P got judicial decree for dissolution, D challenges the sufficiency of the
evidence for dissolution determination
 Holding: there was enough evidence to support a decree of dissolution
 Evidence Supporting Dissolution:
o The disharmony between the partners substantially effected the business
o Most of the disharmony stemmed from D trying to be dominating partner and
humiliating P to employees and customers
o D never did much work for the business but wanted P to do all the actual
work/labor
o D told a mutual friend that P would not be there very long
o D wanted to open a gambling room in the bowling alley, P did not
o D started taking small amounts of $$ from the business for himself
o It’s D’s fault that the partnership is being dissolved, and therefore cannot
continue making profits, so P get’s his contribution back
 Rule: A court may order the dissolution of a partnership where there are
disagreements of such a nature and extent that all confidence and cooperation
between the parties has been destroyed or where one of the parties by his
misbehavior materially hinders a proper conduct of the partnership business
 Page v. Page (Not Reaching Return on Investment Alone creates Implied Term
Limit)
 Facts: P and D were partners in a linen supply business. P supplied essentials to
the business, and as a result the partnership owed him $47,000. P also was the
managing partner. Each partner contributed $43,000 in capital. There was no
written agreement. The partnership was unprofitable at first, but then began to get
profitable right before P decided to terminate the partnership. P argues the
partnership was at will; D argues there was an implied term of long enough to
repay investment debts
 Holding: The partnership was at will, however a partner may not freeze out a
partner and appropriate a business to his own use; he cannot dissolve a
partnership to gain the benefits of the business for himself unless he fully
compensates his co-partner for his share of the prospective business opportunity
 Rule: A partnership may be dissolved by the express will of any partner when no
definite term or particular undertaking is specified (at will), but must be done in
good faith. A partner is not bound to remain in a partnership, regardless of
whether the business is profitable or unprofitable.
 The Consequences of Dissolution
 Liquidation or Continuation?
o UPA § 38(1) Right to Require Liquidation: If dissolution caused in any way
except in breach of agreement, partner may request liquidation
o Continuation – In practice this is the more popular choice because between
partners because it maximizes the value of the partnership.

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 o Default rule is that upon dissolution caused in any way (except in breach of
partnership agreement) any partner may request liquidation
o In practice, partners often agree to continue the business because liquidation will
not produce maximum value to partners
o UPA § 38(2) - Right to Damages and to Continue the Business
 If dissolution in violation of partnership agreement occurs: non-breaching
partner may claim for damages against breaching partners and may continue
the business and possess the partnership property for that purpose
 If business continued, breaching partner entitled to receive value of her
interest less damages but not including good will
 Example of Continuation: Andrew, Barry and Chris have formed a partnership
(ABC) to sell used casebooks to law students. They have no written partnership
agreement and no agreed term. Andrew decides to accept full time employment as a
casebook editor and talks to the others about resigning. David expresses an interest in
joining the business. After discussions among the four of them, A, B, C & D agree
that David will buy out Andrew’s interest. Andrew starts his new job and David joins
the business. B, C & D continue to sell used casebooks through a successor
partnership (BCD). Andrew’s withdrawal has dissolved the old ABC partnership, but
A, B & C have each agreed not to compel liquidation.
 Pav-Saver Corporation v. Vasso Corporation (Right to Continue Business)
 Facts: P & D have partnership – P contributed TMs and patents for the
technology needed to run the business. Partnership agrmt stated: (1) all TMs and
patents of PSC remain property of PSC and shall return copies at expiration of
partnership (2) partnership is permanent and only terminated by consent of both
parties. PSC unilaterally terminated the partnership; D wants to continue business,
claims he has right to patents and TMs bc continuation is impossible w/o them
 Holding: PSC wrongfully terminated the partnership. Vasso was entitled to
continue the business and to possess the partnership assets, including PSC's TM
and patents
 Reasoning: Where one party wrongfully terminates the contract, non-breaching
party is allowed to posses property and continue business. Breaching party is
entitled to the value of that property, but here, the patents have no value.
 Rule: When wrongful dissolution occurs, partners who have not wrongfully
caused the dissolution shall have the right to continue the business in the same
name and to receive damages for breach of the agreement.
 The Sharing of Losses
 UPA § 40(b) Rules for Distribution – Payment of Liabilities:
o Payment to creditors other than partners
o Payment to partners other than for capital or profits
o Payment to partners for capital
o Payment to partners for profits
 UPA § 40(d) Rules for Distribution: Partners must contribute the amount
necessary to satisfy the liabilities in Section 40(b)
o As provided in § 18(a)- Partners share equally in Profits and Losses
 Capital Accounts  Partnerships establish capital accounts for each partner
where the following are recorded:

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 o Additions: initial capital contributions and additional capital contributions,
fair market value of contributed asset at time of contribution, profits allocated
to partners from ongoing activities
o Subtractions: interim withdrawals of capital, losses allocated to partners from
ongoing activities
o Post-contribution appreciation or depreciation of contributed asset does not
affect capital accounts.
 Distribution Following Dissolution
o Rightful Dissolution: In a rightful dissolution, where the partnership is
liquidated, the assets are sold.
 Out of the proceeds, partners receive value of their capital accounts after
creditors and partner loans are paid off.
 Profits are what remains and that is divided according to the default rule of
equal sharing or as agreed by the partners.
o Wrongful Dissolution: In a wrongful dissolution, settling among partners is
the same except breaching partner share is decreased by damages under UPA
§38 (2)(a)(II)
 Kovacik v. Reed – (Contributing labor can get you out of sharing losses)
 Minority Rule: In the absence of an agreement to the contrary the law
presumes that partners and joint adventurers intended to participate equally in
the profits and losses of the common enterprise, irrespective of any inequality
in the amounts each contributed to the capital employed in the venture, with
the losses being shared by them in the same proportions as they share the
profits. However an exception arises for a partner who contributed labor is not
liable to the other for contribution for any financial loss sustained.
 Facts: P and D formed partnership P invested all money, D performed the
work. Agreed to split profits equally. Partnership failed and P tells D that
venture lost money and demanded that D contribute to the amount. D says
there was never an agreement on sharing of losses, just on sharing of profits
 Holding: Court holds that D is NOT required to pay half the losses he was
a services partner, not a financial partner. The rule of equal sharing of losses
doesn’t apply when one partner doesn’t contribute capital.
 Rationale (Minority View): court equate human capital with financial
capital. Also fairness it would be unfair for D to have the obligation to pay
half the losses.
o Directly rejected by UPA §18 loss sharing provision and RUPA §401.
Also not the view shared by the majority of US courts
 Majority Rule: would have held that D was responsible for half the losses
o Underlying principle uniformity and conformity with rules
o Also, P could have contributed his $ to another (possibly successful)
venture, meaning he lost more than D

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 Example of Distribution Following Dissolution
Partnership Formation
 A&B form partnership Capital
 Agree to share profits Accounts upon
equally formation
 A contributes $10,000  A = $10,000
 B contributes value of  B=0
his legal services in
drafting partnership
agreement

Interim Profits Interim Losses

 Partnership has profits  Partnership has losses of
of $10,000 after first $2,000 after second year
year which are shared which are shared equally
equally

Capital Capital
Accounts Accounts
 A = $15,000  A = $14,000
 B = $5,000  B = $4,000

Distribution
Dissolution  Assets of partnership =
 After a number of years, $30,000
partnership decides to  Loss payment to creditors 32
dissolve. At this point, it ($3000)
has assets with a fair market  Loss discharge of A’s capital
 Buyout Agreements
 An arrangement between owners of a business by which the surviving owners
agree to purchase the interest of a withdrawing or deceased owner.
 An agreement that allowed a partner to end their relationship with the other
partners and receive a cash payment, or series of payments, or some assets of the
firm, in return for their interest in the firm
 A good buyout agreement must be tailored to the needs and circumstances of the
firm
 What are common terms in such agreements?
o Trigger events death, disability, will of any partner
o Obligation to buy vs. option to buy firm, other investors, consequences for
refusal to buy (if there is an obligation, if there is no obligation)
o Price book value, appraisal, formula (e.g. “five times earnings”), set price each
year, relation to duration (e.g. “lower price in the first 5 years”)
o Method of Payment cash, installments (with interest?)
o Protection against partnership debt
o Procedure for offering to buy or sell first mover sets price to buy or sell, first
mover forces other to set price
 G&S Investments v. Belman (Cocaine addict who died was bound by K)
 Facts: General Partners Nordale and G&S Investments. Limited Partners
Jones and Chapin. Nordale began using coke which caused a personality change
and effected his work (become suspicious of partners/others, wouldn’t
communicate with partners/others, stopped keeping normal business hours,
threatened partners, solicited under aged tenants, ect.) and then died.
 Issues: 1) can surviving general partner is entitled to continue the partnership
after Nordale’s death? 2) How Nordale’s interest in the partnership property is to
be computed.
 Relevant Law: The Articles of Partnership
o Art 19(a): In the event of the death, retirement, insanity or resignation of one
of the general partners, the surviving or remaining general partners may
continue the business

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 o Art 19(2): In the event the surviving or remaining general partner shall desire
to continue the business, he shall purchase the interest of the retiring or
resigning general partner
o Art. 19(e)(2)(i) The Buy-Out Formula: The amount shall be calculated as
follows: By the addition of the sums of the amount of the resigning or retiring
general partner’s capital account plus an amount equal to the average of the
prior three years’ profits and gains actually paid to the general partner or as
agreed upon by the general partners, provided said agreed sum does not
exceed the calculated sum in dollars.
 Holding: Nordale’s conduct affected the carrying on of the business and made it
impracticable to continue in partnership with him (UPA §38(1)). His conduct was
wrongful and in contravention of the partnership agreement, thus allowing the
court to power to dissolve the partnership and to permit appellees to carry on the
business (UPA §38). UPA §32 authorizes the court dissolve a partner (dissolution
for cause by decree of court).
 Rules: 1) B/c partnerships result from contract, the rights and liabilities of the
partners among themselves are subject to such agreement as they may make. 2) A
partnership buyout agreement is valid and binding even if the purchase price is
less than the value of the partner interest, since the partners may agree among
themselves by K as to their rights and liabilities. Modern day business practice
mandates that the parties be bound by the K the enter into, absent fraud or duress
 UPA §18(f) Rule against extra compensation – Partner not entitled to remuneration
for acting in the partnership business except for surviving partner receiving
reasonable compensation for his services in winding up the partnership,
 Jewel v. Boxer
 Dissolution of law firm partnership
 Facts: Jewel, Boxer and Elkind Law firm (4 person general partnership). No
written partnership agreement. Know they didn’t follow default rule because there
are uneven profit sharing percentages (Howard Jewel (30%), Stewart Boxer
(27%), Peter Elkind (27%), Brian Leary (16%)). There is a dissolution of
partnership into 2 new law firms, 1) Jewel & Leary 2) Boxer & Elkind. No
surviving partner of the old partnership, all go their separate ways.
 Issue: how do you allocate fees from cases pending on the day of dissolution?
What are partners entitled to in regards to dissolution?
 Holding: Court goes back to old law firm method of allocation based on original
percentages. Court relies on default rules because there was no partnership
agreement UPA unequivocally prohibits extra compensation for post
dissolution services, with a single exception for surviving partners. But, the words
“surviving partner” not relevant in this case because there is none so exception
does not apply
 Rule: Uniform Partnership Act (Corp.Code, § 15001 et seq.), a dissolved
partnership continues until the winding up of unfinished partnership business.
(Corp.Code, § 15030.) No partner (except a surviving partner) is entitled to extra
compensation for services rendered in completing unfinished business.2
(Corp.Code, § 15018, subd. (f).) Thus, absent a contrary agreement, any
income generated through the winding up of unfinished business is allocated

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 to the former partners according to their respective interests in the
partnership.
 Policy for rule against extra-compensation: prevents partners from competing
for the most lucrative cases during the partnership in anticipation that they would
retain those profits upon dissolution, discourage former partners from scrambling
to take physical possession of files and seeking personal gain by soliciting a
firm’s existing client’s upon dissolution.
 Meehan v. Shaughnessy (winding up, fair charge)
 Rule: rights provided by a partnership agreement, even though different from
those provided in the UPA, control the method of dividing assets upon
dissolution, provided the dissolution is not premature.
 Determining Damages:
o If the D’s prove that the clients improperly taken by them would have
consented to the removal in the absence of a fiduciary breach, Court looks to
the partnership agreement (D’s pay fair charge)
 Fair charge receivable account of the earlier partnership…and is
divided between the remaining partners and the retiring partner on the
basis of which they share in the profits of the firm at the time of
withdrawal (*You can take business with you if you decide to leave law
firm, but you have to pay back a fair charge)
o If judge determines that D’s have unfairly removed (D’s fail to prove that
certain clients would not have preferred to stay w/ P&C, D’s must account to
the partnership for any profits they received from these cases-UPA § 21.
(profits+ fair charge)
 UPA § 21-“Every partner must account to the partnership for any benefit ,
and hold as a trustee for it any profits derived by him w/out the consent of
other partners from any transaction connected w/ the formation , conduct
or liquidation of the partnership”
 Basically, partner must account for profits that flow from a breach of
fiduciary duty.
 Court discusses what a departing partner entitled to receive under the terms of the
Parker Coulter partnership agreement:
1) Return of capital contributions
2) The right to share in net income to which the dissolved partnership is
currently entitled (Pending fees on date of dissolution)
3) Right to a portion of firm’s unfinished business that they can take away as
long as they pay a fair charge

Limited Partnership

 Differences from General Partnership:

 Formalities: Need to file certificate of limited partnership
 2 Categories: General Partners & Limited Partners
 Liability Differences: Limited liability for LPs; Unlimited for GP
 Management: Management in GP; LPs are passive investors

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  Losses: Profit and Loss Sharing: LPs share in profits and losses based on their
contribution
 Dissolution: Dissociation of LP does not dissolve
 RULPA §303(a): Limited partner is NOT LIABLE FOR OBLIGATIONS of limited
partnership unless
o Limited partner is also a general partner OR
o Limited partner takes part in the control of the business In this case, limited
partner is liable to 3P who transact business with limited partnership and who
reasonably believe based on limited partner’s conduct, that she is a general
partner
 RULPA §303(b): Limited partner does not participate in control solely by
consulting/advising with general partner on partnership business
 Holzman v. De Escamilla (LP only risks what he put in)
 Rule: Limited partnership – management lies only in the general partner. The
general partner also has unlimited liability, so if there is a debtor obligation that
goes beyond the partnerships funds then creditors can go after General Partner
(GP) for debts. LP are passive investors, meaning they put $ in and get return but
they cannot interfere in the management of the business. Trade off is that they are
only liable up to the amount of their investment.
 Holding: Court holds that the R&A are partners since they were able to draw $
from account w/o GP approval, overrule GP and had power to remove GP.

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