Agency and partnership

Knowall owned and operated a meat processing company. The business consisted of basically three distinct parts: Purchasing the livestock to the processed, processing the livestock basically three distinct parts: Purchasing the livestock to be processed, processing the livestock and shipping the processed meat to different parts of the country, all of which were managed by Knowall. Knowall's business grew to such an extent that he no longer had enough time to supervise the purchasing section of his business and therefore decided to hire someone to do so. Knowall made a contract with Buyer whereby Buyer was to run the purchasing section of Knowall's business and was to be paid based on the number and quality of the cattle that he purchased. The contract further indicated that Buyer was to run the purchasing section as if it were his own business and that all decision so with respect to the purchased of cattle were to be made based on his independent judgment. But Knowall's ego was so large that he could not help himself and continually gave Buyer advice on how to purchase cattle. Because of Buyer's independent nature, he seldom followed Knowall's advice.

One day while Buyer was driving to a livestock sale in a car owned by Knowall's company he decided to pick up his wife's dress at the local cleaners, which happened to be located immediately before and on the same street as the livestock auction house. After deciding to puck up the dress Buyer remembered the argument that he had had with his wife, he subsequently, became enraged and ran an oncoming car off the road. The driver, Unsuspecting suffered severe injuries. Buyer did not lose control of his car and continued on to the cleaners and the livestock sale. Knowall learned of Buyer's indiscretion the next day but did not fire Buyer as he happened to be a distant cousin. Buyer had never done such an act before nor had he ever shown any prior propensity to engage in such behavior.

Shortly thereafter, Knowall discovered that Buyer was an incompetent livestock purchase as the livestock he had purchased were of low quality and did not command a high selling price. This situation caused Knowall's business profits to plummet. Knowall's most recent balance sheet showed that liabilities exceeded assets. In order to remedy this situation, Knowall sought out partners who could contribute money to his company. Because of Knowall's desire to manage the company by himself he sought to form a limited partnership with the prospective partners. Knowall found Money and Rich who were interested in contributing money to Knowall's company as limited partners. They all signed a partnership agreement designating Knowall as the general partner and Money and Rich as the limited partners. Money and rich each contributed $20,000 to the company. The business continued to flounder and consequently, Money and rich decided to participate in the actual management of the company as each possessed past managerial experience. Subsequently the company began to prosper but later again failed an incurred massive debts totaling 500,000 due to the American public's shift to a vegetarian diet. The company's total assets consisted of only 100,000.

1. What are the rights and liabilities of Knowall with respect to Unsuspecting and to the company's debts?
2. What are the rights and liabilities of Money and Rich with respect to the company's debts?

DO NOT DISCUSS POSSIBLE TORT ISSUES.

Firstly, what is the relationship between Buyer and Knowall? The relationship is not one of a plain employer employee bond, but goes further. Buyer has a mandate to make contracts on behalf of Knowall that bring him into legal relations with third parties and bind him accordingly. This relationship is therefore one of agency1. Buyer has authority to make contracts with third parties and these will bind Knowall Agency law is concerned with any principal - agent relationship. Such relationships can arise from explicit appointment, or by implication. The law of agency is based on the Latin maxim "Qui facit per alium, facit per se," which means "he who acts through another is deemed in law to do it himself."

Firstly I shall deal with the legal implications caused by the debts when Knowall discovered that Buyer was an incompetent livestock purchase as the livestock he had purchased were of low quality and did not command a high selling price. This situation caused Knowall's business profits to plummet and Knowall's most recent balance sheet showed that liabilities exceeded assets.

The contract, whether written or oral, expressly or impliedly gave actual authority to the effect that Buyer was to run the purchasing section as if it were his own business and that all decisions with respect to the purchased of cattle were to be made based on his independent judgment. There is no doubt then that the buyer therefore has exclusive competence over the operations in this area. However, Knowall has also being interfering with the running of the buying operation, but the facts show that Buyer rarely took his advice. What then is the legal position as regard the negative effects on the business of Buyer?

The actions of the Agent that are carried out with the express or implied authority of the Principal will bind him, as long as these are done within the authority granted by the Principal.2 This is even if the case if, acting under his actual or ostensible authority, the Agent has acted entirely for his own benefit and in fraud of the Principal.3 Unless the third party knew that the agent was acting for his own benefit or fraudulently in which case the circumstances will not bind the Principal. There seems to be no suggestion of this whatsoever. It seems that for all intensive purposes that the Agent was acting inside his authority and that he was plainly incompetent in his duties. Therefore the Agent drops out of the contract as soon as it is created and all liabilities that result. Therefore the acts of the Agent. Buyer, will bind the Principal,4 Knowall and thus the company will be liable for the debts created by him.

What then are the legal implications under contract of the scenario formed by Buyer driving to a livestock sale in a car owned by Knowall's company? He decided to pick up his wife's dress at the local cleaners, which happened to be located immediately before and on the same street as the livestock auction house, and remembered an argument with is wife and subsequently, became enraged and ran an oncoming car off the road with the driver, Unsuspecting, suffering severe injuries. There is no contractual relationship formed between Buyer running Unsuspecting off the road, and therefore unsurprisingly, there is no contractual remedy that is open to Unsuspecting whatsoever. When an Agents act bind the Principal in the carrying out of his duties the Principal will only be bound in the contracts that he creates on behalf of the Principal. The employer employee relationship will make him vicariously liable for the actions of an agent/employee but strictly speaking that is tortious remedy and is outside the discussion of this essay.

We shall now move on the scenario when Knowall found Money and Rich and they all signed a partnership agreement designating Knowall as the general partner and Money and Rich as the limited partners. Money and rich each contributed $20,000 to the company. The business continued to flounder and consequently, Money and rich decided to participate in the actual management of the company as each possessed past managerial experience.

The parties agreed to form a limited partnership. Under English Law this is governed by the Limited Partnerships Act 1907. Usually in a partnership agreement each partner shares directly in the organization's profits and shares control of the business operation - the consequence of this profit sharing is that partners are jointly and independently liable for the partnership's debts. Ordinarily partners are personally liable for acts committed by the partnership and its agents.

However this is not the case of a limited partnership. A limited partnership is a partnership in which the duties and obligations of the partners are divided between those of general partners and limited partners. One or more general partners manage business operations and assume personally liability for partnership debts while other contributing/profit sharing partners take no part in running the business and incur no liability beyond contribution obligations. The advantage of limited partnerships is that limited partners are not personally responsible for the partnership's debts and other obligations. As a result, it is far easier to market limited liability partnership interests as an investment, particularly with respect to discrete projects such as real estate development.

A general partner is a partner who is responsible for managing the partnership and its operations. Like the partners in a general partnership, general partners in a limited partnership are personally liable for all of the partnership's debts and other obligations. A limited partner however is one who is prohibited from taking part in the partnership's management and day-to-day operations. In contrast to the general partner, the limited partner is usually not personally liable for the partnership's debts and other obligations. Thus, the only risks taken by limited partners are the money or other assets that they have invested in the partnership and any loans made to the partnership.

However section 6(1) of the Limited Partnerships Act 1907 stipulates that limited partners will lose their privilege if they of limited liability if they take any part in the management of the company. A limited partner participating in management of the limited partnership may become personally liable, however, for partnership debts and obligations.

Therefore this places those such as Rich and Knowall in the position that if they intervene and attempt to salvage a wreck, as they have done here, then they will be liable for the debts if the company as well.

As subsequently the company began to prosper but later again failed an incurred massive debts totaling 500,000 due to the American public's shift to a vegetarian diet. And the company's total assets consisted of only 100,000 then all three will be jointly liable for the remainder of the companies debts, and as such this is why a limited company is often a preferable arrangement to a limited partnership.

1. See Bowstaed and Reynolds on Agency 16th edn. (1996)[^ Return]
2. See Anson's Contract Law J. Beatson 27th ed. Oxford University Press Pg 624[^ Return]
3. Hanbro v Burnand and others [1904] 2 K.B. 10.[^ Return]
4. Reckitt v Burnett, Pembroke and Slater Ltd [1929] AC 176[^ Return]
   

BIBLIOGRAPHY

Beatson, J Anson's Contract Law 27th ed. - Oxford University Press

Bowstead and Reynolds Bowstead and Reynolds on Agency 16th edn. - Sweet and Maxwell

Keenan, D Law for Business - Longman

Smerdon, R Palmer's Company Law Manual - Sweet & Maxwell.

Stone,R The Modern Law of Contract, Cavendish Publishing

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