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Agency and Partnerships
Southern Illinois University School of Law
Gross, Leonard

Professor Gross Spring 2000 Text: Agency, Partnership, and the LLC (5th Ed.)

(Just for general information purposes, probably not testable)

A. Corporation: Legal entity formed under a state statute by filing articles of incorporation with the proper state office.
B. Sole Proprietorship: One person going into business without making any plans for an entity to carry on the business. All losses are indistinguishable from losses related to the proprietor’s personal life and can thus be paid from personal assets. (Default for one businessman or women) [can still have agency principles if the business is a sole proprietorship—example, truck drivers].
C. Business trust: Created by placing the assets of a business in trust under trustees who hold title to the property for the benefit of holders of shares in the trust.
D. Partnership
a. General partnership: created when two or more persons carry on as co-owners a business for profit. (Default): It exists as soon as two or more people start doing business together without choosing another form of business. Partners are personally liable for all the debts of the partnership.
b. Governed by UPA (Uniform Partnership Act). States the law of agency shall apply under this act.
E. Limited Liability Partnership (LLP): Makes available limited liability for all partners of a general partnership if a proper filing is made with the state. Shields partners from vicarious liability for the acts of others.
F. Limited Partnership: Contains both general and limited partners (Strictly a creature of statute)
a. General Partners: have personal liability for the debts of the business.
b. Limited partners: not liable for the debts of the business.
G. Limited Liability Limited Partnership (LLLP): (Creature of statute also.)
a. General partners do have limited liability.
H. Limited Liability Company (LLC): Offers owners the benefits of limited liability, taxation as a partnership, and management flexibility. Liability is limited in a sense that owners are not liable for the debts of the business.

I. There are four matters of common concern for persons who become co-owners of a business:
(1) The right to manage or at least share in management of the business.
(2) The option to avoid personal liability for the debts of the business.
(3) Enjoyment of favorable tax treatment.
(4) The right to exit the business and cash out one’s holdings in a reasonably prompt way.


Definition of an agency: Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other (1) shall act on his behalf and subject to his (2) control, and (3) consent by the other to so act.
A. Therefore, the Elements of an agency relationship are:
(1) The acting party must be acting on behalf of the principal (look to whether the agent is working for the principal or himself).
a. Agent is required to make reasonable efforts to obtain the desired results.
b. However, doing a favor or making a suggestion has been found not to be an agency relationship.
(2) Control “element of subservience”
(3) Consent of both parties (principle and agent), but they don’t have to be aware of the formation of an agency agreement.

B. Example Case: Carrier v. McLlarky: D installed a new water heater for Pl and said that he would send the other one in to see about a warranty. D did do this but was never given payment of warranty. Pl brought an action against the D. Was there an agency relationship? Yes, all three elements are met (1) D was acting on behalf of Pl (2) there was control, he was doing her wishes and (3) there was consent. However, the second issue was, was there a breach in this instance, and the court held no….he had sent the water heater into the manufacturer; accordingly, he made a reasonable effort to get the directed result.

C. Breaching the fiduciary relationship: Agents have a duty to conduct the affairs of the principle with a certain level of diligence, skill, and competence. The promise to act as an agent is interpreted as being a promise only to make reasonable efforts to accomplish the directed result.

D. COUNTER ARGUMENT: However, note Violette v. Shoup: a person does not become the agent of another simply by offering help or making a suggestion. To permit a finding of agency upon this evidence would be to hold that one who performs a mere favor for another, without being subject to any duty or service and without assessing to any right of control, can be an agent.

HYPO: U asks N to help him wash the car and U tells N to get water and throw it on the car, and some lands on the sidewalk. It gets cold and B slips on ice. B sues U on an agency situation. U states N was only doing a favor. Would N be U’s agent? Yes—all elements are met. U was subject to liability. (1) Acting on behalf, (2) control details of agents work to create a master servant, employee, employer situation, (3) both consented. Control element described here is based on tort liability.

(Agents acting for other agents) (As opposed to co-agency: two agents both act for one principal.)

Subagent: a person appointed by an agent empowered to do so, to perform functions undertaken by the agent for the principal, but for whose conduct the agent agrees with the principal to be primarily responsible. This agreement can further be implied.
a. Example: in a multiple listing service, the selling broker was an agent of the listing broker and a subagent of the seller.

1. Agency or SALE. (Probably the most critical distinction to make.)

Restatement s.14(j): One who receives goods from another for resale to a third person is not thereby the other’s agent in the transaction: whether he is an agent for this propose or is himself a buyer depends upon whether the parties agree that his duty is to act primarily for the benefit of the one delivering the goods to him or is to act primarily for his own benefit.

Example case: Hunter Mining Laboratories v. Management Assistance: D, distributors of MAI, entered into contracts with Pl to install softwear. They never did. Pl sued MAI on an agency theory, but the court did not buy it. There was SOME control however (as would be the case in all distributors cases) e.g. keep adequate facilities, inform MAI in management, submit monthly reports, advertisement monitoring, and refuse to supply if they did not meet standards. However, the court found that these controls were not enough because it was necessary to uphold the goodwill of MAI…An agency relationship does not exist every time one party has a contractual right to control some aspect of another party’s business.

Furthermore, the “acting on behalf of” requirement was missing because title to the goods passed to the D upon MAI delivery, D had no duty to account to MAI and each company did business independently and in their own names.

Factors to look at is distinguishing lender/borrower or sale:
1. How much control is being exercised. The greater the extent of control is a factor, but that is not the extent of the story (see Hunter Mine.)
2. Is the party acting on behalf of the other party, or really on his own behalf.
a. Further example: Broker (99% of the time is an agent) buys stocks at a discount price, takes title in his own name, then sells to client without a commission. Here, he was acting in his own behalf and this would be considered a sale.
3. Whether the buyer fixes his own resale prices. (looks like a purchaser rather than an agent).
4. Whether title passes from the seller to buyer (if so, more likely a purchase).
5. How was the parties relationship labeled.
6. Is the buyer engaged in this type of business (if so, looks like a purchaser).

2. Agency or TRUST
A. The element of control plays a major role in distinguishing agency from trust, because in an agency relationship, the principal tells the agent what to do, while here, the document tells the trustee what to do.

B. Although a trustee acts on behalf of its beneficiary, usually a trustee is not subject to the beneficiary’s control. Thus, an agency relationship does not ordinarily exist between trustee and beneficiary. This is also true of guardians, executors, who act on behalf of persons but are not subject to their control and thus are not agents.

3. Agency or ESCROW

An escrow is not an agent of either party at the time the property is given to him. However, if the occurrence specified occurs, then the escrow becomes an agent to the person he is required to deliver to. If the event does not happen for the specified time, the escrow is ended and the holder becomes the agent for each party as to the property which each had deposited with him.

B. **IMPORTANT DIFFERENCE BETWEEN AGENT AND ESCROW HOLDER**If the escrow holder losses or disposes of an escrow, the one having legal title to the property at the time has the risk of loss and a corresponding claim against the escrow holder if the loss is caused by the holders fault.

a. Example of how this works out: K engaged B as a broker to sell a business. B found a buyer P and drafted a contract of sale. B then takes off with the money. If an agency takes the loss, then K does, but if it is an escrow, then P takes the loss.

A principle is free to make any changes to the agents instructions. Remember this when determining issues of agency or escrow. However, under a third party beneficiary rule: an agent acting on behalf of one person may be held liable to a third person for failure to perform a contract intended to benefit the third party.

a. Problems for the agent in this third party beneficiary scenario:
1. Can be an element of surprise in the application of this theory. There may be enforceable rights outside of the principle-agent relationship under circumstances where the agent had not considered that possibility.
2. Risk that an agent may be presented with conflicting demands from the principle and the third party. The agent is accustomed to obeying the principle, yet is exposed to contractual liability to the third party.
3. Therefore, some courts, before allowing recovery based on this theory, require that a promise of A to P to pay T must be for the primary benefit of T.

DUAL AGENCY RULE: an agent cannot act on behalf of the adverse party to a transaction connected with the agency without the permission of the principal. (A man cannot serve two masters at the same time).
a. If the two masters are unaware of the double employment, the transaction is voidable.
b. If one principal secretly employs the agent to act on its account knowing that the other principal is unaware of the double employment, the defrauded principal has a voidable transaction and recover damages from the other principal or the knowing agent.
c. However, an agent can deal with the other party if such dealing is not inconsistent with his duties to his principle.

Test: for ambiguous principal situations:
a. Whether it is understood that the agent owes a primary allegiance to the general employer or to the other party. In answering this question, there is an inference that the general employment continues.

A. Example case: Norby v. Bakers Life: D was an employer and administered a group health insurance policy to its employees. D failed to execute the proper paperwork, and thus, an employee (Pl) was denied coverage he would have otherwise been eligible for absent the D screw up. Pl sued insurance company stating that employer was its agent. The question then arose, who is the employer the agent of in this type of situation? Employee (majority says so) or the insurance co? Court took a minority opinion due to the fact the insurance company had so much control over the administration process, which was

n action in tort or in contract against an agent who wrongfully causes it loss.
Servant is subject to a duty to indemnify the master for damages the master has to pay resulting from the servants negligence (whether gross or inadvertent) while acting within the scope of employment.

D. Duty to account for any profits they make

An agent is subject to a duty to keep, and render to his principal, an account of money or other things which he has received or paid out on behalf of the principal.

E. Duty of care to use reasonable efforts to accomplish the direct result.

Determined by the scope of the authority.
Duty to act as the ordinary member in that business or pursuit, unless he claims to have higher skill.

F. Duty to disclose the material facts that the agent learns in the course of the agency. Agent is acting in the alter ego of the principal
a. General Rule: An agent who acts on his own account in a transaction in which he is employed has a duty to disclose to him all facts which the agent knows or should know would reasonably affect the principals judgement.
b. An agent is subject to a duty to use reasonable efforts to give his principle information which is relevant to affairs entrusted to him and which the principal would desire to have. (Lindland v. United Business Investments)

G. Duty of loyalty during the relationship
a. General Rule: An agent occupies a relationship in which trust and confidence is the standard. When the agent places his own interest above those of the principal there is a breach of fiduciary duty to the principal. The fiduciary is duty bound to make a full, fair, and prompt disclosure to his employer of all facts that threaten to affect the employer’s interests or to influence the employee’s actions in relation to the subject matter of the employment.
b. Therefore, as in the case of Gelfand v. Horizon, where the agent put his interest above his employers when he sold a business and allowed his wife and third party to make a substantial profit, he was found to have breached the duty of loyalty and disclosure.
(i) REMEDY: Where an agent seeks to recover compensation growing out of the same transaction in which he was guilty of being disloyal to his principal, a court is justified in denying the agent compensation based on the equitable principal applicable to the fiduciary that he is not to profit from his own wrong.
(ii) Furthermore, a fiduciary who has, by violating his obligation of loyalty, made it possible for others to make profits, can himself be held accountable for that profit, even if no loss has been placed upon the principal, but this is not a mandatory rule imposed upon courts and should be required when the facts of the case deem it necessary.
aa. Notice the significance of “even if no loss has been placed upon the principal.” In other words, a principal may recover damages in the form of profits others received as a result of the agents breach even if the principal has not realized it!!!! HE DOESN’T HAVE TO PROVE HE WAS EVEN DAMAGED!!! This serves a compensatory as well as a deterrent purpose, and shows how large of a duty the agents fiduciary responsibility is.

c. The duty of loyalty includes a duty not to use confidential information in competition with or to the injury of the principal.

Question? Can an agent, after learning a particular skill, quit her principals business and set up a competing business, assuming there is no agreement in her contract relating to this?
d. Common law will not stand in the way of competition so long as it is fair.
e. Determining fairness:
1. How did the employee leave the business, what was the position of the employee and the nature of the alleged violation of fiduciary duty.
(i) In the absence of a restrictive covenant, an agent whose agency is terminated without breach by him is entitled freely to compete with his former principal in the solicitation of former customers, acting for himself or another principal except by the use of confidential information which it is improper for him to use for any purpose.
(ii) If an agent wrongfully terminates his employment before the time contracted for, any competition by him until the end of that time is doubly wrong and may be enjoined.
f. Exceptions: (1) An agent may not use confidential information obtained during the course of his agency to compete with his principal. (2) Even after the agent has left his employment he may not use this confidential information.

A. Analyzing a covenant not to compete:
1. Is this a legitimate interest that the employer is trying to protect? If it is a trade secret, may be high one to balance: (See below)